Progress to date

At the time of writing (September 2010) the IASB has issued the following exposure drafts:

LO 3.9

Key chapter points

x There are advantages and disadvantages to having a conceptual framework.

x The IASBs Framework for the preparation and presentation of financial statements provides the conceptual framework for the development of IFRS.

x The Framework states that:

'The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.'

x Many figures in financial statements are derived from the application of judgment in applying fundamental accounting assumptions and conventions. This can lead to subjectivity.

Quick revision questions

1 A conceptual framework is:

A a theoretical expression of accounting standards B a list of key terms used by the IASB

C a statement of theoretical principles which form the frame of reference for financial reporting D the proforma financial statements

2 Which of the following is an advantage of a conceptual framework?

A there are a variety of users, so not all will be satisfied with the content of the framework B there are a variety of accounting situations which mean flexibility in the accounting approach

is needed

C the framework does not simplify the preparation and implementation of standards D a framework encourages standardised accounting practice

3 What is the name of the IASB’’s conceptual framework?

A The Framework for the disclosure of financial statements

B The Framework for the presentation of financial statements to users C The Framework for the preparation and presentation of financial statements D Statement of principles for financial reporting

4 What is the fundamental reason that financial statements are produced according to the preface of the IASB’’s conceptual Framework?

A to provide information to tax authorities

B to report on a company’’s performance to its national government C to satisfy the requirements of external users

D to provide information for internal management

5 Which of the following are uses of financial statements prepared by a company?

I Decisions to buy, hold or sell equity investments II Assessment of the security of amounts lent to the entity III Assessment of management stewardship and accountability IV Inclusion in national income statistics

A I and III only B I, II, III and IV C II and III only D I and IV only

6 According to the Framework, who has responsibility for preparing an entity’’s financial statements?

A management B accountants C shareholders D auditors

8 If an accountant comes across a transaction that is not covered by an accounting standard, where should they look for guidance on accounting for that item?

A company law

B US GAAP

C conceptual framework

D UK GAAP

Answers to quick revision questions

The answers to these quick revision questions can be found in the Answers to quick revision questions at the end of the Study Manual.

Self-assessment questions

1 Which of the following is a disadvantage of having a conceptual framework?

A there are a variety of accounting situations which mean flexibility in the accounting approach is needed

B there may be a need for a variety of accounting standards, each produced for a different purpose

C the framework does not simplify the preparation and implementation of standards D a framework encourages standardised accounting practice

2 Which of the following is not a chapter in the IASB’’s Framework?

A underlying assumptions B concepts and conventions

C the elements of financial statements

D recognition of the elements of financial statements 3 Consider the following statements:

I One of the purposes of the IASB’’s Framework is to allow alternative accounting treatments in accounting standards

II One of the purposes of the IASB’’s Framework is to assist auditors in forming an opinion as to whether financial statements have complied with IFRS.

Which of the statements is correct?

A I only B II only

C both statements D neither statement

4 Which of the following are part of the financial statements of a company?

I Statement of cash flows II Directors' report

III Management commentary IV Statement of financial position V Explanatory notes

A I, II, III B II, IV, V C I, IV, V D II, III, IV

5 Which part of the financial statements best illustrates a company’’s ability to provide funds for investing, operating and funding activities?

A statement of financial position

6 Consider the following statements:

I Liquidity relates to the ability to repay short-term financial commitments II Solvency relates to the ability to repay longer-term commitments Which of the statements is correct?

A I only B II only

C both statements D neither statement

Answers to self-assessment questions

The answers to these self-assessment questions can be found in the Answers to self-assessment questions at the end of the Study Manual.

Answer to chapter question

1 (a) Investors are the providers of risk capital:

(i) Information is required to help make a decision about buying or selling shares, taking up a rights issue and voting.

(ii) Investors must have information about the level of dividend, past, present and future and any changes in share price.

(iii) Investors will also need to know whether the management has been running the company efficiently.

(iv) As well as the position indicated by the statement of comprehensive income, statement of financial position and earnings per share (EPS), investors will want to know about the liquidity position of the company, the company's future prospects, and how the company's shares compare with those of its competitors.

(b) Employees need information about the security of employment and future prospects for jobs in the company, and to help with collective pay bargaining.

(c) Lenders need information to help them decide whether to lend to a company. They will also need to check that the value of any security remains adequate, that the interest repayments are secure, that the cash is available for redemption at the appropriate time and that any financial restrictions (such as maximum debt/equity ratios) have not been breached.

(d) Suppliers and other creditors need to know whether the company will be a good customer and pay its debts.

(e) Customers need to know whether the company will be able to continue producing and supplying goods.

(f) Government's interest in a company may be one of creditor or customer, as well as being specifically concerned with compliance with tax and company law, ability to pay tax and the general contribution of the company to the economy.

(g) The public at large would wish to have information for all the reasons mentioned above, but it could be suggested that it would be impossible to provide general purpose accounting information which was specifically designed for the needs of the public.

Learning objectives Reference

The regulatory framework LO2

Describe the process involved when the IASB introduces a new accounting standard

LO2.8

Accounting standards and concepts LO4

Define the purpose of an accounting standard LO4.1

Explain the reason accounting standards are used to regulate financial reporting LO4.2 Explain the advantages and disadvantages of accounting standards LO4.3 Explain the need for financial statements to provide a fair presentation of the

financial performance and financial position of an entity LO4.4

Define the principle of substance over form LO4.5

Explain the importance of recording the economic substance of transactions rather than the legal form

LO4.6

Distinguish between a principles-based and a rules-based system of accounting LO4.7 Identify recent developments in the harmonisation of worldwide accounting

standards

LO4.8

Identify the effect of harmonisation of accounting standards on companies LO4.9 Identify the importance of International Financial Reporting Standards in the

harmonisation process

LO4.10

Chapter 4

Accounting standards