The Regulatory Framework Of Accounting Flashcards
What is the regulatory framework of accounting?
As the framework forms the ‘rules’ of accounting. Accountants seek to follow the same set of ‘rules’, thus enabling broad comparisons to be made between the financial result of different companies.
What three things is the regulatory framework of accounting made up of?
- The accounting standards - set by the IASB (IAS and IFRS)
- Company Law (Companies Act)
- The conceptual framework
What does following the three things of the regulatory framework lead to?
GAAP (generally accepted accounting principles)
What is the objective of the financial reporting as per the conceptual framework?
The objective of general purpose financial reporting is 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 entity.
What are the three things that the conceptual framework is/does?
- Concepts for preparation and presentation of financial statements
- Development of IFRS’s
- Deals with objective of financial reporting.
What are the two things that the conceptual framework is not/does not do?
- It is not an accounting standard
2. It is not so much a rule that can be broken, but lays out the ‘Ethos’ that accounting statements should be built upon
What are the two bases that are used when preparing financial statements?
- Going Concern
2. Accruals Basis
What is meant by going concern in relation to the conceptual framework?
Financial statements are prepared assuming that the business will continue in the forseeable future.
What is the basis called when the financial statements are prepared when the business is not going to continue is the foreseeable future?
Break up basis
What is meant by accrual accounting in relation to the conceptual framework?
Means that financial statements are prepared on the assumption that transactions are recorded/recognised when they occur and not when the cash is received or paid. Using accrual accounting means revenues + costs are entered into the accounting period.
What are the two fundamental qualitative characteristics?
Relevance
Faithful representation
What are the four enchancing qualitative characteristics?
Comparability
Verifiability
Timeliness
Understandability.
What three things make up relevance?
- Capable of making a difference in the decisions made by a user.
- Have predicted value, which helps user to predict future outcomes
- Have confirmatory value, which helps user to confirm previous evalutations
What two things make up faithful representation?
- Correspond to the effects of transactions + events
2. As far as possible be complete, neutral and free from error
What does comparability mean?
Enables users to identify and understand similarities and differences for several years of an entity’s trading or between different companies.
What does verifiability mean?
Helps assure users that information is faithfully represented. Can be direct (counting cash, stock take etc) or indirect (application of inventory value using a specific method (LIFO, FIFO etc))
What does understandability mean?
Means that information is classified, characterised and presented clearly and concisely. (Bear in mind that financial statements are presented on the basis that users and their advisors have a reasonable knowledge of business and economic activity)
What does timeliness mean?
Means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older information is, the less useful it is
What two things mean materiality?
- Information is material if its omission or mis-statement would influence the economic decisions that users make based on the financial information about a specific reporting entity.
- Materiality is an entity-specific aspect of relevance, based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.
