KCB Week 1 Flashcards

Question

Define 'asset'

Answer 1

A resource controlled by entity as result of past event from which future eco benefit expected to flow

Answer 2

A present obligation arising from past events, settlement of which is expected to result in outflow from entity of resources embodying economic benefits.

Answer 3

Income – increase in eco benefit during accounting period

Answer 4

- Ensuref financial reporting is regulated through financial rep standards (IFRS/UK GAAP/US GAAP) * Ensure financial information is reported **objectively** to provide **relevant, reliable and faithfully represented information** * **Adequate minimum level** of information * Ensure financial information is **comparable and consistent** * Improve **transparency** and **credibility** of financial reports (not to mislead aka fraud)

Answer 5

* Rules – designed to cover every aspect of reporting (ex. US GAAP) * Principles – ‘conceptual framework’ used to provide underlying set of principles within standards set (guidelines) – ex. IFRS system – a degree of flexibility is permitted

Answer 6

* **Rules** - Minimises subjective judgement – less scope for controversial arguments * **Principles** – Flexibility permitted (accountant has limited scope of accounting treatment/to deviate from standard if explained)

Answer 7

- Rigid regulatory system = detrimental effect in long-term ( so much regulation becomes a ‘straight-jacket’ and true information cannot be put out because just following rules alone ) - Political/economic/social differences of different countries not taken into account (how can all countries adapt a single state of standards given differences to their realities) - Arbitrary valuations possible (WHY?) - Rigid standards remove need for judgements - Does not provide precision and comparability - Increased complexity

Answer 8

- IASC until 1991 : set IAS - IASB replaced : set IFRS - IAS are still applicable, both sets of standards are seen as equal

Answer 9

- **Objectives** of financial reporting - Underlying **assumptions** - **Qualiative** characteristics - **Elements** (5) of financial statements (ex. new machine recognised value in statement of financial position but life of machine 5 yrs, show value in fin statements, end of 5th year remove value out as the machine is retired) - **Measurement** of **elements** – sometimes **historic** cost value / sometimes **replacement** values (need to make a **judgement** which to use when) - Concepts and guidance related to **regulation and disclosure** - Concepts of **capital and capital maintenance** Ex. When calculating profit – normally, i.e. if inflation is under control, can prepare FS in formal way as money has same value at start and end of the period/year – if inflation very high and money loses value, statements need to be prepared accordingly and the previous standard is no longer relevant because **money has lost value** – cap maintenance will then need to be looked at from another angle

Answer 10

* **Global comparison** easier (must be in same industry) * Facilitation of **cross-border listing**, easier to raise funds / make **investments** abroad * Multinational companies with **foreign subsidiaries** have common company-wide accounting language * Multinational companies benefit because * Preparation of **group** financial statements **easier** possibly * A reduction in **audit costs** possibly * **Management control** would be improved * Transfer of **accounting knowledge/expertise** across national borders easier

Answer 11

* **Cost** of implementing * Lower level of **detail** * IFRS are **principles-based** and require application of judgement and not all favour this- ex. US GAAP is rules-based, US accountants subject to high degree of litigation and their defence is usually compliance with the relevant section of the detailed standards of a rules-based system. Such people fear IFRS may remove this defence. * Challenges in **emerging economies** * Economic **environment** * Incompatible **legal/regulatory** environments * Concerns around **SMEs** * Level of **preparedness** (willingnness) * **Education** needs of **auditors**

Answer 12

* **Legal systems**: affects standardisation process (common or code law) – differences can restrict development of accounting practices * **Business financing/accounting practice** – decision making regarding arrangement of funds may including accounting practices – many do not have strong independent accountinacy/business bodies who would press for higher standards/great harmonisation * **Tax systems** – v. influential – re connection with accounting, most countries tax authorities influence accounting rules (not in uk) re recording of revenue and expenses * **Level of inflation** – likely to influence valuation methods for various types of assets * **Political/economic relationships** – some countries very different and affected by issues such as civil war/fluctuating exchange rate- imbalance – do not allow prep / adaption of same standard for all international companies.
Nonetheless, IFRS has been a huge success – promoting global harmonisation, many have adopted it and are benefiting from it.