F3 Concepts Conventions Policies

7/28/2019 F3 Concepts Conventions Policies

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Accounting

concepts/conventions andpolicies

Always on the exam!! MCQ?


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Accounting concepts / conventions

can be viewed as ideologicalpractices that have developed over

time that underpin accounting

They help determine which

transactions are recorded and how.


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Accounting Concepts / conventions

Business Entity

Duality

Money MeasurementRealization

Substance over form

PrudenceConsistency

Matching (Accruals)

Going concern


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Important Concepts

SSAP 2 described 4 concepts

as Fundamental

1. Going Concern2. Consistency

3. Prudence

4. Accruals


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Important Concepts

FRS 18 replaced SSAP 2 in Dec 2000

Emphasises 2 particular concepts

Going Concern & AccrualsPrudence & consistency merely

desireable elements of statements


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Advantages of a Conceptual Framework

Move away from fire fighting

Avoid inconsistencies between standards

Determine how profit should be measuredReduce number of standards, emphasis on

principles

Combat interference, justify procedures


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ASBs Statement of Principles (1999)

Finally published in March 1999.

Principles that should underlie the

preparation and presentation of financialstatements.

True and fair view important.


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8 chapters in S.O.P:

1 The objectives of financial statements

2 The reporting entity

3 The qualitative characteristics offinancial information

4 The elements of financial statements

5 Recognition in financial statements

6 Measurement in financial statements

7 Presentation of financial information

8 Accounting for interests in other entities

The first 4 are the most important for 1.1 studies


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2.1.1 Purpose of the SoP

ASBDevelop future, and review existing, a/c standards.

Reduce the number of alternative a/c treatments.

TO ASSIST

PREPARERS

Apply a/c

standards.

Deal with topics

not covered by a/cstandards.

AUDITORS

Assist in forming

an opinion on

whether fin state

conform with a/cstandards.

USERS

In interpreting the information in financial statements.


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Elements of Financial Statements

AssetsProbable future economic benefits obtained or controlledby an entity as the result of past transactions or events

LiabilitiesProbable future sacrifice of economic benefits arising frompresent obligations to transfer assets or provide services inthe future as a result of past transactions or events

Owners interestThe residual interest in the assets of an entity that remainsafter deducting its liabilities


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Chapter 3Qualitative Characteristics

of Financial Information (S.O.P)

RELEVANCE

RELIABILITY

COMPARABILITYUNDERSTANDABILITY


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Characteristics of Useful Information

Relevant

Reliable

Comparable

Understandable

Influences economic decisions

Complete and faithful

representation

Similarities and differences

can be discerned &evaluated

Significance of information

can be perceived


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Part 2

Generally Accepted Accounting

Principles (GAAP)


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Company Law; EC Law; Directives

Listing Rules (Yellow Book)

SSAPs; FRSs; UITF Abstracts

Statutory Requirements:

Stock Exchange Regulations:

Accounting Standards:


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The companies act and accounting

standards

The two are essentially separate

But.

CA requires companies to include a noteto the accounts saying that they have

been prepared in accordance with

applicable accounting standards

Or giving details of any departures


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The Standard Setting Process

Financial ReportingCouncil (FRC)

Accounting

Standards

Board (ASB)

Review Panel

Urgent Issues Task

Force (UITF)

Issues:

Discussion

Drafts

FRED

FRS

Issues: Abstracts


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FRS 18 Revisited

FRS 18 replaced SSAP 2 in Dec 2000

Emphasises 2 particular concepts

Going Concern & AccrualsFRS 18 provides detailed practical

implementations of the concepts outlined

in the S.O.P


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FRS 18 and Accounting Policies

FRS 18 requires that the specific

accounting policies adopted by an

organisation are properly disclosed.

The Accounting Policy chosen should be

the one that gives a true and fair view


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FRS 18 and Accounting Policies

Accounting policies are the principles,

bases and practices applied by an

organisation.

They are how an organisation chooses to

recognise, measure and present

components of financial information

e.g a policy to depreciate office equipment

rather than not depreciate it


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Accounting policies and

Estimation techniques

The distinction is an important one in

practice:

Changes in accounting policies are

dealt with as prior-year adjustments.

Changes in estimation techniques are

only reflected in the profit and loss

account for the year of change.


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Choosing an accounting policy involves

making a selection of three factors:

Whether or not to recognise elements

as a result of the transaction

recognition criteria.

How to attribute a monetary amount to

the elements that are recognised

measurement bases.

Where to present the elements in the

financial statements.


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Estimation techniques are the methods

adopted by an entity to arrive at the

estimated monetary amounts(corresponding to the measurement

bases selected) for elements of the

financial statements.


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Change in Accounting policy?

FRS 18 says that a change of

accounting policy has occurred where

there has been a change to any one ofthe components of the definition:

Recognition criteria

Measurement basisMethod of presentation


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eg 1: change in depreciation method

This decision does not involve a change in anyof the three key criteria:

The fixed assets are still carried at cost less

accumulated depreciation.The depreciation is still allocated to individual

accounting periods so as to reflect the

consumption of economic benefits.

Fixed assets and depreciation are presented inthe same way in the balance sheet and the profit

and loss accountrespectively.


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eg2: change in stock valuation from

wac to fifo

This involves a change in the basis

used to measure stocks from average

cost to historical cost and as suchrepresents a change in accounting

policy.


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eg 3: a company decides to capitalise

finance costs incurred building a factory

instead of writing them off

Recognition the costs are now included

as part of an asset.

Presentation the costs are nowpresented in the balance sheet rather than

the profit and loss account.

This decision represents a change in

accounting policy


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Essential Reading for next week

Read over consolidated accounts in

your study pack!!!

F3 Concepts Conventions Policies

Documents

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