Conceptual and regulatory
Purpose and use of financial statements
Bases of accounting
The IASB Framework
International Accounting Standards Committee
International Financial Reporting Standards (IFRS)
Inherent limitations of financial statements
Summary and Self-test
Answers to Self-test
Answers to Interactive questions
F inancial accounting
Explain the nature of financial reporting
Explain the objectives of financial statements
Discuss the conceptual and regulatory framework affecting the preparation of financial statements
Discuss the importance of the IASB Framework
Apply the principles of the IASB Framework, including the qualitative characteristics of financial information, the elements of financial statements, recognition and measurement of the elements
Explain and demonstrate the differences between financial statements produced using: –
The accrual basis
The break-up basis
Explain and illustrate the different definitions of capital and capital maintenance Explain the regulatory framework affecting not-for-profit entities Specific syllabus references for this chapter are: 1a, b, c, d, e, f, 2e.
The way that items and transactions are treated and presented in the financial statements may affect an investor's perception of the position and performance of an entity. Whilst individual accounting standards can be developed to deal with specific issues it is also important that there is a framework that sets out the wider purposes that accounting standards are intended to achieve. This helps to ensure that standards are consistent and not overly affected by political influence or self-interest groups. The International Accounting Standards Board's Framework for the Preparation and Presentation of Financial Statements (IASB Framework) attempts to provide this framework in the context of International Accounting Standards and International Financial Reporting Standards (jointly referred to from this point as 'IFRS'). It does so by setting out consistent principles which form the basis for the development of detailed requirements in IFRS.
Stop and think
What do you think are the advantages of a principles based approach to the setting of accounting standards?
In the working environment you are unlikely to be consciously aware of the effect of the issues covered by this chapter. They are important nevertheless as these principles underpin all the financial statements which you will prepare or audit.
CONCEPTUAL AND REGULATORY FRAMEWORK
The issues covered by this chapter and particularly the principles introduced by the IASB Framework are a fundamental part of the Financial Accounting syllabus.
Throughout the rest of the text we will make reference to the way that the Framework affects the way that specific transactions are accounted for and presented. These principles will be further developed in Financial Reporting and at the Advanced Stage.
F inancial accounting
Accounting and reporting concepts constitute 10% of the syllabus. This area of the syllabus is likely to be examined in the written test section of the paper in conjunction with another topic, rather than in its own right. For example, in a question on tangible non-current assets you could be asked to consider how the definition of an asset affects the recognition of certain expenses as capital or revenue items. Part (a) of question 4 in the sample paper required an explanation and discussion of the concept of substance over form in the context of the topic of leasing.
You could also be asked to...