Theory

Question 1

Benefits of having group accounts?

Answer 1

• Improved accountability
• Financing
• raise more finance
• diversification
• Provision of security
• consolidated as one entity
• Disposals
• short - term investement
• Dispose in future to make profit

Question 2

Define the word ‘control’

Answer 2

IAS27: Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities.
Control is presumed to exist when an invetsor owns, either directly or indirectky through subsidiaries, more than 50% of the voting power of an entity

Question 3

Definition of financial instrument

Answer 3

Any contract that gives rise to a financial asset of one entity and a financial liability of another entity

Question 4

Problems with accounting for financial instruments

Answer 4

o Standards were most difficult and controversial for the IASB to issue.
o Drawn from USGAAP and have been criticised for being too rules based.
o They have had political implications
o Blamed as contributing to the banking crisis in October 2008
o IAS 39 was amended without going through the normal due process

Question 5

Catagories of instruments

Answer 5

he standard catagorises assets / liabilities as:
- held for trading
- held to maturity
- loans and recievables
- available for sale
Available for sale and held for trading measured at fair value
Loans and recievables and held to maturity measured at amortised costs using the effective interest method
Any financial asset that does not habe a quoted market price in an active market and whose fair value cannot be relaibely measured is valued at ammortised cost

Question 6

Compare and contrast IAS 39 and IFRS 9

Answer 6

Problems with IAS 39:
Lack of guidance to measure the elements in a multiple-element arrangement
* Without a specified measurement objective for the remaining elements in such an arrangement, entities apply different measurement approaches to similar transactions, which reduces the comparability of revenue across entities.
- No clear distinction between good and services

Question 7

DIsclosures required for financial instruments

Answer 7

The objective of IFRS 7 and IAS 32 disclosures is to provide sufficient
information so users can evaluate:
– the significance of on balance sheet and off balance sheet financial instruments on an
enterprise’s financial position, performance and cash flows
– the risk management policies of the organisation
– the of terms, conditions and accounting policies in relation to all financial assets,
financial liabilities and equity
– the exposure to interest rate risk and credit risk in all financial assets and financial
liabilities
– information on fair values e.g. method used to determine fair value

• Practical matters to be disclosed:
  – classification of the financial instrument (using substance over form)
  – separate classification of component parts of the financial instrument in equity and
  liabilities (convertible debt)
  – reporting of interest, dividends, losses and gains from a financial instrument

Question 8

The concept of revenue recognition as per IAS 18 and IFRS 15

Question 9

The definiton of revenue as per IAS 18 and IFRS 15

Answer 9

The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases of equity, other than increases relating to contributions from equity participants.

Question 10

The definiton of income as per IAS 18 and IFRS 15

Answer 10

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants.

Question 11

The origin of revenue

Answer 11

IAS 18: The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases of equity, other than increases relating to contributions from equity participants.

origin of revenue:
- sale of goods
- Rendering of services
- Revenue earned from use of the entity’s assets yielding interest, royalties and dividends

Question 12

What disclosures are required IFRS 15

Answer 12

Accounting policy, including methods to
determine the stage of completion of
services rendered.
* If different policies for different types of
revenue, disclose each policy.
* Disclose policy for each element of sales if
multiple elements.
* Specific transaction

Question 13

ANy critisms of IAS 18 - benefits of IFRS15

Answer 13

The historic revenue standrad IAS 18 were complex, detailed, and had disparate revenue recognition
requirements for specific transactions and industries including, for example,
software and real estate. As a result, different industries use different
accounting for economically similar transactions.
The new standard IFRS 15 is a major achievement in the International
Accounting Standards Board (IASB) and Financial Accounting
Standards Board (FASB) efforts to improve this important area of financial
reporting
- converged standrad between IFRS and USGAAP

Question 14

IFRS 15 5 step model

Answer 14

1. Idnetify the contract with a customer
2. Identify the seperate performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the seperate performance obligations
5. Recognise revenue when the entity satisfied each performance obligation

Question 15

The need for financial accounting regulations

Answer 15

Fundamnetal qualatative characteristics
* Faithful representation
* Relevence
- ENhancing qualatative characteristics
* Comparability
* Verifiability
* Timeliness
* Understandability

Question 16

The importance of qualatative charactersitics of useful financial information

Answer 16

Fundamnetal qualatative characteristics
* Faithful representation
- An essential quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, information about complex matters that should be included in the financial statements because of its relevance to the economic decision-making needs of users should not be excluded merely on the grounds that it may be too difficult for certain users to understand.
* Relevence
- To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them to evaluate past, present or future events or confirming, or correcting, their past evaluations.

Question 17

Globalisation and its impact towards financial reporting standard

Question 18

Inconsistency in financial reporting when there is flexibility in applying accounting standards

Answer 18

This accounting flexibility is, to a large extent, determined by the type of GAAP which is applied.
Accounting standards that are characterized by more flexibility allow managers more easily to report income in those financial periods when managers have incentives to present better results.

Question 19

Optimal level of disclosure by companies to avoid excessive amount of info disclosed – information overloaded

Answer 19

firm. In principle, the published figures should represent the underlying economic situation of the firm. However, due to the flexibility that exists in the accounting standards to be applied and the incentives top executives face towards earnings management a situation might be created in which the published figures in the financial statements do not translate the underlying economic condition of the firm. Although companies must provide a minimum level of disclosure as required by the GAAP they are complying with, the management team can always make more voluntary disclosures.
Most empirical research studies provide evidence that an increase in disclosure leads to lower costs of capital due to the reduction in information asymmetry

Question 20

held for trading (FI)

Answer 20

These are assets intended to generate a profit fro short-term price fluctuations
These assets measured at fair value on the SoFP with gains and losses being posted through te income statement
Exanples:
- Ordinary shares
- Iredeemable prefernce shares
- Bonds
- Derivative contracts

Question 21

held to maturity

Answer 21

These are asstes iwth fixed or determinable payments and fixed maturity that the company intends to hold to maturity, irrespective of changes in market prices or the company’s positions
Prices for these assets must be quoted in an active market
Examples
- Redeemable preference shares
- Bonds
- Forward Contracts