Chapter 2: The framework

Question 1

Reasons for regulatory framework

Answer 1

Make comparisons

how transactions make up financial statements

how value of assets and liabilities has been determined

Question 2

What is the regulatory framework made up of?

Answer 2

IAS and IFRS

Companies Act 2006

Conceptual Framework for Financial Reporting

Question 3

Which body is responsible for the development and issuance of the IAS and IFRS?

Answer 3

IASB (International Accounting Standard Board)

Question 4

IFRS Foundation

Answer 4

They appoint the IASB, Advisory council & Interpretations Committee members, raise funds for the IASB and monitor IASB effectiveness

Question 5

IFRS Advisory Council

Answer 5

take recommendations from individuals, corporations, auditors and national standard setters and provide advice to the IASB on priority areas of accounting

before the standards are set

Question 6

IASB

Answer 6

IASB set IFRS (and previously IAS’s)

Question 7

IFRS Interpretations Commitee

Answer 7

Reports to the IASB with interpretations of IFRS and in the context of the framework, provides guidance on financial reporting issues not specifically addressed by IFRS

after standards are set

Question 8

companies act 2006 - directors responsibilities

Answer 8

keeping proper accounting records

preparing financial statements, having them audited and presenting them to shareholders in general meeting

Filling to companies house (6 months for PLC, 9 months for LTD)

Question 9

Conceptual framework for financial reporting

Answer 9

• produced by IASB
• sets out some generally accepted accounting principles which apply to the preparation of financial statements
  -set of principles which provide a basis for accounting transactions and for setting accounting standards
  -principle based

Question 10

principle based approach advantages

Answer 10

• individual must use judgement
• less likely to go out of date
• harder to avoid requirements/find loopholes
• spirit of the regulation can be followed where there is no specific accounting treatment

Question 11

objective of general purpose financial reporting

Answer 11

provide financial information about the reporting entity which is useful to existing to potential investors, lenders and other creditors in making decisions relating to providing resources

Question 12

Accrual accounting

Answer 12

costs and revenues should be included in the period in which they relate to not when cash is paid / received

Question 13

Qualitative characteristics

Answer 13

Relevance and faithful representation

Question 14

Relevance

Answer 14

financial info is relevant if it is capable of making a difference to decision making

can make a difference to decision making if:

Predictive value
Confirmatory value - feedback about previous evaluations

Question 15

Materiality

Answer 15

Info is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users make a basis of financial information about a specific reporting entity

Question 16

Faithful representation

Answer 16

complete
neutral
free from error

Question 17

prudence

Answer 17

exercising caution when making judgements under conditions of uncertainty.

Take care in not overstating assets and income or understate liabilities and expenses

Question 18

Enhancing qualitative characteristics

Answer 18

Comparability

Verifiability

Timeliness

Understandability

Question 19

stewardship

Answer 19

management / directors are accountable to the shareholders. Responsible for safekeeping company resources, ensure they are used in a proper, efficient and profitable way

Question 20

Going concern assumption

Answer 20

assumption that the business will continue trading for the foreseeable future, it will not be shutting down or stop trading, accessed by looking at the next 12 months

affects how we value assets and liabilities

Question 21

what are the five elements

Answer 21

Assets
liabilities
equity
income
expenses

Question 22

what is an asset

Answer 22

A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits

Question 23

what is a liability

Answer 23

A present obligation of the entity to transfer an economic resource as a result of past events

Question 24

What is equity

Answer 24

The residual interest in the assets of the entity after deducting all its liabilities

Equity = Net assets = share capital + reserves

Question 25

What is income

Answer 25

Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims

Question 26

What is expenses

Answer 26

Decreases in assets, or increases in liabilities, that result in decrease in equity, other than those relating to distributions to holders of equity claims

Question 27

Element of the financial statements should be recognised if:

Answer 27

meets the definition

provides relevant info

faithfully represented

Question 28

measurements of elements

Answer 28

Historical cost - measurement of original price paid or received

Current value - updated to reflect conditions at the reporting date

3 ways to obtain current value
Fair value
Value in use/fulfilment value
Current cost

Question 29

Setting Standards

Answer 29

Topic is identified

Topic is discussed and the IASB may set up a working group

Discussion papers is issued and public comment invitied

Exposure draft issued for public comment

IASB consults with IFRS Advisory council and working groups before an IFRS is voted on and issued

Question 30

derecognition of an element

Answer 30

no longer meets the definition of the element

for an asset this usually means that the entity has lost control over the asset

liability - no longer a present obligation

Question 31

Fair value

Answer 31

price that would be received to sell an asset or settle a liability , in an ordinary arms length transaction

Question 32

Value in use (asset) / fulfilment value (for liabilities)

Answer 32

Value in use is the present value of all the cash flows we expect to derive from an asset. Fulfilment value is the present value of the cash outflows we expect to transfer to settle a liability.

Question 33

Concepts of capital and capital maintenance

Answer 33

Capital maintenance is a theoretical concept which tries to ensure that excessive dividends are not paid.

Financial capital maintenance - capital is maintained when net assets at the end of the period are equal to or higher than net assets at the start of the period

Physical capital maintenance - Capital is maintained when operating capacity of the entity is equal to or greater than a the start of the period