Module 1 - Accounting Principles and the Conceptual Framework Flashcards
UK listed companies use
IFRS in compliance with Companies Act 2006
UK unlisted companies use
FRS
IFRS amended by
IASB
FRS 102 amended by
FRC
New conceptual framework applicable from
1 January 2020
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 relating to providing resources to the entity.
Users need information about (3)
- Economic resources and claims
- Changes in resources and claims
- Use of economic resources
Conceptual framework qualitative characteristics (2)
Fundamental and enhancing
Fundamental characteristics (2)
Must be present for information to be useful
- Relevance
- Faithful representation
Enhancing characteristics (4)
Usefulness of information is enhanced by these characteristics
- Comparability
- Verifiability
- Timeliness
- Understandability
Relevance is.. (+ two values)
Capable of making a difference in the decisions made by users. This is the case if it has:
- Predictive value
- Confirmatory value
Information is material if
Omitting it or misstating it could influence the decisions of the primary users
Three characteristics of faithful representation
- Complete
- Neutral
- Free from error
Neutrality is supported by
Prudence
Consistent use of accounting policies and methods helps to achieve
Comparability
Verifiability =
Different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation
Verification can be (2)
- Direct > eg counting cash
- Indirect > eg recalculation
Timeliness =
Having information available to decision makers in time to be capable of influencing their decisions
Information is made understandable if it is (3)
- Classified
- Characterised
- Presented clearly and concisely
3 types of financial statements
- Unconsolidated
- Combined
- Consolidated
Asset =
A present economic resource controlled by the entity as a result of past events
Economic resource =
A right that has the potential to produce economic benefits
Liability =
A present obligation to transfer an economic resource as a result of past events
Obligation =
A duty or responsibility that an entity has no practical ability to avoid
Equity =
The residual interest in the assets of the entity after deducting all of its liabilities
Income =
Increases in assets or decreases in liabilities that result in increases in equity
Expense =
Decreases in assets or increases in liabilities that result in decreases in equity
Recognition of income can be
- Recognition of an asset
- Derecognition of a liability
Recognition of expense can be
- Derecognition of asset
- Recognition of liability
Item is recognised in the financial statements if (2)
- Meets the definition of an element
- Provides users with information that is relevant and a faithful representation
Derecognition
Removal of all or part of a recognised asset or liability from an entity’s statement of financial position
Derecognition of an asset
When control is lost
Derecognition of a liability
When there is no longer a present obligation
Two main measurement bases
- Historical cost
- Current value
Historical cost =
Based on transaction price when asset was acquired or created or liability was incurred
Current value (3) =
Reflects changes in values
- Fair value
- Value in use
- Current cost
Fair value =
Price received to sell asset or paid to transfer liability
Value in use =
Present value of cash flows from use and disposal of asset/ present value of resources transferred to fulfil a liability
Current cost =
Cost of an equivalent asset
IAS 2 Inventories requires measurement at
Lower of cost or NRV
NRV =
Fair value adjusted for costs to completion and selling costs
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets require measurement at
The cost model or revaluation model
IAS 36 Impairment of assets requires that an impaired asset is written down to higher of
Value in use and fair value less costs of disposal
IAS 40 Investment Property requires measurement using
The cost model or fair value model
In exceptional circumstances, the IASB may include income or expenses arising from a change in value of an asset or liability as
Other comprehensive income
Financial concept of capital maintenance
Capital refers to the net assets or equity of the entity, profit is made if the equity increases over a period
Physical concept of capital maintenance
Capital refers to the productive capacity of the entity, profit is made if the operating capacity at the end of the period is greater than at the start
Standard for determining fair value
IFRS 13
Level 1 inputs
Quoted price in an active market for identical assets or liabilities
Level 2 inputs
Inputs other than quoted prices that are directly or indirectly observable eg quoted prices for similar assets/ liabilities in active/ inactive markets. May need to make adjustments
Level 3 inputs
Unobservable inputs that cannot be sourced from the market
