Subject (SQ): FINANCIAL REPORTING

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  • 20 Marks

FR – L2 – Q8 – Financial Reporting Standards

Explain the correctness of accounting treatments for preference shares, customer liquidation, and goodwill impairment in Trust Plc's financial statements.

The following information has been extracted from the draft financial statements of Trust Plc for the year ended 31 December 20X8.

Net assets Profit for the year
GH¢000 GH¢000
5,000 500

As the senior in charge of the audit, you identify the following:
(i) The company has preference shares in issue and these are included in equity at an amount of GH¢500,000. The annual dividend of 10% has been recognised in equity. The shares are to be redeemed in three years’ time.
(ii) One of Trust Plc’s customers went into liquidation shortly after the year-end owing Trust Plc GH¢25,000. The finance director has argued that the liquidation did not exist at the year-end and has retained the balance in the financial statements.
(iii) The company had recognised impairment of goodwill in the amount of GH¢400,000 in the financial statements for the year ended 31 December 20X8. The finance director has reversed the write-off in this year’s accounts due to an upturn in fortunes of the cash-generating unit to which the goodwill related. This has resulted in a credit of the full amount to the statement of profit or loss.

Required:
(a) Explain whether the above accounting treatments are correct and, if not, explain the correct

(b) Adjust the net assets and profit figures after making any necessary corrections in respect of the above accounting treatments.

(c) Identify and explain any ethical issues arising in the above. (Assume that Kofi is a full member of ICAG and that you are a student member).

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  • 10 Marks

FR – L2 – Q7 – Sustainability

Identify and explain three balances in the statement of financial position affected by sustainability issues.

Sustainability issues are becoming increasingly important in corporate reporting. They may also affect amounts reported in the financial statements.

Required:

(a) Identify and explain THREE examples of balances in the statement of financial position that may be affected by sustainability issues.

(b) Explain the work of the International Sustainability Standards Board to address investors’ information needs with regards to sustainability issues.

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  • 20 Marks

FR – L2 – Q6 – Conceptual Framework

Explain understandability, comparability, and the role of consistency in accounting policy changes in financial reporting.

The IASB’s Conceptual Framework for Financial Reporting states that the qualitative characteristics of financial statements are the attributes that make financial information useful.

Two of the enhancing qualitative characteristics of useful financial information contained in the IASB’s Conceptual Framework for Financial Reporting are understandability and comparability.

Required:

(a). Explain the meaning and purpose of the above characteristics in the context of financial reporting and discuss the role of consistency within the characteristic of comparability in relation to changes in accounting policy.

(b). Recognition in financial reporting is the process of incorporating into the financial statements an item that meets the definition of an element of financial statements and satisfies specified criteria.

Required:

State the criteria for recognition of an element of financial statements in financial reporting.

(c). The conceptual framework includes the measurement bases of the elements of the financial statements together with recognition criteria for them.

Required:

Explain the FOUR bases of measurement used in the financial statements.

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  • 9 Marks

FR – L2 – Q5 – Conceptual Framework for Financial Reporting

Explain relevance, faithful representation, and comparability in financial information per IASB's Conceptual Framework.

CHAPTER TWO
Chapter 2 of the IASB’s Conceptual Framework states that in order to be useful for decision making purposes information must have certain characteristics. It goes on to describe both fundamental and enhancing qualitative characteristics of financial information.
Fundamental qualitative characteristics are relevance and faithful representation. Enhancing qualitative characteristics include comparability.

Required
Explain what is meant by relevance, faithful representation and comparability and how they make financial information useful.

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  • 15 Marks

FR – L2 – Q4 – Conceptual Framework

Explain the term "Conceptual Framework" in relation to IFRS Accounting Standards.

(a). Explain the term “Conceptual Framework” in relation to IFRS Accounting Standards.

(b). Define assets and liabilities.

(c) The International Accounting Standards Board’s Conceptual Framework requires that entities should comply with certain accounting concepts and underlying assumptions which include:
(i) Substance over form;
(ii) Materiality;
(iii) Comparability; and
(iv) Going concern.

Explain briefly the meaning of these concepts.

(d). Discuss the information needs of the following users of a company’s financial statements:

(i) Lenders;

(ii) Suppliers;

(iii) Customers;

(iv) Employees; and

(v) Government and its agencies.

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  • 10 Marks

FR – L2 – Q3 – Conceptual Framework for Financial Reporting

Appraise the validity of a statement claiming the statement of financial position is sufficient for assessing business performance, defining key terms.

“A statement of financial position is a snapshot of a business at a point in time. It shows the assets that an entity owns and the liabilities that it owes. This is all that is required to convey a business’s performance, position and adaptability.

As income generated and expenses incurred by a business are already reflected within the assets and liabilities shown in the statement of financial position, a statement of profit or loss is a superfluous statement.”

Required

Briefly appraise the validity of the above statement, defining the words underlined.

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  • 15 Marks

FR – L2 – Q1 – General Purpose Financial Statements

Explain the meaning of general purpose financial statements per IAS 1.

IFRS Accounting Standards are generally accepted as accounting standards in the preparation of general purpose financial statements in many countries of the world.

GENERAL PURPOSE FINANCIAL STATEMENTS

Required:
(a) Explain briefly the meaning of a general purpose financial statements in accordance with IAS 1 Presentation of Financial Statements. (2 marks)
(b) State and explain briefly any FOUR possible reasons for the prevalence of IFRS Accounting Standards in many countries of the world. (8 marks)
(c) Outline FIVE areas of relevance that the Conceptual Framework might have in respect of the quality of financial reporting. (5 marks)

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