Principles and concepts Flashcards
Define - Accounting conceptual framework
A theory that explains the reasoning which underlines the prep of accounts. It sets out the generally accepted accounting principles.
Answers:
What are the accounts for, what are they, who are they for, what makes them useful
IFRS Conceptual framework helps the IASB develop standards, preparers to create accounts and parties to understand
Principle based vs Rule based
Rule based system = series of detailed rules on how accounts should be prepared. Less flexible, more comparable and consistent, can lead to looking for loopholes. Not possible for rules to cover all possible accounting transactions.
Principle system = conceptual generally accepted accounting principles which are underpinned by a set of key objectives. More flexible, require judgement and interpretation. Can lead to inconsistencies.
Standards that are based on conceptual frameworks are called principles-based. IFRS rules are based on underlying concepts
Categories of qualitative characteristics
Fundamental (i.e. essential)
Enhancing (i.e. a further improvement)
Fundamental qualitative characteristics
There characteristics need to ensure the accounts are “true and fair”.
Relevance - helps the user assess past, present or future events (predictive value) and helps users to confirm past assessments (confirmatory value).
Faithful representation - Complete, Neutral, Free from error. Neutrality = prudence, exercising caution when making judgements.
Enhancing qualitative characteristics
Comparability, Verifiability, Timeliness & Understandability
Comparability = enable users to compare different periods in the entity and between different entities.
Verifiability = verifiable information which enables users to determine whether a particular accounting treatment is a faithful representation i.e. counting cash.
Timeliness = Provided in reasonable time
Understandability = understandable to users with reasonable business knowledge
Recognition and derecognition
Recognition = to include something in the accounts i.e. useful information and meets the definition of an element (asset, liability, income, expense, equity)
Derecognition = to remove something from the accounts. Normally when an entity loses control of an asset or no longer has a liability
Measurement basis
Historical cost or Current value
Current value = fair value, value in use (present value of the cash flows or other economic benefit of an asset and its ultimate disposal) or current cost (cost of an equivalent asset at measurement date being Y/E)
Fair value hierarchy
Level 1 = quoted price from an active market for an identical asset
Level 2 = observable directly or indirectly for the asset (similar asset active market price)
Level 3 = unobservable, but based on the best available information
Capital maintenance
Concept to ensure excessive dividends are not paid in time of raising pries
Regulatory structure
IFRS Foundation
IFRS Advisory Council - IASB - IFRS Interpretations Committee
IFRS Foundation
Responsibilities
Responsible for:
Appointing members to the Board, Interpretations committee and Advisory council
Review general strategy of the board and monitor its effectiveness
Approve annual budget and determine funding
International Accounting Standards Board (IASB)
Responsibilities
Responsible for:
Development and publication of standards (IFRSs) and the conceptual framework
IFRS Interpretations Committee
Responsibilities
Responsible for:
Providing timely guidance on the application and interpretation of IFRSs and in the context of the conceptual framework. Interpretations are approved by the Board
IFRS Advisory Council
Responsibilities
Responsible for:
Takes advice from individuals, corporations and national standard-setters and provides advice to the Board on priority areas
Advantages of IFRS over national frameworks
IFRS has a stronger reputation (may help with credit rating)
Comparable with mass accounts produced under IFRS
Use of IFRS may reduce audit fees
Easier listing on stock exchange
