Frameworks of financial reporting

• What is the regulatory framework of financial reporting?

  A system of rules governing financial reporting
• Why is regulation needed in financial reporting?

  To address limited liability and management separation
• What are the main reasons for the need for regulation in financial reporting?

  1. Limited liability of shareholders
  2. Separation of management and ownership
  3. Historical market failures
  4. Benefits like credibility and discipline
• What are the sources of regulation in financial reporting?

  Company law, stock exchange rules, UK standards
• What must listed companies prepare their financial statements in accordance with?

  IFRS in full
• What options do non-listed companies have for financial reporting?

  Full IFRS or UK-based accounting standards
• What does the Companies Act 2006 require from UK companies?

  To comply with adequate accounting records
• What additional requirements must companies listed on the stock exchange comply with?

  FCA's additional reporting requirements
• What does GAAP stand for?

  Generally Accepted Accounting Principles
• How can differences in GAAP affect financial reporting?

  They can lead to significant differences in numbers
• What is the issue with differing GAAP standards in terms of economic integration?

  It acts as a barrier for cross-border capital flow
• What are the benefits of accounting harmonisation?

  1. Easier access to foreign capital markets
  2. Increased credibility of domestic markets
  3. Lower cost of capital
  4. Comparability of financial data
  5. Transparency and common financial language
  6. Reduced national standard-setting costs
• What are the arguments against accounting harmonisation?

  1. Adverse effects on accounting practice
  2. Not suitable for varieties of capitalism
  3. Competition between FASB and IASB standards
• What is the purpose of the conceptual framework in financial reporting?

  To provide guidance for reporting practices
• What is the latest conceptual framework for financial reporting?

  IFRS conceptual framework for financial reporting 2018
• What are the components of the conceptual framework?

  1. Objective of general-purpose financial reporting
  2. Qualitative characteristics of useful information
  3. Financial statements and reporting entity
  4. Elements of financial statements
  5. Recognition and de-recognition
  6. Measurement
  7. Presentation and disclosure
  8. Concepts of capital maintenance
• What is the primary objective of financial reporting?

  To provide useful financial information for decision-making
• What are the fundamental qualitative characteristics of useful financial information?

  Relevance and faithful representation
• What does financial information consist of?

  1. Statement of financial position
  2. Statement of financial performance
  3. Other statement notes
• What is included in the statement of financial position?

  Assets, liabilities, and equity
• What is the assumption under which financial statements are normally prepared?

  That the entity is a going concern
• What is the definition of an asset?

  A present economic resource controlled by the entity
• What is the definition of a liability?

  A present obligation to transfer an economic resource
• What is the definition of equity?

  The residual interest in the assets after liabilities
• What is the definition of income?

  Increases in assets or decreases in liabilities
• What is the definition of an expense?

  A decrease in assets or increase in liabilities
• What does recognition in financial reporting mean?

  Including an item that meets financial statement definitions
• What is de-recognition in financial reporting?

  The removal of a recognised asset or liability
• What is measurement in financial reporting?

  Assigning monetary amounts to financial statement elements
• What is the importance of effective communication in financial reporting?

  Enhances relevance and faithful representation
• What are the advantages and disadvantages of the conceptual framework?

  Advantages:

  • More useful financial information
  • Forces critical thinking
  • Coherent and consistent standards
  • Enhanced communication

  
  

  Disadvantages:

  • Restricted view of accountability
  • Stifles future reporting innovation
  • Distorted view of performance
• What is relevance


  Predictive value and materiality
• What is materiality


  If omitted it could influence users decisions
• What is faithful representation

  Completeness, neutrality and free from error
• What are the enhancing QC

  Comparability, verifiability, timeliness and understandability
• What is historical cost

  The cost incurred at the acquisition date
• What is fair value

  The price that would be received to sell an asset or paid to transfer a liability
• What is net realisable value

  Fair value less transaction cost
• What is value in use

  The present value of the cash flows that an entity expects to derive
• Current cost


  Cost of buying equivalent asset plus transaction cost