22
2: The regulatory framework Part A The context and purpose of financial reporting
Answers to Quick Quiz
1
B
The IASB has no powers of enforcement.
2
The International Financial Reporting Interpretations Committee (IFRIC).
3
D
The other arguments are all in favour of accounting standards.
4
B
IFRSs to be used in consolidated financial statements.
5
True. The IASB is responsible for the standard setting process.
Now try the question below from the Exam Question Bank
Number
Level
Marks
Time
Q2
Examination
1
1 min
23
The qualitative characteristics
of financial information and the
fundamental bases of
accounting
P
A
R
T
B
25
Accounting
conventions
Introduction
The purpose of this chapter is to encourage you to think more deeply about the
assumptions on which financial statements are prepared.
This chapter deals with the accounting conventions which lie behind accounts
preparation and which you will meet in Part C in the chapters on bookkeeping.
In Part D, you will see how conventions and assumptions are
put into practice. You will also deal with certain items which are the subject of
accounting standards.
The first part of this chapter deals with two important standards: IAS 1 and the
Framework. Do not neglect these sections as they contain
very important
basic ideas which underlie the whole of accounting.
In the second half of this chapter, you will consider the bases of valuation of
items in the financial statements and IAS 8 on changes in accounting policies.
Topic list
Syllabus reference
1 Background
B1(a)
2 IAS 1
Presentation of financial statements
B1(a)
3 The IASB's Framework
B1(a) – (b)
4 Criticisms of accounting conventions
B1(b)
5 Bases of valuation
B2(a) – (b)
6 IAS 8 Accounting policies, changes in accounting
estimates and errors
B2(c) – (d)
26
3: Accounting conventions Part B The qualitative characteristics of financial information and the fundamental bases of accounting
Study guide
Intellectual level
B1
The qualitative characteristics of financial reporting
(a)
Define, understand and apply accounting concepts and qualitative
characteristics:
1
(i) Fair
presentation
(ii) Going
concern
(iii) Accruals
(iv) Consistency
(v) Materiality
(vi) Relevance
(vii) Reliability
(viii) Faithful
representation
(ix)
Substance over form
(x) Neutrality
(xi) Prudence
(xii) Completeness
(xiii) Comparability
(xiv) Understandability
(xv)
Business entity concept
(b)
Understand the balance between qualitative characteristics.
1
B2
Alternative bases used in the preparation of financial information
(a)
Identify and explain the main characteristics of alternative valuation bases
eg historical cost, replacement cost, net realisable value, economic value.
1
(b)
Understand the advantages and disadvantages of historical cost accounting.
1
(c)
Understand the provision of International Financial Reporting Standards
governing financial statements regarding changes in accounting policies.
1
(d)
Identify the appropriate accounting treatment if a company changes a
material accounting policy.
1
Exam guide
This is a very important chapter, which set the basis of accounting ideas and conventions. Expect
questions on all aspects, including the Framework. Accounting conventions have been called into question
and you may be asked to
question them yourself in an exam. Pay particular attention to Section 4 of this
chapter.
Always
read the question carefully before answering. Make sure that you understand
the requirement and
have picked out the main points of the question. Remember that the distracters (wrong options) will
include common errors made by students, so always
check your answer before moving on.
Exam focus
point
Part B The qualitative characteristics of financial information and the fundamental bases of accounting
3: Accounting conventions
27
1 Background
In preparing financial statements, accountants follow certain
fundamental assumptions.
Accounting practice has developed gradually over a matter of centuries. Many of its procedures are
operated automatically by people who have never questioned whether alternative methods exist which
have equal validity. However, the procedures in common use imply the acceptance of certain concepts
which are by no means self-evident; nor are they the only possible concepts which could be used to build
up an accounting framework.
Our next step is to look at some of the more important concepts which are taken for granted in preparing
accounts. In this chapter we shall single out the following assumptions and concepts for discussion.
(a)
Fair presentation
(b) Going
concern
(c) Accruals
or
matching
(d) Consistency
concept
(e) Prudence
(f) Materiality
(g)
Substance over form
(h) Relevance
(i) Reliability
(j) Faithful
representation
(k) Neutrality
(l) Completeness
(m) Comparability
(n) Understandability
(o)
Business entity concept.
We begin by considering
accounting policies and those
fundamental assumptions which are the subject
of IAS 1 Presentation of financial statements (items (a) – (g) of the above list).
2 IAS 1 Presentation of financial statements
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.
IAS 1 Presentation of financial statements was published in 1997 and revised in 2004 and again in 2007.
Here we will look at the general requirements of IAS 1 and what it says about
accounting policies and
fundamental assumptions. The rest of the standard, on the format and content of financial statements will
be covered in
Chapter 21
.
2.1 Objectives and scope
The main objective of IAS 1 is:
'To prescribe the basis for presentation of general purpose financial statements, to ensure
comparability both with the entity's financial statements of previous periods and with the financial
statements of other entities.'
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