Acca f3 Financial Accounting (int) Study Text

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

You will deal with limited company financial statements in 

Chapter 21

. We suggest that you flag this 

example and return to it after you have studied Chapter 21. 

Question

IAS 8 

AB Co decides to change its accounting policy following the issue of a new IFRS. The IFRS includes 

provisions for accounting for transitional changes. 

How should it account for the change in policy? 

A 

According to IAS 8 

B 

According to the new IFRS 

Answer

The correct answer is B. The new IFRs includes accounting requirements on the transition. IAS 8 is only 

followed if the new IFRS does not include transitional arrangements. 

Attention!

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

  3:  Accounting conventions

51

Chapter Roundup 

 

In preparing financial statements, accountants follow certain fundamental assumptions.

 

IAS 1 identifies 

four fundamental assumptions that must be taken into account when preparing 

statements:

 – Fair 

presentation 

 – Going 

concern 

 – Accruals 

 – Consistency 

 

IAS 1 also considers three other concepts extremely important. 

Prudence, substance over form and 

materiality should govern the selection and application of accounting policies. 

 The 

IASB's Framework provides the basis of its conceptual framework. IASs and IFRSs are based on this 

framework. The key elements are: 

 

– 

Financial statements should provide 

useful information to users. 

 – 

Financial position is shown in the statement of financial position. 

 – 

Financial performance  is shown in the income statement. 

 

– 

Changes in financial position are shown in the statement of cash flows. 

 – The 

main 

underlying assumptions are accruals and going concern.

 

– 

Financial statements should be:  –  Understandable 

– Relevant 

– Reliable 

– Comparable 

Accounting conventions  are not 'set in stone'. They can be, and have been, criticised. 

 

Items in the financial statements can be valued under a number of bases. For your syllabus, you need to 

know the following bases. 

 – Historical 

cost 

 – Replacement 

cost 

 

– 

Net realisable value 

 – Economic 

value 

 

IAS 8 Accountancy policies, changes in accounting estimates and errors is an important standard. Here, 

you need to be able to understand the provisions and identify the appropriate accounting treatment in 

respect of 

changes in accounting policies.

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

Quick Quiz 

1 

Which IAS deals with accounting assumptions?  

2 

Which of the following assumptions are included in IAS 1? 

 A Money 

measurement 

 B Objectivity 

 C Going 

concern 

 D 

Business 

entity 

3 

Define 'going concern'.  

4 

What is meant by the prudence concept?  

5 

Only items which have a monetary value can be included in accounts. Which of the following is a basis of 

valuation?

 A Historical 

cost 

 B Money 

measurement 

 C Realisation 

 D 

Business 

entity 

6 

Suggest four possible values which might be attributed to an asset in the statement of financial position of 

a business.

7 

Making an allowance for receivables is an example of which concept? 

 A Accruals 

 B Going 

concern 

 C Materiality 

 D 

Prudence 

8 

Why is a conceptual framework necessary?  

A 

To provide a theoretical basics for financial statements 

B 

To provide concepts on which to build a framework 

9 

Which of the following sections are not included in the IASB's Framework?

 

A 

Users of financial statements 

 B Underlying 

assumptions 

 C Qualitative 

characteristics 

 

D 

Concept of capital maintenance 

10 

What does 'reliability' mean in the context of financial statements?  

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

  3:  Accounting conventions

53

Answers to Quick Quiz 

1 IAS 

1 

Presentation of Financial Statements. 

2 

C 

Only going concern is included in IAS 1, the others are assumptions and concepts generally used 

in accountancy, but not mentioned in IAS 1. 

3 

The assumption that a business will continue in operation for the foreseeable future, without going into 

liquidation or materially scaling down its operations. 

4 

Prudence means to be cautious when exercising judgement. In particular profits should not be recognised 

until realised, but a loss should be recognised as soon as it is foreseen. 

5 

A 

This is the only valuation basis. 

6

 Historical 

cost 

 Replacement 

value 

 

Net realisable value 

 Economic 

value 

7 D Prudence 

8 

A 

It forms the theoretical basis for determining what is included in financial statements, how they are 

measured and how they are communicated. 

9 A  

10 

Free from material error and bias. 

Now try the questions below from the Exam Question Bank

Number

Level

Marks

Time

Q3

Examination

2

2 mins 

Q4

Examination

2

2 mins 

Q5

Examination

2

2 mins 

Q6

Examination

2

2 mins 

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