The Regulatory Framework Flashcards
What is the framework made up of?
International Accounting Standards (ISA’s) and International Financial Reporting Standards (IFRS’s)
Companies Act 2006
Conceptual Framework for Financial Reporting
What is the body responsible for the development and issuance of the ISA’s and IFRS’s?
IASB
What does IASB stand for?
The International Accounting Standards Board
What does the IAS’s stand for?
International Accounting Standards
What does the IFRS stand for?
International Financial Reporting Standards
What are the 5 steps to setting standards?
1) Topic is identified
2) Topic is discussed and the IASB may set up a working group
3) Discussion paper is issued and public comment invited
4) An exposure draft is issued (circulated to accountancy bodies, government, other interested parties and available on the website) for public comment
5) IASB consults with IFRS Advisory Council and working groups before an IFRS is voted on and issued
What is the Companies Act 2006?
Is UK legislation which governs Limited Companies.
According to The Companies Act 2006 what are Directors responsible for?
1) Keeping proper accounting records
2) Responsible for preparing in the financial statements, having them audited and presenting then this the shareholders in a general meeting
3) Filling accounts at Companies House -once shareholders approve. This must be done within 6 months for Plc and 9 months for Ltd.
What are the two fundamental qualitative characteristics?
Relevance and faithful representation
When is something considered to have achieved relevance?
If it is capable of marking a different to the decision of a user
How can financial information make a difference to a decision?
If it has predictive value - it can be used to predict future outcomes
Confirmatory value - provides feedback about previous evaluations
What is informations relevance affected by?
Nature and materiality
What is the materiality?
Information is material is omitting, misstating or obscuring it could reasonable be expected to influence decisions that the primary users make on the basis of the financial information about a specific reporting entity
What is meant by faithful representation?
Information is:
Complete
Neutral
Free from error
Neutrality is supported by the exercise of….
Prudence
What is prudence?
Prudence means exercising caution when making judgements under conditions of uncertainty.
What are the 4 enhancing characteristics?
Comparability
Verifiability
Timeliness
Understandability
What is meant by comparability?
It enables users to identify and understand similarities in, and differences among, items. Therefore there are set standard formats of a presentation and rules to following when preparing financial statements.
What is meant by verifiability?
Helps to assure users that information represents faithfully the economic reality of the transaction. Means that different knowledgable and independent observers could reach agreement that a particular treatment of an item is a faithful representation.
What is meant by timeliness?
Timeliness means that information is available to decision makers in time to be capable of influencing their decisions.
What is meant by understandability?
Classifying, characterising and presents information clearly and concisely will make it understandable.
What is meant by cost constraint on useful information?
The more info provided the more costly it becomes.
What is meant by stewardship?
Management are accountable to the shareholders. They are responsible for day to day but make sure to use assets etc in a proper, efficient and profitable way.
What is the going concern assumption?
The assumption that the business will continue trading for the foreseeable future. Usually it will continue to trade for 12 months.
What are the 5 elements of the financial statements?
Assets Liabilities Equity Income Expense
What is the definition of an asset?
A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
What is the definition of liabilities?
A present obligation of the entity to transfer an economic resource as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
What is the definition of equity?
The residual interest in the assets of the entity after deducting all its liabilities.
What is equity as a calc?
Share capital + reserves
What is the definition of income?
Increase in assets, or decrease in liabilities, that result in increases in equity, other than those relating to contribution from holders of equity claims.
What is the definition of expenses?
Decreases in assets, or increased in liabilities, that result in decreases in equity, other than those relating to distribution to holders of equity claims.
What does recognition mean?
Including an element in the financial statements.
An element should be recognised when…
It meets the definition of an element
Provides relevant information
Can be faithfully represented
Must do all three
When should an element be derecognised ?
When an element no longer meets the definition of an asset or liability.
What are the two possible bases of measurements?
Historical cost or current value
What is meant by historical cost?
Typically original price paid or received. Once recorded this is not regularly updated each year except for impairments.
What is meant by current value?
Values are updated to reflect conditions at the reporting dates.
What are the 3 ways to obtain current value and what do they mean?
Fair value - price that would be received to sell that asset or pay that liability in an ordinary arms length transaction. Eg independent price today
Value in use - present value of all future cash flows
Current cost - cost of an equivalent item if you had to replace it or settle the liability today
What does effective communication of information in financial statements require?
- focus on objectives rather than rules (qualitative characteristics)
- grouping of similar items together
- separation of dissimilar items
- aggregation of similitudes (adding together) so no unnecessary details given
- offsetting of assets and liabilities is generally not appropriate
What is meant by capital maintenance?
Theoretical concept of which tries to ensure that excessive dividends are not paid.
What are the two ways capital maintenance is split?
Financial capital maintenance
Physical capital maintenance
What is meant by financial capital maintenance?
Capital is maintained if the net assets at the end of the period are equal to or greater than the assets at the start of the year
What is meant by physical capital maintenance?
Capital is maintained I’d the operating capacity of the entity is equal to or greater than at the start of the period
What are the 5 fundamental ethical principles?
Integrity Confidentiality Competence and due care Professional behaviour Objectivity
What is meant by integrity?
Members should be straightforward and honest when doing work. This applies to financial reporting when preparing and presenting the information so accountants do not manipulate results.
What is meant by objectivity?
Members should be fair in what they do. Members should not allow any prejudice or bias to influence the worn they are doing. Eg producing accurate financial statements not to try and reach a desirable outcome.
What is meant by professional competence and due care?
Memeber must refrain from undertaking or continuing any assignments which they are not competent to carry out. Members have a duty to maintain there professional knowledge.
What is meant by confidentially?
Members should respect all information given to them by clients or employers as confidential and should not disclose any details of their work or findings without proper authorisation or legal obligation to do so.
What is meant by professional behaviour?
Members should act in a manner which is consistent with a good reputation the profession has developed. Members should not discredit the profession and should try to enhance the reputation,
What are the 5 ethical threats?
Self interest Self review Familiarity Intimidation Advocacy
When should an element be recognised?
Meets the definition of an element
Provides relevant information
Can be faithfully represented
