Part 2: Accounting quality and regulation

Question 1

What four categories can market failure be divided into?

Answer 1

Asymmetric information
Public goods (non-excludable and/or non-rivalrous)
Externalities (the uses benefit but the preparers bear the costs)
Market power

Question 2

What are Nobes (1992) two factors and two dimensions explaining differences in accounting systems

Answer 2

The financial system and the tax system factor
Regulation and role of the accounting profession factor
Principle-based versus rule-based regulation dimension
Enforcement dimension
(This laid the foundation for the Anglo-American and Continental groupings)

Question 3

What is the conceptual framework?

Answer 3

The conceptual framework takes on normative traits as it contains declaration of the objective of financial reporting, through definitions of core concepts and principles governing the preparation of financial reporting.

Question 4

What is the general purpose, and the four types of characteristics financial reporting should consist of to be useful according to the conceptual framework?

Answer 4

General purpose – decision usefulness
Fundamental qualitative characteristics
Aspects of qualitative characteristics
Enhancing qualitative characteristics

Question 5

What are the fundamental qualitative characteristics?

Answer 5

Materiality – information item is material and has predictive or confirmatory value
Relevance – when users are provided the reports
Faithful representation – of economic events into the financial reports

Question 6

What are the aspects of the fundamental qualitative characteristics?

Answer 6

Predictive value 
	Confirmatory value 
	Completeness 
	Neutrality 
	Free from error

Question 7

What are the enhancing qualitative characteristics?

Answer 7

Comparability
Verifiability
Understandability
Timeliness

Question 8

What is the trade-off between relevance and faithful representation?

Answer 8

Potentially relevant information could be difficult to represent faithfully (measurement uncertainty) such as the recognition and measurement of internally generated intangible assets. This mean that some prefer information that is not faithfully represented if it carries relevance. Here we can see a differences between the two roles of accounting, where the stewardship role generally prefers faithful representation (historical cost) and the valuation role relevance (fair value).

Question 9

What are the four (most important) principles of accounting and why aren’t they included in the conceptual framework?

Answer 9

Matching principle 
	Prudence (conservatism) 
	Substance over form 
	True and fair view
	(It is said that if a financial report possess the CF’s qualitative characteristics, these principles are met)