Summary
Summary ICAEW - Financial Accounting & Reporting
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FAR - Professional Level Exam Notes
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Financial ReportingThis is the process of identifying, measuring and communicating economic information about an
entity to allow users of the of the information to make decisions using this information and also to
assess the stewardship of the entity’s management.
This involves:
- Recording transactions undertaken by the entity
- Grouping similar transactions together which are business related/appropriate
- Presenting periodically the results of transactions
Users of information include: public, government, investors, lenders and suppliers etc. The
information is used by them to:
- Assess whether to buy/hold or sell equity investments
- Assess stewardship or accountability of management
- Assess security for amounts lent/due from entity.
Conceptual Framework:
Important Guidance which explains the principals behind financial statements → objective is to
facilitate the consistent and logical formulation of IFRS & provides basis for use of judgement in
resolving accounting issues.
- Conceptual Framework IS NOT A STANDARD (underpins all standards) & does not override
IFRS but forms the conceptual basis for the formulation and development of IFRS. → in case
of conflict between IFRS and conceptual framework, the IFRS will always prevail.
- Gives guidance to development of all IFRS.
- Tends to be more general → IFRS are more detailed.
However, IAS 1 → Presentation of Financial Statements states that in order to achieve fair
presentation, the entity must comply with both:
- IFRS & Conceptual framework for Financial Report.
There are 8 Chapters to the Conceptual Framework:
1- The objectives and general purpose of financial reporting
2- Qualitative characteristics of useful financial information
3- Financial statements and reporting entity
4- Elements of financial statements
5- Recognition and derecognition
6- Measurement
7- Presentation and disclosures
8- Concept of capital and capital maintenance
Page 1 of 88
,Chapter 1: Objectives:
Objective of general-purpose financial reporting is to provide information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors to allow them to make
decisions relating to providing resources to the entity, including buying, selling and holding equity
and debt instruments and settling loans and other forms of credit.
Primary and Principal Users need info about:
- Economic Resources of entity (profits/assets)
- Claims against entity (liabilities)
This allows users to assess liquidity and solvency and the need for additional financing. Is it about to
go bust?
- Changes in entity economic resources and claims.
This helps users to understand the return that the entity has produced on its economic resources.
How profitable is the entity?
Secondary Users of financial information:
These are secondary users because financial information is not prepared with them in mind, rather
they also make use of the published information. This includes:
- Management
- Regulators (e.g., HMRC)
- Members of public → not invested in firm but may have general interest.
They can get information from financial statements but also may have other sources available to
them to get information from.
The conceptual framework states that financial information should be prepared on accrual
accounting basis/aka should follow the matching principal → underlying assumption that all income
and expenses should be matched the period in which they are incurred, even if they have not been
settled within the period. Examples of Matching principal include Inventory measurement at YE,
COS, prepayments & Depreciation.
Chapter 2: Qualitative Characteristics of Financial information:
Qualitative characteristics identify the types of information which will be most useful to existing and
potential investors/lenders/other creditors for making decisions about the entity on the basis of the
information provided within the financial statements.
Two main categories:
1- Fundamental Qualitative characteristics → vital
2- Enhancing qualitative characteristics → not so vital
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,The fundamental characteristics include:
- Relevance
o This means that information which is relevant is reported and relevant information
is any which can influence the decision of users. Information is relevant if:
▪ It has predictive value → can be used to forecast
▪ It has confirmatory value → can be used to confirm transactions which have
happened.
• Materiality (info is material if its omission/misstatement and
obscuring can influence decision making) links to relevance because
it may not be viable to report on minor/small expenses. However, if
a large volume of minor expenses is omitted from reporting → can
influence decisions and can turn losses into profits and distort entity
financial picture.
- Faithful representation
o Reported information should not be relevant but should also give a ‘true and fair
view’ in that it should represent the substance of what it is reporting/the
phenomena it is purporting to represent → economic substance over legal form.
o Faithful representation means that information is:
▪ Complete → all is disclosed – though materiality may mean not all is
necessary
▪ Neutral → fair presentation of positives & negative reporting
▪ Free from error → though if materiality is considered, not viable to report to
pennies.
• Prudence (exercising caution) links to faithful representation in
that in order to be neutral one should err on the side of caution to
ensure that profits and assets are not overstated, or expenses and
liabilities are not understated as to distort the picture of the entity.
• Prudence is important for judgement and estimation.
Enhancing qualitative characteristics include (CUT-V):
1- Comparability:
o Information is useful if it can be compared to other periods/entities, hence being
consistent allows to achieve comparability
2- Understandability
o Classifying & presenting information, in a way in which it is clear, concise and easy to
understand → e.g., having a standard format for presentation of F.S.
3- Timeliness
o Making information available to users in time to allow for decision making
o There needs to be a balance between timeliness and detail/accuracy of info.
4- Verifiability
o Assures users that information is faithfully represented and is trustworthy
o Can be direct or indirect verification e.g., Bank Confirmation letters to confirm bank
balances in audit.
Page 3 of 88
, Cost constraint and financial reporting
When reporting financial information, a consideration needs to be made on the costs incurred to
provide and use information and the benefits of reporting that information. E.g., if vast amounts
are used to report information to the single penny (immaterial), the benefit of reporting to the
penny may not justify the cost to get to this.
Chapter 3: Financial statements and reporting entity:
Objective and scope of reporting:
AS stated earlier, objective of Financial statements (F.S) is to provide financial information about an
entity to the users, to report on the entity’s assets, liabilities, income and expenses in a useful way
so that users of the information can assess the future net cash inflows to the entity and also to
assess the management stewardship in regards to the economic resources → how well have
management utilised the economic resources which are controlled by the entity.
Reporting Period:
FS are prepared for a specific period (reporting period) and provide info on the assets/liabilities and
income and expenses. Comparative information (prior year figures) must also be provided.
FS should report transaction from the entity’s perspective and not that of the investors (to reduce
investor bias).
Going Concern
This is an underlying assumption that FS are prepared on the assumption that the entity is a going
concern; will continue to operate for the foreseeable future (more than 12 months).
- It is assumed that the entity has no intention nor the need to liquidate or cease operations.
If it does, then the FS are presented on a Break-up basis and relevant disclosures are made.
Break Up basis:
Presents the company’s ability to use assets to pay off all its liabilities, meaning that ALL assets are
shown as ‘current assets’ as they will be sold immediately to settle liabilities. Inventory is normally
valued at lower of cost and NRV but in break-up basis, it will be valued much lower (due to
discounts) as the company has no choice but to sell all inventory. All liabilities are classified as short-
term liabilities as all need to be settled immediately.
Chapter 4: Elements of FS:
Transactions and other events are grouped together in broad classes → 5 elements of FS.
The conceptual framework of defines these elements to reduce confusion regarding the recognition
(What it is) and the presentation (where to present) of items. If items don’t meet element
definitions, they should not be recognised in financial statements.
Economic Resource: a right that has the potential to produce economic benefits
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