Week 1 Flashcards
Name the 7 Stakeholders
Shareholders
Customers
Suppliers
Employees/Managers
Debenture Holders
Government
Public at large
Name the 4 main financial statements
Statement of Profit and loss
Statement of Financial Position
Statement of Cash Flow
Statement of changes in equity
5 (Trial Balance Adjustments)
- Inventory
- Depreciation
- Provision for Bad Debts
- Accruals and Prepayments
- Correction of errors
Qualitative Characteristics
Fundamental characteristics:
1. Relevance
2. Faithful representation
Enhanced characteristics
1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
What is the objective of Financial Reporting
To provide useful financial information about the reporting entity to shareholders, as well as other users of financial statements who use the information to make financial decisions.
What is meant by Comparative Information in relation to financial statements?
Each statement serves a particular objective.
The statements are interconnected.
They should be looked at in totality.
All statements are to be presented with equal prominence.
Reports that are presented outside the financial statements are outside the scope of IFRSs.
Comparative information should be provided in respect of the previous period for all amounts reported in the financial statements.
What should you consider with regards to the consistency of financial statements?
General rule: The presentation and classification of items in the financial statements should be the same from one period to the next.
Exception to the general rule; A change is justified by
i) a change in circumstances
or
il) requirement of a new IFRS
Disclosure: a change in circumstance or a requirement of a new IFS along with its effect on financial statement items must be disclosed.
IAS 1 - 4 points regarding Fair Presentation?
a) The financial statements must present the financial position, financial performance and cash flows of an entity fairly and accurately.
b) Compliance with IFS - explicit disclosure in the notes.
c) Transactions are fairly represented in accordance with the definitions and recognition
criteria for the accounting elements.
Departure from IFS: In rare circumstances where a compliance with IFRS would conflict
with the objective of financial statements, a departure from IRS is permitted.
What are the 3 overriding concepts of financial statements?
Going Concern Basis
Accruals Basis
Materiality Basis
What are the elements of Financial Statements?
Elements relating to financial position: Assets, Liabilities & equity
Elements relating to financial performance: income & expense
What is the regulatory framework?
Provides a structure for regulatory bodies for producing Financial Reporting and Accounting Standards
What is the Role of the regulatory framework?
To ensure Finance Reporting is regulated through Financial Reporting
Standards. IFRS, UK GAAP, US GAAP
To ensure financial information is reported objectively to provide relevant, reliable and faithfully represented information.
• To provide adequate minimum level of information
• To ensure financial information is comparable and consistent.
• To improve transparency and credibility of financial reports.
Describe Rule V Principles based system
Rule Based - rules are designed to cover every aspect of reporting E.g. US GAAP system
Principles Based - it used a ‘conceptual framework’ to provide an underlying set of principles within which standards are developed E.g. IFRS system
Advantages for Rule and Principle based systems
Rule based: system minimises the exercise of subjective judgement so there is less scope for controversial arguments
Principle based system allows flexibility
Disadvantages of rule based system
A rigid regulatory system will have detrimental effect in the long term
Political economical and social differences of different countries are ignored
Arbitrary valuations are possible
Rigid standards remove the need for judgements
Does not provide precision and comparability
Increases complexity
What does the IASB conceptual Framework cover
The objectives of financial reporting
The underlying assumptions
The qualitative characteristics
The elements of financial statements
The recognition and de recognition of the elements
The measurements of the elements
The concepts of capital and capital maintenance
What are the advantages of the IFRS system?
Financial statements presented under IFRS make global comparisons easier
Cross-boarder listing is facilitated, making it easier to raise funds and make investments
Multinational companies with subsidiaries in foreign countries have a common, company-wide accounting language
Foreign companies can be more easily appraised for mergers and acquisitions
Multinational companies benefit from only having to prepare one set of accounts
What are the Disadvantages of IFRS?
Cost of implementation
Lower level of detail in the IFRS
IFRS is principle based which require the application of judgement, many don’t like this approach. US accountants are subject to a high degree of litigation and their defence is they complied with the rules of US GAPP etc.
Challenges in adopting IFRS in emerging economies
Name the Barriers to Global Harmonisation of financial reporting
Legal system
Business financing and accounting practices
Tax system
