Chapter 2: The framework Flashcards
Reasons for regulatory framework
Make comparisons
how transactions make up financial statements
how value of assets and liabilities has been determined
What is the regulatory framework made up of?
IAS and IFRS
Companies Act 2006
Conceptual Framework for Financial Reporting
Which body is responsible for the development and issuance of the IAS and IFRS?
IASB (International Accounting Standard Board)
IFRS Foundation
They appoint the IASB, Advisory council & Interpretations Committee members, raise funds for the IASB and monitor IASB effectiveness
IFRS Advisory Council
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
IASB
IASB set IFRS (and previously IAS’s)
IFRS Interpretations Commitee
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
companies act 2006 - directors responsibilities
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)
Conceptual framework for financial reporting
- 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
principle based approach advantages
- 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- less likely to go out of date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
objective of general purpose financial reporting
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
Accrual accounting
costs and revenues should be included in the period in which they relate to not when cash is paid / received
Qualitative characteristics
Relevance and faithful representation
Relevance
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
Materiality
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
Faithful representation
complete
neutral
free from error
prudence
exercising caution when making judgements under conditions of uncertainty.
Take care in not overstating assets and income or understate liabilities and expenses
Enhancing qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability
stewardship
management / directors are accountable to the shareholders. Responsible for safekeeping company resources, ensure they are used in a proper, efficient and profitable way
Going concern assumption
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
what are the five elements
Assets
liabilities
equity
income
expenses
what is an asset
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
what is a liability
A present obligation of the entity to transfer an economic resource as a result of past events
What is equity
The residual interest in the assets of the entity after deducting all its liabilities
Equity = Net assets = share capital + reserves
What is income
Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
What is expenses
Decreases in assets, or increases in liabilities, that result in decrease in equity, other than those relating to distributions to holders of equity claims
Element of the financial statements should be recognised if:
meets the definition
provides relevant info
faithfully represented
measurements of elements
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
Setting Standards
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
derecognition of an element
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
Fair value
price that would be received to sell an asset or settle a liability , in an ordinary arms length transaction
Value in use (asset) / fulfilment value (for liabilities)
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.
Concepts of capital and capital maintenance
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
