Lecture 1 - The Regulatory & Conceptual Framework - Presentation of FSs Flashcards
companies are owned by …
companies are managed by…
owned by shareholders
managed by directors
do shareholders have day-to-day involvement in the company?
no
what do shareholders rely on to help them make important decisions?
financial reports
who uses financial reports as a source of information on a company?
shareholders, creditors and other user groups
what is the purpose of regulations surrounding financial reports?
to ensure that financial reports provide a faithful representation
no fraud / dishonesty
what are the 3 main sources of regulation?
legislation
accounting standards
stock exchange regulations
legislation characteristics?
legislation is a source of regulation for financial reports
- broad rules
- e.g., companies act 2006 in UK
accounting standards’ characteristics?
accounting standards are a source of regulation for financial reports
- detailed rules
- e.g., national standards (FRC in UK, FASB in US)
- international standards (IASB)
stock exchange regulations?
source of regulation for financial reports of listed companies
e.g., requires listed companies to publish quarterly figures
GAAP?
generally accepted accounting practice
a complete set of accounting regulations and conventions that apply in a certain jurisdiction
e.g., US GAAP, UK GAAP etc
‘international GAAP’?
refers to the standards issued by the IASB
IASB = international accounting standards board
IASB?
- international accounting standards board
- formed in 2001 to replace IASC (international accounting standards committee)
what is the link between the IASB and the IFRS?
- IASB is responsible to the IFRS foundation
- IFRS advisory council advises the IASB on its agenda
- IFRS interpretations committee interprets international standards and provides guidance on matters not covered by the standards
IFRS Foundation?
umbrellas the IFRS advisory council, the IASB and the IFRS interpretations committee
what is the objective of general purpose financial reporting?
to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the company
4 pieces of information that financial reports must cover?
- financial position
- financial performance
- cash flows
- changes in equity
primary users of financial reports?
- existing/potential investors
- existing/potential lenders
- other creditors
other users of financial reports?
- employees
- customers
- governments and their agencies
- the public
fundamental characteristics of financial information?
- relevance
- faithful representation (complete, error-free)
enhancing characteristics of financial information?
- comparability
- verifiability
- timeliness
- understandability
‘going concern’ basis?
financial statements are normally prepared on the ‘going concern’ basis
the assumption that the entity will continue operations into the foreseeable future
what’s included in a SOFP?
assets (a resource controlled by the entity expected to derive future economic benefits)
liabilities (a present obligation of the entity arising fro past events)
equity (residual interest in assets after deducting liabilities)
whats included in a P&L?
income (increases in economic benefits during the accounting period)
expenses (decreases in economic benefits during the accounting period)
bases of measurement for assets?
historical cost
current cost
realisable value
present value
what is the most commonly used measurement basis?
historical cost
this is sometimes combined with other costs (e.g., inventory is valued at the lower of cost and net realisable value)
sometimes companies use current cost to deal with assets that have fluctuating valuations (e.g., property)
who is responsible for preparing FSs?
directors
5 components of financial statements?
- statement of financial position (B/S or SOFP)
- statement of profit or loss and other comprehensive income (I/S or SOCI)
- statement of changes in equity (SOCE)
- statement of cash flows (SOCF)
- notes
must financial statements be prepared on the accruals basis?
yes
other than the statement of cash flows (SOCF)
what makes information ‘material’?
if it is capable of changing a user’s decision
- can be significant in AMOUNT
- or significant in NATURE or FUNCTION
offsetting?
an entry can be offset by an equal but opposite entry that nullifies the original entry
e.g., a loss in one division can be eliminated by an equal profit in another division
frequency of FS reporting?
normally, annually
an entity which presents FS for a period which is longer or shorter than a year should disclose the reason and the fact that the amounts in the prolonged/shortened period aren’t comparable with a regular 12-month period
how is comparability ensured?
consistency of presentation
meaning the way in which items are presented and classified should be consistent from one accounting period to another
current assets?
assets that are realised, sold or consumed in one operating cycle
held for trading purposes
expected to be liquidated within 12 months
e.g., cash or cash equivalents or inventory
all other assets are non-current (e.g., PPE)
current liabilities?
liabilities that are expected to be settled within 12 months
all other liabilities are non-current (e.g., long term loan)
examples of line items on SOFP / BS?
PPE
intangible assets
financial assets
trade receivables
cash/ cash equivalents
provisions
liabilities
tax
equity capital and reserves
what is included in SOFP OR notes?
classes of PPE
receivables
classes of inventory
provisions
classes of equity / reserves
difference between I/S and SOCI?
I/S shows profit/loss after deducting business expenses from revenues
SOCI shows total comprehensive income after taking into account other comprehensive income (e.g., profit on sale of a NCA or interest income or revaluation of NCA)
what information is presented in the statement of comprehensive income (SOCI)?
everything on a P&L + comprehensive income
statement of changes in equity (SOCE)?
shows how much each component of equity has changed during an accounting period
includes
- total comprehensive income for the period
- effects of any changes in accounting policies
- share issues
- dividends paid
shows reconciliation of the opening/closing balance of each component of equity
what do FS notes include?
- measurement bases and other accounting policies
- further information required by international standards
- additional information relevant to an understanding of the FSs
dividends - interim?
most listed companies propose & declare an interim dividend half way through the FY
dividends - final?
most listed companies propose & declare the final dividend JUST AFTER the FY, but before the FSs are issued
journal entry to recognise dividends?
when proposed/declared:
dr retained earnings, cr dividends payable
when paid:
dr dividends payable, cr bank
impacts of IFRS?
- enhanced investor confidence due to increased transparency
- seamless cross-border M&A due to consistent FR principles
- reduced reporting costs due to consistent standards that comply with multiple jurisdictional regulations
- facilitation of capital flows by eliminating barriers arising from diverse accounting practices
what do IFRS aim to enhance?
efficiency, comparability, accuracy and transparency of financial information
what do the IASB do?
develop and amend international accounting standards
are dividends an expense?
no, they come out of retained earnings on the balance sheet
e.g., dr owners equity, cr div payable… dr div payable, cr bank
under which circumstances can presentation/classification of items on an FS change?
- change of operations
- change in law
revaluation of PPE journal entry?
dr PPE, cr revaluation reserve
revaluation reserve is an equity account that goes on the SOCI
are leased equipment classed as an asset on the SOFP?
yes, but it’s classed as a ‘right of use’ asset
you also need to disclose the amount owing to the lessor as a liability
define liability
define asset
liability = present obligation to transfer an economic resource as a result of past events
asset = a resource controlled by the entity as a result of past events from which future economic benefit is expected
