FA1 Concepts & Conventions

Regulation

• Self-Regulation• National Law• EU law

Professional Self-Regulation

Self Regulation

International Financial Reporting Standards

IFRS

International Accounting Standards

Board IASB

International Accounting Standards

IAS

Rules and guidelines issued that govern the

presentation of Financial Statements

True & Fair

Companies Acts

CompanyStatements• True & Fair

Shareholder

True & Fair

• A legal concept – undefined – changes over time• Objective is that accounts fairly reflect the true

substance of the business• Accounts are an accurate portrayal of the

business activities• Accounts should provide useful information• Concepts and Conventions adopted by the

profession to help ensure “True & Fair”

Accounting Principles & Conventions

• Rules or accepted practice– Which assets and liabilities are in Stmt of FP– How assets and liabilities are valued– What income and expenditure are in Stmt of P&L– The value of income and expenditure recorded

Accounting Conventions1. Historical Cost2. Monetary Measurement3. Business Entity4. Materiality

Historical Cost An item should be valued at historical cost Its purchase price Not its current value Reliable A certaintyProblem: Valuing assets such as PropertyEg Bought for €100,000 in 2002 - not reflective of current valueIASB has moved away from using Historical cost to value assetsIASB now use FAIR VALUESIreland & UK tend to use historical cost – following standard issued by ASB

Accounting Conventions

Monetary Measurement Accounted for if it can be measured in

monetary terms We don’t account for quality of

management, skill set, morale etc

Accounting Conventions

Business Entity From an accounting viewpoint:

Transactions entered into by a business and the those entered by the owner are separate and distinct.

From a legal viewpoint: Sole trader and the business are one

entity Limited company and the owner are

separate legal entities

Accounting Conventions

Materiality Information is material to the Financial

Statements if omission or misstatement could influence economic decisions

Material in terms of Size eg €1 million loan not declared

Material in terms of Nature eg “A” is a director and received a salary with ABC plc. “A” is also owner of XYZ ltd that trades with ABC plc – IAS 24 “Related Party Transaction”

Accounting Conventions

ACCOUNTING CONCEPTS1. Dual Aspect2. Going Concern3. Consistency4. Prudence5. Accruals

DUAL ASPECT Every Debit has a corresponding Credit Accounting Equation Assets = Capital + Liabilities

ACCOUNTING CONCEPTS

GOING CONCERN When financial statements are prepared

under IFRS, management are required to make an assessment of the entity’s ability to continue as a going concern

Ability to continue in business for foreseeable future – 12 months from date financial statements signed

Resources to continue If not going concern, then Financial

Statements prepared on a Breakup basis

ACCOUNTING CONCEPTS

CONSISTENCY Presentation and classification of items

should be retained from one period to the nextUnless a change is justified by a changeOr a change if IFRS

Facilitates comparability

ACCOUNTING CONCEPTS

PRUDENCE Under conditions of uncertainty a

degree of caution must be exercised. Uncertainty:

estimating gains and assetsEstimating losses and liabailities

Confirmatory evidence required before recording in financial statements

Prudence not required where there is no uncertainty

ACCOUNTING CONCEPTS

ACCRUALS Income & Expenditure should be

recognised in the financial year in which they relate rather that the year paid

Eg sales in December not paid for until Jan should be recorded in Dec

Eg Electricity used in Dec not paid for until Jan should be recorded in Dec

ACCOUNTING CONCEPTS

Accruals Vs Prudence

• Accruals – Credit Sales recorded• Prudence – only record when paid

“Reasonably Certain” – not too optimistic nor too pessimistic

Sales based on contract – reasonably certain it will come in – credit history – allowance for receivables

6 Key Characteristics of Accounting Information

Characteristic Explanation

Relevance Must assist user to form, confirm or change opinion

Reliability Should be truthful, accurate, complete and capable of being verified

Comparability Used to make performance comparisons over time or with similar companies

Understandable Express with clarity and understandable to user

Objectivity Reported in a neutral way. Not biased to a particular user

Consistency Consistent application of items over time

IASB Conceptual Framework - Importance

• Purpose – to assist the IASB in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements

• A basis for reducing the number of accounting treatments permitted by IFRS

• Hope to support harmonisation of accounting standards globally• Outlines generally accepted theoretical principles for financial

accounting• Basis for developing new standards and for assessing existing

standards• Like a constitution – new law must be consistent• Less inconsistency between standards

Qualitative Characteristics

1. Relevant2. Reliable3. Comparable4. Understandable

Relevant

Information is relevant if it influences economic Decision Making even if not

acted on If it has predictive value If it has confirmatory value If it helps a user to evaluate a past, present or future

event/decision If it confirms or corrects past evaluations

Reliable

Financial reports should faithfully represent the underlying economic situation of the entity

Faithful Representation if Complete Neutral Free from error

Comparability

Compare one financial year against another Vital information Assessing trends

Compare with other competitions Benchmark performance

Achieved through Consistency in use of accounting standards

Changes in standard should be disclosed

Understandable

Information is classified, characterised and presented clearly and concisely

Don’t leave information out for understandability

Assume that the reader has a reasonable knowledge

Conflicts

• Relevance Vs Reliability– Eg property valued at historical cost (reliable) but

current value more relevant• Neutrality Vs Prudence– Eg profits not overstated (prudence) given

knowledge of debtors but bias (neutrality)?• Relevance Vs Understandability– Use information that is most reliable and relevant

Accounting Policies

• Policies, principles, bases, conventions rules and practices that specify how transactions and events are reflected in the Financial Statements

• It’s the recognition, selection of a measuring basis and the presentation of Assets, Liabilities, Gains, Losses, and Changes to Capital

• It doesn’t include estimation techniques

Estimation Techniques

• Methods for estimating amounts for assets, liabilities, gains, losses, and changes in capital.

• Allowance for receivables• Depreciation

Measurement Bases

• Cost• Net Realisable Value• Replacement Cost

Selecting Accounting Policies

• Ensure Financial Statements show a true and Fair view

• Consistent with accounting standards and company legislation

• Provide useful information

Changing Accounting Policies

• Don’t change unless absolutely necessary• IAS 8 Accounting policies, Changes in

accounting , Estimates and Errors• Select policies that result in relevant and

reliable information (framework)• NB in selecting policies– The going concern concept– The accruals concept (accounting concepts)