ACCA - Association Of Chartered Certified Accountants
ACCA - Association Of Chartered Certified Accountants
ACCA - Association of Chartered Certified Accountants
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ACCA Strategic Business Reporting (UK Version) March - June 24 Sitting
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ACCA - Association of Chartered Certified Accountants
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ACCA - Association Of Chartered Certified Accountants
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ACCA Strategic Business Reporting
The following document is a high level summary of the Kaplan textbook for March 2024 & June 2024 ACCA Strategic Business Reporting Exam. All chapters are covered in detail with each chapter summarised into easily understandable points which can be summarised into revision cards for later levels of ...
ACCA - Association of Chartered Certified Accountants
ACCA - Association of Chartered Certified Accountants
ACCA - Association of Chartered Certified Accountants
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CHAPTER 1: FRAMEWORKS
Frameworks
IFRS 13: Fair
The Conceptual
Materiality Value
Framework
Measurement
Introduction
This chapter consider two documents issued by the International Accounting Standards Board (IASB). These two
documents underpin a range of IFRS and IAS Standards:
1. The Conceptual Framework for Financial Reporting
2. IFRS 13 Fair Value Measurement
THE CONCEPTUAL FRAMEWORK
Introduction & Purpose
A conceptual framework is a set of theoretical principles and concepts which underlie the preparation and presentation
of financial statements.
The Conceptual Framework is principles based, meaning it acts as a reference point for instances where no specific
accounting standard governs a particular transaction. Principles based framework is harder to circumnavigate, as under
a rules based approach, users would always be looking for loopholes.
The purpose of the Conceptual Framework:
Assists the IASB in developing new IFRS standards (based on conistent concepts).
Assists preparers of financial statements when no specifc IFRS applys to a particular
transaction or there is a choice of accouting policy.
NOTE: Standards (IAS/IFRS) overrule the Conceptual Framework (The Framework is just a guide in case
there is no specific standard!
,Content of the Conceptual Framework
Elements
Definitions
The Framework identifies that financial statements are composed of five elements:
Elements Definition
Assets A present economic resource controlled by the entity as a result of past events
Liabilities A present obligation of the entity to transfer an economic resource as a result of past events.
Equity Residual interest in the net assets of an entity
Income Increases in assets or decreases in liabilities that result in an increase in equity.
Expenses Decreases in assets or increases in liabilities that result in a decrease in equity.
Measurement
When recognise in the financial statements, elements must be quantified in monetary terms. There are two possible
ways to measure the elements:
Historical Cost Current Value
•Asset: Consideration paid + purchase costs. •Includes: Fair Value, Value-in-Use, Current
•Liability: Proceeds received – transaction costs Cost, Net realisable value.
incurred.
•Historical cost is updated after initial
recognition to reflect depreciation, amortisation,
payments and interest.
Recognition & Derecognition
1. Recognition
• Items are only recognised in the financial statements if they meet the definition of one of the elements.
• Elements are only recognised if it provides users with useful financial information (i.e. be relevant and a faithful
representation of assets/liabilities/income/expenses).
• Hence not all items meeting those element definitions will be recognised. This might be because:
o Uncertainty over its existence
o Low probability of an inflow/outflow I.e. contingent liabilities are not recognised if it is NOT probable that
resources will flow from the reporting entity.
o High degree of measurement uncertainty.
• If an asset or liability is not recognised, disclosures may be required.
2. De-recognition
,• De-recognition usually occurs when the entity:
o Loses control of the asset, or
o Has no present obligation for the liability.
Financial Statements
Qualitive Characteristics
Fundamental Characteristics Enhancing Characteristics
The Conceptual Framework states that financial information There are 4 enhancing qualitive characterisitcs of useful
is only useful if it is: financial information:
o Relevant (capable of influencing the users decision and o Comparability: Investors should be able to compare an
considers materiality). entity's financial information YoY and to other entitys.
o A Faithful Representation (Financial information must o Timeliness: Information should be provided to users in
be complete, neutral and free from error). time for their decision making purposes.
o Verifiability: If information can be verfified through audit
it gives more assurance to users thats it credible and
reliable.
o Understandability: Informatioation should be presented
clearly and concisely.
Hence the elements should only be recognised if recognition provides relevant information or a faithful
representation of the asset/liability – E.g. intangible assets are not recognised as they cannot be reliably
measured.
Presentation & Disclosure
The Conceptual Framework states that income and expenses should be presented in the statement of profit or loss.
However there are occasions where the income or expense should be recognised in other comprehensive income, i.e.
in instances where there is a revaluation of an asset to its current value.
Including this in the P&L would not offer a faithful representation of the entity’s financial performance during the
period – thus should not be included. If including in the P&L is not relevant – include in OC,, unless a IAS says so.
Example
Entity A owns land and buildings that are accounted for using the revaluation model in IAS16 PPE. At the reporting
date. Entity A revalued these assets from £250m to £350m. IAS 16 says that the £50m gain must be recognised in
other comprehensive income.
PPE is not held for trading but is instead used over more than one period to produce, supply, store and distribute
goods. Including this £50m gain in the P&L would not offer a faithful representation of Entity A’s financial
performance during the period.
Criticisms of Financial Reporting
Criticism Reasoning
Historical The P&L shows past performance, despite investors being more interested in future profits.
Information
Unrecognised assets Not all assets and liabilities are recognised under IFRS standards, i.e. internally generated
& Liabilities goodwill and unprobable contingent assets/liabilities.
A company’s reputation ad employees/skills play a pivotal role in its success but are not
represented in the financial statements.
Estimates Financial reporting uses many estimates (i.e. depreciation rates). They are subjective and
could be manipulated to achieve profit targets.
Policy Choices Some standards such as IAS16 PPE, allow entities to choose between cost and FV. This
makes it more difficult for investors to compare financial statements between entitles.
, MATERIALITY
Definition
Information is material if omitting, misstating or obscuring it would influence on the economic decisions of the
financial statement users.
An entity can still comply with the IFRS/IAS if the treatment/error is not material.
Application
@ Step 2
When assessing whether information is material, an entity should
consider:
- Quantitative Factors: % of revenue/profit/assets/cashflows.
- Qualitative Factors: Items may be material if they trigger non-
compliance or transactions that might be key to future operations.
@ Step 3
An entity should recognise the financial element if it is material.
An entity only needs to disclose the information if it is material.
If
Errors
It is best practice to correct all errors identified. However, the correction of immaterial errors may involve undue costs
or delay the publication of the financial statements.
Material misstatements identified before the financial statements are approved MUST be corrected.
Material errors relating to prior period must be adjusted retrospectively.
Where management encounter immaterial errors, consideration should be given to implications on other areas of the
accounts. In other words, they must consider if an immaterial error in one account, does not cause a material error
elsewhere.
IFRS13: FAIR VALUE MEASUREMENT
Introduction
Many accounting standards require/allow items to be measured at fair value.
Standard IFRS 13 applies? Explanation
IAS 16: Property, Plant & Yes Allows entities to measure PPE at fair value.
Equipment
IFRS 3 Business Yes Requires the identifiable net assets of a subsidiary to measured
Combinations at fair value at the acquisition date.
IAS 38: Intangible Assets Yes
IFRS 2: Share based No
transactions
IFRS 16: Leases No Lease liability measured at Present value of future payments.
IAS 2: Inventories No Measured at lower of cost or NRV.
IAS 36: Impairments No
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