BUSI 2143 Intermediate Corporate Reporting
The Conceptual Framework
1. The objective of general-purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
2. If financial information is to be useful, it must be relevant and faithfully represent what it purports to
represent:
a. Relevance
i. Makes a ‘difference in the decisions’ of users.
ii. Predictive value
iii. Confirmatory value
b. Faithful representation
i. Key concept
ii. Essentially the same as ‘true and fair’
iii. Three elements: completeness, neutrality and freedom from error.
3. Concept of Prudence
a. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making
the estimates required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated
a. Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when
making judgements under conditions of uncertainty. The exercise of prudence means that assets and
income are not overstated and liabilities and expenses are not understated. Equally, the exercise of
prudence does not allow for the understatement of assets or income or the overstatement of liabilities
or expenses. Such misstatements can lead to the overstatement or understatement of income or
expenses in future periods
Recognition criteria
1. Assets
a. It is a resource controlled by the entity as a result of past events; and from which future economic
benefits are expected to flow to the entity.
b. Recognised when:
it is probable that the future economic benefits will flow to the entity and the asset has a cost or
value that can be measured reliably.
2. Liability
a. a present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity embodying economic benefits
b. Recognised when:
It is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation; and the amount at which the settlement will take place can be
measured reliably.
Regulatory Framework
1. Regulations:
a. Con
i. Vulnerability of the regulatory process to lobbying and ‘group-think’
ii. Question effectiveness of enforcement (local auditing and punishment for non-compliance
may be ineffective)
iii. Accounting regulation imposes costs on the producers of information
iv. ‘Regulatory arbitrage’ e.g. companies migrate to areas where the burden of regulation is lower
b. Pro
i. To counter the failure of a free market in accounting information to overcome informational
asymmetries 信息灵通 有些人有信息 有些没有 (the ‘public interest’ theory of regulation)
, ii. Lower cost of capital results from market confidence being supported
iii. Markets are encouraged to be more efficient
2. GAAP: Generally Accepted Accounting Principles
- The complete set of regulations from all sources that apply in a particular
jurisdiction – plus any local principles and conventions
a. Companies Act 2006 - includes EU influence
b. Local Accounting standards (FRS set by FRC)
c. London Stock Exchange Rulebook
3. Reasons for international accounting differences
a. the nature of legal systems
b. the nature of business ownership and financing systems
c. history
d. the strength of the accounting profession
4. Harmonisation and standardisation
a. Standardisation
- implies countries settling on exactly the same standards and processes
- Benefits:
i. Easier access to international capital markets
ii. Reduced costs for companies with listings on different international stock exchanges
iii. Reduced accounting costs for multinationals
iv. Increased comparability across industries, territories and companies, benefitting investors
b. Harmonisation
- process of making standards used in different countries more similar (e.g. the ‘convergence project’
bringing IFRS and US GAAP closer)
- Difficulties:
i. Significant differences between the accounting practices of different countries
ii. Different need of users/countries
iii. Nationalism
iv. Sophistication of local accounting professions
v. High cost of implementation/training
vi. Problems in ensuring consistent application
- International Accounting Standards Board
i. Sets International Financial Reporting Standards “IFRS”
ii. Objectives:
a. to formulate and publish accounting standards and to promote their rigorous use and
acceptance worldwide
b. to work on the improvement and harmonisation of regulations, accounting standards
and procedures
5. Principles Based standards v Rules Based standards debate
a. Principles:
conventions such as ‘fair presentation’; definitions of elements of financial statements; concepts such
as prudence, matching, consistency, comparability (i.e. the key assumptions which underpin financial
statements) – requiring judgment and following spirit of regulation
b. Rules:
specific criteria, thresholds, detailed tests, restrictions, exceptions, detailed implementation guidance
c. Illustration of principles and rules based approaches: Depreciation
, i. Underlying principle:
the accruals concept – depreciation allocates cost of non-current assets to the periods of their
use in generating revenue
ii. Could use a hard rule to apply this principle:
‘annual depreciation for all non-current assets of equipment is to be 10% of the original cost of
the asset until the asset is fully depreciated’
iii. Judgment in applying the principle:
‘depreciation expense for the reporting period should reflect the decline in the economic value
of the asset over the period’
For Rules Based Standards Against Rules Based Standards
are what preparers, auditors and regulators reduce or eliminate the exercise of
want - they provide detailed guidance and professional judgement and lead to de-skilling
clarification and precise answers to questions of the profession
are authoritative and enforceable do not prevent dishonest practice
provide greater comparability do not guarantee comparability
reflect the complexity of the underlying cause complexity and delay in keeping up with
business change
deter creative accounting foster creative accounting
6. Economic substance over legal form
a. The principle of ‘substance over form’ is central to the faithful representation and reliability of
information contained in the financial statements.
b. By placing the responsibility on the preparers of the financial statements to actively consider the
economic reality of transactions and events to be reflected in the financial statements, it will be more
difficult for the preparers to justify the accounting of transactions in a manner that does not fairly
reflect the substance of the situation.
, Property, Plant and equipment - IAS 16
1. Definition:
a. Tangible assets
b. Held for use in the business
c. Expected to be used for more than one year
2. Initial recognition:
a. it is probable that future economic benefits associated with the item will flow to the entity; and
b. the cost of the item can be measured reliably.
c. Usually when the asset is received, but:
i. No requirement for legal ownership (finance leases).
ii. Does not have to be complete (assets in the course of construction).
iii. Can be an addition to an existing asset.
3. Subsequent Costs
a. Repairs and maintenance - Expense
b. Replacement Parts - Capitalise (Disposal)
c. Major inspections - Capitalise (Disposal)
d. Enhancement - Capitalise (Additional)
4. Measurement
a. Recognise at cost, which includes:
i. Purchase price.
ii. ‘Any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management’.
- Employee costs, for construction or acquisition.
- Site preparation.
- Initial delivery & handling costs.
- Installation and assembly costs.
- Costs of testing.
- Professional fees.
iii. The initial estimate of the costs of dismantling and removing the item and restoring the site.
b. Measurement after initial recognition
i. Net book value = Cost – Acc. Depreciation – Impairment losses
5. Depreciation
a. Recognising the expense (depreciable amount) of an item of PPE over its useful economic life.
b. ‘The depreciation method used shall reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity.’
c. Straight line & Reducing & Units of production
Units produced in the period
i. Cost x
Total expected units over life of asset
d. Component accounting:
An item of PPE may need to be split up into different parts which have different useful lives. (Land &
buildings, social housing)
6. Revaluation
a. Fair Value
i. Covered by IFRS 13 Fair Value Measurement.
ii. Use a market-based value where possible.
iii. For specialised assets, may need to use a valuation model, such as depreciated replacement
cost.
b. Revaluation model
i. Only if fair value can be measured reliably.
ii. Apply policy to entire class of PPE.
iii. Update regularly so that carrying amount is not materially different to fair value.
iv. All assets in the same class must be revalued at the same time.
The Conceptual Framework
1. The objective of general-purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
2. If financial information is to be useful, it must be relevant and faithfully represent what it purports to
represent:
a. Relevance
i. Makes a ‘difference in the decisions’ of users.
ii. Predictive value
iii. Confirmatory value
b. Faithful representation
i. Key concept
ii. Essentially the same as ‘true and fair’
iii. Three elements: completeness, neutrality and freedom from error.
3. Concept of Prudence
a. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making
the estimates required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated
a. Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when
making judgements under conditions of uncertainty. The exercise of prudence means that assets and
income are not overstated and liabilities and expenses are not understated. Equally, the exercise of
prudence does not allow for the understatement of assets or income or the overstatement of liabilities
or expenses. Such misstatements can lead to the overstatement or understatement of income or
expenses in future periods
Recognition criteria
1. Assets
a. It is a resource controlled by the entity as a result of past events; and from which future economic
benefits are expected to flow to the entity.
b. Recognised when:
it is probable that the future economic benefits will flow to the entity and the asset has a cost or
value that can be measured reliably.
2. Liability
a. a present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity embodying economic benefits
b. Recognised when:
It is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation; and the amount at which the settlement will take place can be
measured reliably.
Regulatory Framework
1. Regulations:
a. Con
i. Vulnerability of the regulatory process to lobbying and ‘group-think’
ii. Question effectiveness of enforcement (local auditing and punishment for non-compliance
may be ineffective)
iii. Accounting regulation imposes costs on the producers of information
iv. ‘Regulatory arbitrage’ e.g. companies migrate to areas where the burden of regulation is lower
b. Pro
i. To counter the failure of a free market in accounting information to overcome informational
asymmetries 信息灵通 有些人有信息 有些没有 (the ‘public interest’ theory of regulation)
, ii. Lower cost of capital results from market confidence being supported
iii. Markets are encouraged to be more efficient
2. GAAP: Generally Accepted Accounting Principles
- The complete set of regulations from all sources that apply in a particular
jurisdiction – plus any local principles and conventions
a. Companies Act 2006 - includes EU influence
b. Local Accounting standards (FRS set by FRC)
c. London Stock Exchange Rulebook
3. Reasons for international accounting differences
a. the nature of legal systems
b. the nature of business ownership and financing systems
c. history
d. the strength of the accounting profession
4. Harmonisation and standardisation
a. Standardisation
- implies countries settling on exactly the same standards and processes
- Benefits:
i. Easier access to international capital markets
ii. Reduced costs for companies with listings on different international stock exchanges
iii. Reduced accounting costs for multinationals
iv. Increased comparability across industries, territories and companies, benefitting investors
b. Harmonisation
- process of making standards used in different countries more similar (e.g. the ‘convergence project’
bringing IFRS and US GAAP closer)
- Difficulties:
i. Significant differences between the accounting practices of different countries
ii. Different need of users/countries
iii. Nationalism
iv. Sophistication of local accounting professions
v. High cost of implementation/training
vi. Problems in ensuring consistent application
- International Accounting Standards Board
i. Sets International Financial Reporting Standards “IFRS”
ii. Objectives:
a. to formulate and publish accounting standards and to promote their rigorous use and
acceptance worldwide
b. to work on the improvement and harmonisation of regulations, accounting standards
and procedures
5. Principles Based standards v Rules Based standards debate
a. Principles:
conventions such as ‘fair presentation’; definitions of elements of financial statements; concepts such
as prudence, matching, consistency, comparability (i.e. the key assumptions which underpin financial
statements) – requiring judgment and following spirit of regulation
b. Rules:
specific criteria, thresholds, detailed tests, restrictions, exceptions, detailed implementation guidance
c. Illustration of principles and rules based approaches: Depreciation
, i. Underlying principle:
the accruals concept – depreciation allocates cost of non-current assets to the periods of their
use in generating revenue
ii. Could use a hard rule to apply this principle:
‘annual depreciation for all non-current assets of equipment is to be 10% of the original cost of
the asset until the asset is fully depreciated’
iii. Judgment in applying the principle:
‘depreciation expense for the reporting period should reflect the decline in the economic value
of the asset over the period’
For Rules Based Standards Against Rules Based Standards
are what preparers, auditors and regulators reduce or eliminate the exercise of
want - they provide detailed guidance and professional judgement and lead to de-skilling
clarification and precise answers to questions of the profession
are authoritative and enforceable do not prevent dishonest practice
provide greater comparability do not guarantee comparability
reflect the complexity of the underlying cause complexity and delay in keeping up with
business change
deter creative accounting foster creative accounting
6. Economic substance over legal form
a. The principle of ‘substance over form’ is central to the faithful representation and reliability of
information contained in the financial statements.
b. By placing the responsibility on the preparers of the financial statements to actively consider the
economic reality of transactions and events to be reflected in the financial statements, it will be more
difficult for the preparers to justify the accounting of transactions in a manner that does not fairly
reflect the substance of the situation.
, Property, Plant and equipment - IAS 16
1. Definition:
a. Tangible assets
b. Held for use in the business
c. Expected to be used for more than one year
2. Initial recognition:
a. it is probable that future economic benefits associated with the item will flow to the entity; and
b. the cost of the item can be measured reliably.
c. Usually when the asset is received, but:
i. No requirement for legal ownership (finance leases).
ii. Does not have to be complete (assets in the course of construction).
iii. Can be an addition to an existing asset.
3. Subsequent Costs
a. Repairs and maintenance - Expense
b. Replacement Parts - Capitalise (Disposal)
c. Major inspections - Capitalise (Disposal)
d. Enhancement - Capitalise (Additional)
4. Measurement
a. Recognise at cost, which includes:
i. Purchase price.
ii. ‘Any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management’.
- Employee costs, for construction or acquisition.
- Site preparation.
- Initial delivery & handling costs.
- Installation and assembly costs.
- Costs of testing.
- Professional fees.
iii. The initial estimate of the costs of dismantling and removing the item and restoring the site.
b. Measurement after initial recognition
i. Net book value = Cost – Acc. Depreciation – Impairment losses
5. Depreciation
a. Recognising the expense (depreciable amount) of an item of PPE over its useful economic life.
b. ‘The depreciation method used shall reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity.’
c. Straight line & Reducing & Units of production
Units produced in the period
i. Cost x
Total expected units over life of asset
d. Component accounting:
An item of PPE may need to be split up into different parts which have different useful lives. (Land &
buildings, social housing)
6. Revaluation
a. Fair Value
i. Covered by IFRS 13 Fair Value Measurement.
ii. Use a market-based value where possible.
iii. For specialised assets, may need to use a valuation model, such as depreciated replacement
cost.
b. Revaluation model
i. Only if fair value can be measured reliably.
ii. Apply policy to entire class of PPE.
iii. Update regularly so that carrying amount is not materially different to fair value.
iv. All assets in the same class must be revalued at the same time.
