FA1 Concepts & Conventions
Regulation
• Self-Regulation• National Law• EU law
Professional Self-Regulation
Self Regulation
International Financial Reporting Standards
IFRS
International Accounting Standards
Board IASB
International Accounting Standards
IAS
Rules and guidelines issued that govern the
presentation of Financial Statements
True & Fair
Companies Acts
CompanyStatements• True & Fair
Shareholder
True & Fair
• A legal concept – undefined – changes over time• Objective is that accounts fairly reflect the true
substance of the business• Accounts are an accurate portrayal of the
business activities• Accounts should provide useful information• Concepts and Conventions adopted by the
profession to help ensure “True & Fair”
Accounting Principles & Conventions
• Rules or accepted practice– Which assets and liabilities are in Stmt of FP– How assets and liabilities are valued– What income and expenditure are in Stmt of P&L– The value of income and expenditure recorded
Accounting Conventions1. Historical Cost2. Monetary Measurement3. Business Entity4. Materiality
Historical Cost An item should be valued at historical cost Its purchase price Not its current value Reliable A certaintyProblem: Valuing assets such as PropertyEg Bought for €100,000 in 2002 - not reflective of current valueIASB has moved away from using Historical cost to value assetsIASB now use FAIR VALUESIreland & UK tend to use historical cost – following standard issued by ASB
Accounting Conventions
Monetary Measurement Accounted for if it can be measured in
monetary terms We don’t account for quality of
management, skill set, morale etc
Accounting Conventions
Business Entity From an accounting viewpoint:
Transactions entered into by a business and the those entered by the owner are separate and distinct.
From a legal viewpoint: Sole trader and the business are one
entity Limited company and the owner are
separate legal entities
Accounting Conventions
Materiality Information is material to the Financial
Statements if omission or misstatement could influence economic decisions
Material in terms of Size eg €1 million loan not declared
Material in terms of Nature eg “A” is a director and received a salary with ABC plc. “A” is also owner of XYZ ltd that trades with ABC plc – IAS 24 “Related Party Transaction”
Accounting Conventions
ACCOUNTING CONCEPTS1. Dual Aspect2. Going Concern3. Consistency4. Prudence5. Accruals
DUAL ASPECT Every Debit has a corresponding Credit Accounting Equation Assets = Capital + Liabilities
ACCOUNTING CONCEPTS
GOING CONCERN When financial statements are prepared
under IFRS, management are required to make an assessment of the entity’s ability to continue as a going concern
Ability to continue in business for foreseeable future – 12 months from date financial statements signed
Resources to continue If not going concern, then Financial
Statements prepared on a Breakup basis
ACCOUNTING CONCEPTS
CONSISTENCY Presentation and classification of items
should be retained from one period to the nextUnless a change is justified by a changeOr a change if IFRS
Facilitates comparability
ACCOUNTING CONCEPTS
PRUDENCE Under conditions of uncertainty a
degree of caution must be exercised. Uncertainty:
estimating gains and assetsEstimating losses and liabailities
Confirmatory evidence required before recording in financial statements
Prudence not required where there is no uncertainty
ACCOUNTING CONCEPTS
ACCRUALS Income & Expenditure should be
recognised in the financial year in which they relate rather that the year paid
Eg sales in December not paid for until Jan should be recorded in Dec
Eg Electricity used in Dec not paid for until Jan should be recorded in Dec
ACCOUNTING CONCEPTS
Accruals Vs Prudence
• Accruals – Credit Sales recorded• Prudence – only record when paid
“Reasonably Certain” – not too optimistic nor too pessimistic
Sales based on contract – reasonably certain it will come in – credit history – allowance for receivables
6 Key Characteristics of Accounting Information
Characteristic Explanation
Relevance Must assist user to form, confirm or change opinion
Reliability Should be truthful, accurate, complete and capable of being verified
Comparability Used to make performance comparisons over time or with similar companies
Understandable Express with clarity and understandable to user
Objectivity Reported in a neutral way. Not biased to a particular user
Consistency Consistent application of items over time
IASB Conceptual Framework - Importance
• Purpose – to assist the IASB in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements
• A basis for reducing the number of accounting treatments permitted by IFRS
• Hope to support harmonisation of accounting standards globally• Outlines generally accepted theoretical principles for financial
accounting• Basis for developing new standards and for assessing existing
standards• Like a constitution – new law must be consistent• Less inconsistency between standards
Qualitative Characteristics
1. Relevant2. Reliable3. Comparable4. Understandable
Relevant
Information is relevant if it influences economic Decision Making even if not
acted on If it has predictive value If it has confirmatory value If it helps a user to evaluate a past, present or future
event/decision If it confirms or corrects past evaluations
Reliable
Financial reports should faithfully represent the underlying economic situation of the entity
Faithful Representation if Complete Neutral Free from error
Comparability
Compare one financial year against another Vital information Assessing trends
Compare with other competitions Benchmark performance
Achieved through Consistency in use of accounting standards
Changes in standard should be disclosed
Understandable
Information is classified, characterised and presented clearly and concisely
Don’t leave information out for understandability
Assume that the reader has a reasonable knowledge
Conflicts
• Relevance Vs Reliability– Eg property valued at historical cost (reliable) but
current value more relevant• Neutrality Vs Prudence– Eg profits not overstated (prudence) given
knowledge of debtors but bias (neutrality)?• Relevance Vs Understandability– Use information that is most reliable and relevant
Accounting Policies
• Policies, principles, bases, conventions rules and practices that specify how transactions and events are reflected in the Financial Statements
• It’s the recognition, selection of a measuring basis and the presentation of Assets, Liabilities, Gains, Losses, and Changes to Capital
• It doesn’t include estimation techniques
Estimation Techniques
• Methods for estimating amounts for assets, liabilities, gains, losses, and changes in capital.
• Allowance for receivables• Depreciation
Measurement Bases
• Cost• Net Realisable Value• Replacement Cost
Selecting Accounting Policies
• Ensure Financial Statements show a true and Fair view
• Consistent with accounting standards and company legislation
• Provide useful information
Changing Accounting Policies
• Don’t change unless absolutely necessary• IAS 8 Accounting policies, Changes in
accounting , Estimates and Errors• Select policies that result in relevant and
reliable information (framework)• NB in selecting policies– The going concern concept– The accruals concept (accounting concepts)
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