Acca f3 Financial Accounting (int) Study Text

28

3: Accounting conventions   Part B  The qualitative characteristics of financial information and the fundamental bases of accounting 

IAS 1 applies to all 

general purpose financial statements prepared and presented in accordance with 

International Financial Reporting Standards (IFRSs). 

2.2 Purpose of financial statements 

The

objective of financial statements is to provide information about the financial position, performance 

and cash flows of an entity that is useful to a wide range of users in making economic decisions. They also 

show the result of 

management's stewardship of the resources entrusted to it. 

In order to fulfil this objective, financial statements must provide information about the following aspects 

of an entity's results. 

 Assets 

 Liabilities 

 Equity 

 

Income and expenses (including gains and losses) 

 

Other changes in equity 

 Cash 

flows 

Along with other information in the notes and related documents, this information will assist users in 

predicting the entity 

future cash flows.

According to IAS 1, a complete set of financial statements includes the following components.

(a) 

Statement of financial position  

(b) 

Income statement and/or statement of comprehensive income 

(c) 

Statement of changes in equity 

(d) 

Statement of cash flows 

(e) 

Accounting policies and explanatory notes 

The preparation of these statements is the responsibility of the 

board of directors. IAS 1 also encourages 

a

financial review by management and the production of any other reports and statements which may

aid users. 

2.3 Fair presentation and compliance with IASs/IFRSs 

Most importantly, financial statements should 

present fairly the financial position, financial performance 

and cash flows of an entity. 

Compliance with IASs/IFRS will almost always achieve this. 

The following points made by IAS 1 expand on this principle. 

(a)

Compliance with IASs/IFRSs should be disclosed 

(b)

All relevant IASs/IFRSs must be followed if compliance with IASs/IFRSs is disclosed 

(c) Use 

of 

an 

inappropriate accounting treatment cannot be rectified either by disclosure of 

accounting policies or notes/explanatory material 

There may be (very rare) circumstances when management decides that compliance with a requirement of 

an IAS/IFRS would be misleading. 

Departure from the IAS/IFRS is therefore required to achieve a fair 

presentation. The following should be disclosed in such an event. 

(a) 

Management confirmation that the financial statements fairly present the entity's financial position, 

performance and cash flows 

(b) 

Statement that all IASs/IFRSs have been complied with except departure from one IAS/IFRS to 

achieve a fair presentation 

(c) 

Details of the nature of the departure, why the IAS/IFRS treatment would be misleading, and the 

treatment adopted 

(d) 

Financial impact of the departure 

IAS 1 states what is required for a fair presentation. 

(a) 

Selection and application of 

accounting policies 

---

Part B  The qualitative characteristics of financial information and the fundamental bases of accounting

  3:  Accounting conventions

29

(b)

Presentation of information in a manner which provides relevant, reliable, comparable and 

understandable information 

(c)

Additional disclosures where required 

2.4 Accounting policies 

We will look at accounting policies in more detail in Section 6 of this Chapter. However, accounting 

policies should be chosen in order 

to comply with International Financial Reporting Standards. Where

there is 

no specific requirement in an IAS or IFRS, policies should be developed so that information 

provided by the financial statements is: 

(a)

Relevant to the decision-making needs of users. 

(b)

Reliable in that they: 

(i) 

Represent faithfully the 

results and financial position of the entity. 

(ii) Reflect 

the 

economic substance of events and transactions and not merely the legal form. 

(iii) Are 

neutral, that is free from bias. 

(iv) Are 

prudent.

(v) Are 

complete in all material respects.

(c) Comparable 

(d) Understandable 

We will look at these four characteristics in more detail in Section 3 of this chapter. IAS 1 then considers 

certain important assumptions which underpin the preparation and presentation of financial statements

.

2.5 Going concern 

The entity is normally viewed as a 

going concern, that is, as continuing in operation for the foreseeable 

future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing 

materially the scale of its operations. 

This concept assumes that, when preparing a normal set of accounts, the business will 

continue to 

operate in approximately the same manner for the foreseeable future (at least the next 12 months). In 

particular, the entity will not go into liquidation or scale down its operations in a material way. 

The main significance of a going concern is that the assets 

should not be valued at their 'break-up' 

value; the amount they would sell for if they were sold off piecemeal and the business were broken up. 

2.6 Example: Going concern 

Emma acquires a T-shirt printing machine at a cost of $60,000. The asset has an estimated life of six 

years, and it is normal to write off the cost of the asset to the income statement over this time. In this case 

a depreciation cost of $10,000 per year is charged. 

Using the going concern assumption, it is presumed that the business will continue its operations and so 

the asset will live out its full six years in use. A depreciation charge of $10,000 is made each year, and the 

value of the asset in the statement of financial position is its cost less the accumulated depreciation 

charged to date. After one year, the 

net book value of the asset is $(60,000 – 10,000) = $50,000, after two 

years it is $40,000, after three years $30,000 etc, until it is written down to a value of 0 after 6 years. 

This asset has no other operational use outside the business and, in a forced sale, it would only sell for 

scrap. After one year of operation, its scrap value is $8,000. 

The net book value of the asset, applying the going concern assumption, is $50,000 after one year, but its 

immediate sell-off value only $8,000. It can be argued that the asset is over-valued at $50,000, that it 

should be written down to its break-up value ($8,000) and the balance of its cost should be treated as an 

expense. However, provided that the going concern assumption is valid, it is appropriate accounting 

practice to value the asset at its net book value. 

Key term 

---