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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!!!
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