Learning Objective 6 - Chapter 7 (LO6 = 2 marks) Flashcards
what rules must quoted companies adopt regarding preparing their accounts?
The International Financial Reporting Standards
What standards must subsidiaries of quoted companies adopt?
FRS 101 (which is essentially IFRS with reduced disclosures)
What standards may all other UK companies other than quoted companies choose to additionally adopt?
FRS 102 (UK GAAP)
What standards may all other insurance companies choose to additionally adopt?
FRS 102
What must companies who have chosen to adopt FRS 102 do?
They must adopt FRS 103
What is the IFRS Foundation?
A non-profit international organisation responsible for developing a single set of high-quality global accounting standards, known as IFRS standards
what is the main mission for the IFRS foundation?
To develop standards that bring transparency, accountability and efficiency to financial markets. It is designed to serve the public interest and is supported by the international organisations including the G20, the financial stability board and the world bank
how many jurisdictions is the IFRS standards required in?
144 - with many others permitting their use
how many tiers are in the IFRS structure?
The IFRS work on a 3 tier governance structure
what is the 3 tier governance structure of the IFRS based on?
The independent standard setting board of experts (the International Accounting Standards Board) (IASB)
who governs and oversees the IFRS Fundation?
The IFRS Foundation Trustees
what is the International Sustainability Standards Board and when was it created?
the purpose of this board is to deliver sustainability related disclosure standards that provide investors and other capital market participants with information about companies sustainability related risks and opportunities to help them make informed decisions.
what is the job of the IFRS Advisory Council?
To provide strategic support to the IFRS foundation, while the board also consults extensively with a range of other boards and consultive groups
who supports the International Accounting Standards Board (IASB)?
The IFRS Interpretations Committee
what is the role of the IFRS Interpretations committee?
To offer guidance where divergence in practice occurs - and by a range of advisory bodies
what do the IASB (International Accounting Standards Board) do?
They cooperate with national accounting standard setters to achieve convergence in accounting standards across the world.
i.e in the UK, this is the Financial reporting Council (FRC) - to be replaced by the Audit, Reporting and Governance Authourity (ARGA) and in the USA this is the Financial Accounting standards Board (FASB)
what does the companies act 2006 refer to the balance sheet as?
The statement of financial position
what does the companies act 2006 refer to the profit and loss account?
The Income statement / statement of comprehensive income
who uses IFRS (International Financial Reporting Standards)?
All companies listed on the London Stock Exchange
Is the IFRS able to be used over seas?
The USA have a Securities Exchange Commission which allows firms to use IFRS (the international version, not the UK one) but the US have said that they do not advise a move to the IFRS for financial reporting by US companies.
what are the remaining capital markets without an IFRS mandate?
- USA - with no current plans to change as they have their own version
- Japan - where there is voluntary adoption but this is not required.
when does the IFRS apply to eligible companies in the UK?
once they have been formally endorsed by the UK endorsement board (UKEB)
what are the three points of criteria that the UKEB applies?
- The accounts must give true and fair view
- The use of the standard is to be conductive of the long term public good
- The standard should meet a level of criteria of understandability, relevance, reliability and comparability
what are the two underlying assumptions used in IFRS?
- Accrual Basis
- Going concern
What is the accrual basis in terms of the underlying assumption used in IFRS?
The effect of transactions and other events are recognised when they occur, not as cash is received or paid
What is the going concern basis in terms of the underlying assumption used in IFRS?
The financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future.
If management conclude that an entity is not a going concern, the financial statement should not be prepared on a going concern basis.
i.e if a company is looking likely to collapse, auditors reports must make this known and financial statements must reflect this.
what did the FRC publish as guidance following COVID 19
That companys can be a going concern even when just one or more material uncertainties exist. In such circumstances, what becomes important is the disclosure of these.
what four characteristics of financial information enhance its usefullness?
- The usefulness of financial information is enhanced if it is:
- comparable
- verifiable
- timely
- understandable
how does the IFRS set out the statement of financial position (the balance sheet)
The IFRS sets out the balance sheet as comprising of Assets, Liabilities and equity.
summarise assets:
Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
summarise liabilities
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
Summarise equity
The residual interest in the assets of an entity after deducting all its liabilities
what is an income statement known as by the IFRS framework?
a statement comprehensive income
what two things should be included in an income statement / statement of comprehensive income according to the IFRS framework?
- Income. i.e increases in economic benefits
- Expenses. i.e decreases in economic expenses
we know that there is a big requirement in the UK under the CA 2006 that accounts must give a true and fair view. What is the view on this worldwide?
The USA and most EU countries do not have any equivalent requirements to this. In these countries, it is kind of a given that a companies accounts will be fairly given if they comply with accounting standards
define ‘ true and fair’
This is not defined in legislation however is generally interpreted as giving a faithful representation of the financial performance of a company for the period, its financial position and where relevant, cash flows for the period.
who created the Financial Crisis Advisory Group? (FCAG)
The IASB (UK) & the Financial Accounting Standards Board (USA Equivalent of IASB) created FCAG in 2007/2008
Why was the FCAG created?
The IASB, together with the Financial Accounting Standards
Board (FASB), its US equivalent, created the Financial
Crisis Advisory Group (FCAG) to consider financial reporting issues arising from the global financial crisis in 2007/2008
when was the first reporting from the FCAG and what did it address?
2009
- effective financial reporting
- limitations of financial reporting
- convergence of accounting standards
- standard -setter independence and accountability
They reported that the crisis had exposed weaknesses in accounting standards and their application. Weaknesses reduced the credibility of financial reporting, which in part contributed to the general loss of confidence in the financial system.
what is IFRS 17?
- Issued in 2017 with an effective date of 01 January 2023 by the International Accounting Standards Board, aimed at insurance contracts.
The objective is to help investors to better understand insurers risk exposure, profitability and financial position.
This will replace IFRS 4 which was bought into place in 2004 - this version allowed companies to use national accounting standards which resulted in investors finding it difficult to compare and contract the financial position of otherwise similar companies
What is IFRS 17 aimed at
The accounting standards of Insurance obligations / costs
what had IFRS 17 replaced as of 01 jan 2023?
IFRS 4
What is the key difference between IFRS 17 and IFRS 4?
The replacement will mean that all insurance firms have to follow the same standards as opposed to being allowed to follow national accounting standards which varied and made it harder for investors to compare firms.
insurance obligations are to be accounted for using current values instead of historical costs, and this information will be updated more regularly
what 6 further impositions have been put into place in IFRS 17 as of 01 Jan 2023 regarding requirements for aspects to be included within statements?
- Insurers need to make more extensive disclosures about their insurance risk management policy, interests, and credit info.
- insurance liabilities need to be kept on the insurers balance sheet until they are discharged cancelled or expire
- insurance liabilities must be included in the balance sheet without ofsetting them against reinsurance liabilities
- a test for the adequacy of recognised insurance liabilities
- an impairment test for reinsurance assets
- provisions for possible claims under contracts that are not in existence at the reporting date
what is different in the way that accounting practices are reflected in the insurance industry
The insurance industry focuses on managing assets and liabilities on an economic basis, which is something accounting practices dont often reflect
what are the requirements for CDTs (Claims development tables) according to IFRS 4?
IFRS 4 requires CDTs to be shown for general insurers
What are CDTs and how are they valuable according to IFRS 4?
Claims Development Tables convey valuable information about how accurate the managements prior estimations of outstanding claims were, and the extend to which insurance liabilities are subject to variation.
what are the 4 ways that we usually see variation to how Claims Development Tables are shown:?
There can be variation as to how these tables are shown, including how to:
- account for acquisitions and disposals
- factor in the effects of foreign exchange fluctuations
- include incurred but not reported claims in the tables
- account for the effects of discounted liabilities
what 4 things are included in the IFRS financial statements?
- Balance sheet
- income statement
- cash flow statement
- notes, summary of the significant accounting policies
IFRS also requires comparative information for the previous
accounting year to be shown.
there are two other additional statements that are only sometimes required by the IFRS apart from the usuals, what are these?
a statement of changes in equity
- a statement of recognised income and expenses. -
If a statement of recognised income and expenses (SORIE) is required, what else must be given?
A note of reconciliation of opening and closing share capital and reserves
what is the guidance on IFRS for SMEs?
They have an alternative requirement to full IFRS. I.e they have to submit a self contained standard of 250 pages, designed to meet the needs and capabilities of SME’s (SME’s account for 95% of the companies of the world)
what is UK GAAP?
UK Generally Accepted Accounting Principals
when was there a significant change to the UK GAAP
2015, - with the introduction of FRS 102, referred to as the new UK GAAP
what does the FRC stand for?
The Financial reporting Council
who is currently the UKs independent regulator responsible for promoting confidence in corporate reporting and is to be replaced by the ARGA in 2023?
The FRC. Financial Reporting Council
When is the Audit, Reporting and Governance Authority (ARGA) going to replace the Financial Reporting Council (FRC)?
2023
what is the main role of the FRC currently?
The FRC issues accounting standards across the UK &I, however with the move to the IFRS, it is more focused on influencing the setting of standards by the IASB on behalf of stakeholders.
what is the main role of the FRC’s conduct committee?
To ensure that the provision of financial information by public and large private companies complies with relevant reporting requirements
they review the directors reports to make sure they are compliant with the law
what FRS takes care of SMALL enterprises
FRS 102
What characteristics does a company have to have to be deemed SMALL?
TWO OF THESE:
- Turnover of less than £10.2m
- total assets of less than 5.1m
- 50 or less employees
according to FRS 102, what does a small company have to comply with when submitting their accounts?
They have to be ‘ true and fair’
What characteristics does a company have to have to be deemed MICRO?
- TO of less than £632,000
- Total asset value of less than £316,000
- 10 employees or less
what FRS do MICRO companies follow?
FRS 105
according to FRS 105, what does a micro company have to comply with when submitting their accounts?
The financial statements of a micro entity prepared in
accordance with FRS 105 are presumed in law to show a
true and fair financial position and so a micro entity does not
have to consider making additional disclosures.
for UK quoted companies that are required to produce accounts in accordance to IFRS standards, what is the deal for their parent companies?
They are under no obligation to adopt IFRS for their own accounts if their subsidiaries have to, but it is common for them to follow the UK GAAP rules.
Why might a parent company of a UK quoted company chose not to adopt IFRS for their individual company accounts?
The onerous disclosure requirements associated with IFRS
what is IFRS 103 and when was it published?
- regards insurance contracts
- issued in march 2014
- contains specified requirements around for insurers applying FRS 102.
- consolidates existing guidance included in IFRS 4 (now 17) and allows entities to continue with their current practices for insurance contracts however now that IFRS 17 has been issued, it is likely that FRS 103 will be revisited.
