Topic 1: The Regulatory & Conceptual Framework - Presentation of Financial Statements (IAS1)

Question 1

List the main sources of regulation.

Answer 1

• Legislation (varies from country to country) - broad rules; Companies Act 2006 in UK.
• Accounting Standards - detailed rules; national standards (e.g. FRC in UK; FASB in the USA); international standards (IASB).
• Stock Exchange Regulations (listed companies) - e.g. requirement to publish quarterly figures.

Question 2

Explain the term ‘GAAP’.

Answer 2

• ‘Generally Accepted Accounting Practice’ (GAAP) is the complete set of accounting regulations (from all sources) and accounting conventions that apply in a certain jurisdiction e.g. UK GAAP, US GAAP etc.
• The term ‘international GAAP’ refers to the standards issued by the IASB and the principles on which those standards are based.

Question 2

Explain the need for regulation.

Answer 2

Regulations try to ensure that financial reports provide a faithful representation to possible users of the information e.g. shareholders & creditors. This information aids users when they make important decisions.

Question 3

Outline the structure of the IASB.

Answer 3

• Responsible to the IFRS Foundation.
• The IFRS Advisory Council advises the IASB on its agenda and priorities.
• The IFRS Interpretations Committee interprets international standards and provides guidance on matters not covered by standards.

Question 4

Outline the functions of the IASB.

Answer 4

Develops and amends international standards.

Question 5

Explain the main features of IFRS I First-Time Adoption of IFRS Standards.

Answer 5

• The “first IFRS reporting period” is the period covered by the first IFRS financial statements.
• The “date of transition” is the date at the start of the earliest period for which companies are provided in the first IFRS financial statements.
• Need to prepare an opening IFRS statement of financial position as at the date of transition.
• Must use the same accounting policies in the opening IFRS statement of financial position and in all periods presented in the first IFRS financial statements; these policies must comply with all international standards in force at the end of the first IFRS reporting period.
• Certain reconciliations are required.

Question 6

State the main purpose of the IASB Conceptual Framework.

Answer 6

The IASB Conceptual Framework identifies the concepts that underlie general purpose financial statements prepared and presented for the benefit of external users.

Question 7

State the scope of the IASB Conceptual Framework.

Answer 7

• Assists in development of international standards.
• Provides a basis for for reducing alternatives.
• Assists national standard-setters in developing national standards.
• Assists those preparing financial statements in applying international standards.
• Assists auditors in forming an opinion as to whether international standards have been complied with.
• Assists users in interpreting financial statements.

Question 8

State and explain the qualitative characteristics of useful financial information.

Answer 8

• Relevance (predictive or confirmatory value)
• Faithful Representation (complete, neutral, error-free)
• Comparability (consistent accounting treatments)
• Verifiability (direct or indirect)
• Timeliness (in time to influence decisions)
• Understandability (clear and concise presentation)

Question 9

State and explain an important assumption that underlies the preparation of financial statements.

Answer 9

• Financial statements are normally prepared on the “going concern basis”.
• It is assumed that the entity will continue in operation for the foreseeable future and has neither the intention nor the need to close down or to materially reduce the scale of its operation.

Question 10

Define each of the main elements of the financial statements.

Answer 10

• An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
• A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
• Equity is the residual interest in the assets of the entity after deducting all its liabilities.
• Income causes increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that results in increases in equity, other than those relating to contributions from equity participants.
• Expenses causes decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or incurring liabilities that results in decreases in equity, other than those relating to distributions to equity participants.

Question 11

Explain the criteria which determine whether or not an element should be recognised in the financial statement.

Answer 11

An item is recognised if:
- (a) it is probable that any future economic benefit associated with the item will flow to or from the entity, and
- (b) the item has a cost or value that can be measured with reliability.

Question 12

Explain the measurement bases included in the Conceptual Framework.

Answer 12

• Historical Cost
• Current Cost
• Realisable Value
• Present Value

Question 13

Distinguish between financial and physical capital maintenance.