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RELEVANT TO ACCA QUALIFICATION CONVENTIONAL PAPER F7 AND PERFORMANCE OBJECTIVES 12 AND 11 The need for and an understanding of a conceptual platform This subject forms most of Section A (and has an influence on Section B) of the syllabus for Newspaper F7, Economical Reporting. A conceptual structure is important for the understanding of the numerous principles and concepts that underpin Foreign Financial Confirming Standards (IFRS) and is an often-neglected part of candidates’ studies.

Questions from these areas regularly come in Paper F7 exams ” usually because Question some ” and I often review in my examiner’s report that they can be the least well-answered question in the exam conventional paper, the queries also have a high incidence of candidates not really attempting all of them at all.

Here is info intended to demonstrate the relevance and importance of this theme. What is a conceptual framework? Within a broad sense a conceptual framework is seen as an effort to specify the nature and purpose of accounting.

A conceptual framework need to consider the theoretical and conceptual problems surrounding financial reporting and form a coherent and consistent foundation that will underpin the development of accounting standards. It is far from surprising that early writings on this subject were generally from teachers. Conceptual frameworks can affect many professions, but when specifically related to financial reporting, a conceptual construction can be seen being a statement of generally approved accounting concepts (GAAP) that form a frame of reference pertaining to the analysis of existing practices and the development of fresh ones.

As the purpose of economical reporting is to provide useful information being a basis intended for economic making decisions, a conceptual framework is going to form a theoretical basis for determining how orders should be measured (historical benefit or current value) and reported ” ie that they are shown or communicated to users. Some accountants have asked whether a conceptual framework is necessary in order to produce reliable monetary statements. Earlier history of standard setting bodies throughout the world tells us it is.

In the absence of a conceptual framework, accounting criteria were frequently produced that had significant defects ” that is: ¢ they were not really consistent with the other person particularly inside the role of prudence versus accruals/matching ¢ they were as well internally sporadic and often the result of the transaction on the assertion of financial location was deemed more important than its impact on income the statement 2011 ACCA 2 THE ADVANTAGES OF AND A COMPREHENSION OF A CONCEPTUAL FRAMEWORK MARCH 2011 ¢ ¢ ¢ tandards had been produced on a ‘fire fighting’ approach, often reacting to a corporate scandal or failing, rather than becoming proactive in determining finest policy. A few standard environment bodies had been biased within their composition (ie not reasonably representative of almost all user groups) and this influenced the quality and direction of standards similar theoretical concerns were revisited many times in successive standards ” for instance , does a transaction give rise to an asset (research and development expenditure) or liability (environmental provisions)?

It could be argued that the not enough a conceptual framework triggered a proliferation of ‘rules-based’ accounting systems whose key objective would be that the treatment of almost all accounting orders should be handled by comprehensive specific guidelines or requirements. Such something is very prescriptive and rigid, but has got the attraction of economic statements getting more similar and steady.

By contrast, the of a conceptual framework could lead to ‘principles-based’ program whereby accounting standards are developed by an decided conceptual basis with specific objectives. This brings us towards the International Accounting Standards Board’s (IASB) The Conceptual Construction for Economic Reporting (the Framework), which is in essence the IASB’s presentation of a conceptual framework in addition to the process of getting updated. The primary purpose of the Framework is to: ¢ ssist in the progress future IFRS and the review of existing standards by setting out the underlying concepts ¢ promote harmonisation of accounting regulation and standards by reducing the number of permitted alternative accounting therapies ¢ support the preparers of financial claims in the application of IFRS, which in turn would incorporate dealing with accounting transactions which is why there is not (yet) an accounting standard. The Framework is also of value to auditors, and the users of financial statements, and more generally help interested functions to understand the IASB’s approach to the ingredients of an accounting standard.

The content of the Framework can be summarised as follows: ¢ Identifying the purpose of financial claims ¢ The reporting entity (to become issued) ¢ Identifying the parties apply financial statements ¢ The qualitative features that make financial statements beneficial ¢ The text with the old Platform dealing with aspects of financial claims: assets, liabilities equity income and expenditures and 2011 ACCA 3 THE ADVANTAGES OF AND AN UNDERSTANDING OF A CONCEPTUAL FRAMEWORK AUGUST 2011 hen they should be recognized and an analysis of dimension issues (for example, historical cost, current cost) plus the related idea of capital repair. The development of the Framework over time has led to the IASB producing a body of world-class requirements that have the next advantages for individuals companies that adopt all of them: ¢ IFRS are widely accepted as being a set of premium quality and transparent global specifications that are meant to achieve uniformity and assessment across the world. They have been produced in assistance with other internationally renowned standard setters, while using aspiration of achieving consensus and global convergence. ¢ Companies that use IFRS and have their monetary statements audited in accordance with Foreign Standards in Auditing (ISA) will have an enhanced status and status. ¢ The International Business of Investments Commissions (IOSCO) recognise IFRS for listing purposes ” thus firms that use IFRS need create only one pair of financial claims for any investments listing intended for countries which have been members of IOSCO.

This will make it easier and cheaper to improve finance in international marketplaces. ¢ Businesses that personal foreign subsidiaries will find the consolidation simplified if all of their subsidiaries use IFRS. ¢ Companies involving IFRS will discover their results are more easily compared with those of other companies that use IFRS. This should obviate the need for virtually any reconciliation by local GAAP to IFRS when analysts assess comparison performance.

It is not necessarily the purpose of this post to go through the detailed articles of the Platform, this is very well documented in lots of textbooks. Now I would stress that it is essential to think about what the content of the Construction really means, it is not enough merely to rote find out principles/definitions. This is because an understanding and application of these types of topics will be tested in exam concerns and it is about these elements that applicants perform somewhat poorly. Since previously mentioned, this kind of topic is usually examined as Question some (worth 15 marks).

Typically, the question will certainly identify a couple of areas of the Framework and inquire for a definition or justification of them ” for example , the meaning of resources and debts, an explanation of accounting ideas such as material over kind or substantialness, or qualitative characteristics including relevance and reliability. It will usually become followed by short scenarios meant to test candidates’ understanding and the ability to apply the above understanding. 2011 ACCA some THE NEED FOR AND AN UNDERSTANDING OF ANY CONCEPTUAL FRAMEWORK OCTOBER 2011 Here are a few types of past concerns.

June 08 exam (a) The IASB’s Framework intended for the Preparing and Business presentation of Financial Assertions requires economic statements to get prepared around the basis that they can comply with specific accounting ideas, underlying assumptions and (qualitative) characteristics. Five of these are: ¢ Matching/accruals ¢ Material over form ¢ Discretion ¢ Comparability ¢ Materiality Required Briefly explain the meaning of each of the above concepts/assumptions. (5 marks) (b) For most entities, making use of the appropriate concepts/assumptions in for stocks is an important aspect in preparing all their financial transactions.

Required Demonstrate with a good example how each one of the concepts/assumptions in (a) can be applied to accounting for inventory. (10 marks) (15 marks) Observations This kind of question displays the progression of the topic from Newspaper F3 to F7. Part (a) is definitely not much more than expected expertise from F3, however Portion (b) moves along this expertise. It requires the application of each of the principles, not to just any condition, but specifically for inventory as a result illustrating what sort of single transaction (inventory from this case) may be subject to a number of accounting ideas.

June 2010 exam (a) An important aspect of the International Accounting Standards Board’s (IASB) Framework for the Prep and Presentation of Financial Claims is that transactions should be recorded on the basis of their substance above their kind. Required Clarify why it is vital that financial statements should reveal the material of the underlying transactions and describe the characteristics that may 2011 ACCA 5 THE NEED FOR AND A COMPREHENSION OF A CONCEPTUAL FRAMEWORK OCT 2011 show that the element of a transaction may be not the same as its legal form.

Observations Part (a) is based on quite topic of substance above form. Note the question will not ask for a definition of the idea (this would be more pertaining to Paper F3), instead this asks why the concept is very important and what features might indicate the fact that substance of your transaction can be different to the legal type. In other words, how do we identify such transactions? Many answers to this question only gave a definition of compound and an example (inevitably leasing) of its use in economic statements.

Portion (b) contains a numerical example associated with a sale and re-purchase arrangement to demonstrate the difference the fact that application of substance has on economic statements (compared to the legal form). June 2011 test (a) Your assistant have been reading the IASB’s Structure for the Preparation and Presentation of Financial Statements (the Framework) and, as part of the qualitative characteristics of financial statements beneath the heading of ‘relevance’, he notes the fact that predictive worth of information is regarded as important.

He’s aware that financial statements have decided historically (ie after transactions have occurred) and offers the view that the predictive value of financial statements can be enhanced in the event that forward-looking information (for example, forecasts) were published instead of backward-looking traditional statements. Required By the use of certain examples, offer an explanation to your assistant showing how IFRS presentation and disclosure requirements can assist the predictive role of historically ready financial claims. (6 marks) Observations Again Part (a) is styled on the Framework: the important characteristic of significance.

This is this kind of import characteristic that the Construction says (implicitly) that in the event that information can be not relevant, it is useless. This question focuses on a specific aspect of relevance, that of predictability. Predictability acknowledges that users of financial transactions are very interested the future performance of an entity. The key of this issue was about just how historical details can be provided, such that it enhances the predictive value of financial statements. 2011 ACCA 6 THE ADVANTAGES OF AND A COMPREHENSION OF A CONCEPTUAL FRAMEWORK OCT 2011

Coming from memory We would say that this kind of (section) question had the very best number of prospects that would not give any kind of answer, associated with those that did, very few scored more than half of the available markings. Part (a) was and then a section on continuing and discontinued procedures, and a calculation of diluted income per share. If these topics had been mentioned in Part (a) by itself, it would have gained a pair of the 6 marks obtainable. Conclusion Just look out for more of this type of issue ” it is an important place and should not really be neglected. Steve Jeff is reviewer, evaluator for Newspaper F7 2011 ACCA

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