FA1 Concepts & Conventions

1. FA1 Concepts & Conventions

2. Regulation • Self-Regulation • National Law • EU law

3. Professional Self-Regulation

4. Companies Acts

5. 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”

6. 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

7. Accounting Conventions • Historical Cost • Monetary Measurement • Business Entity • Materiality

8. Accounting Conventions 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 2002 - 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

9. 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

10. 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

11. Accounting Conventions Materiality • Information is material to the Financial Statements if omission or misstatement could influence economic decisions • Material in terms of Sizeeg €1 million loan not declared • Material in terms of Natureeg “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”

12. Accounting Concepts • Dual Aspect • Going Concern • Consistency • Prudence • Accruals

13. Accounting Concepts Dual Aspect • Every Debit has a corresponding Credit • Accounting Equation • Assets = Capital + Liabilities

14. 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

15. Accounting Concepts Consistency • 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

16. Accounting Concepts Prudence • 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

17. 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

18. 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

19. 6 Key Characteristics of Accounting Information

20. 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

21. Qualitative Characteristics Relevant Reliable Comparable Understandable

22. 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

23. Reliable • Financial reports should faithfully represent the underlying economic situation of the entity • Faithful Representation if • Complete • Neutral • Free from error

24. 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

25. 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

26. 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 VsUnderstandability • Use information that is most reliable and relevant

27. 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

28. Estimation Techniques • Methods for estimating amounts for assets, liabilities, gains, losses, and changes in capital. • Allowance for receivables • Depreciation

29. Measurement Bases • Cost • Net Realisable Value • Replacement Cost

30. Selecting Accounting Policies • Ensure Financial Statements show a true and Fair view • Consistent with accounting standards and company legislation • Provide useful information

31. 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)