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 Company Statements 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 Conventions 1. Historical Cost 2. Monetary Measurement 3. Business Entity 4. Materiality

Historical Cost  An item should be valued at historical cost  Its purchase price  Not its current value  Reliable  A certainty Problem: Valuing assets such as Property Eg Bought for €100,000 in not reflective of current value IASB has moved away from using Historical cost to value assets IASB now use FAIR VALUES Ireland & 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

1. Dual Aspect 2. Going Concern 3. Consistency 4. Prudence 5. Accruals

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

 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

 Presentation and classification of items should be retained from one period to the next  Unless a change is justified by a change  Or a change if IFRS  Facilitates comparability

 Under conditions of uncertainty a degree of caution must be exercised.  Uncertainty:  estimating gains and assets  Estimating losses and liabailities  Confirmatory evidence required before recording in financial statements  Prudence not required where there is no uncertainty

 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

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 CharacteristicExplanation RelevanceMust assist user to form, confirm or change opinion ReliabilityShould be truthful, accurate, complete and capable of being verified ComparabilityUsed to make performance comparisons over time or with similar companies UnderstandableExpress with clarity and understandable to user ObjectivityReported in a neutral way. Not biased to a particular user ConsistencyConsistent 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. Relevant 2. Reliable 3. Comparable 4. 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)