Business Accounting and Assurance Coursework
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The conceptual framework has been defined as ‘a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards.’ (FASB 1978) Answer the following questions in relation to the International Accounting Standards Board’s Conceptual Framework, 2010. Q1. What is meant by general purpose financial reporting and how does it differ from special purpose financial reporting?The financial report implies noticing down the monetary exercise of a business, individual or other substance over a predetermined timeframe. It helps in keeping the record clear and effortlessly open. (10 marks)
General purpose financial reporting is a way to communicate important and dependable information to its users. For e.g. we as a whole get receipts when we make buys from stores and us as a whole get bills. In a sense, these both are financial reports as it conveys us the status of our records and individual exchanges. Special purposes financial reporting is a set of cash related decrees that are prepared using a special purpose framework to consider the particular needs of specific customers who intend to use it. It can be accessed by a specific group of people who are allowed to use it. It is prepared only for the use of management staff or for the government entities or tax authorities. where a general purpose financial report can be viewed by a large number of people. It is prepared for open utilization, with the goal of giving a picture of the organization to its investors, creditors or partners.
Q2. ‘Financial reporting should be concerned with the information needs of users.’ Critically discuss this statement, taking into account five different types of users. (40 marks)
There are numerous clients of the financial explanations delivered by an association. The accompanying rundown recognizes the more typical clients of financial statement articulations and the reasons why they require this information:
for investigating the practicality and productivity of their speculation and deciding any future strategy.
2. Company Management & its Representatives.
The management group needs to comprehend the benefit, liquidity, and money streams of the association consistently, with the goal that it can settle on operational and financing choices about the business.
An organization may choose to give its money related articulations to representatives, alongside a nitty-gritty clarification of what the archives contain. This can be utilized to build the level of worker contribution in and comprehension of the business.
3. Investors & creditors
Investors would utilize this data to help settle on a choice about whether they will purchase, offer, or clutch a specific organization’s stock and creditor would utilize monetary reports to decide their hazard in advancing cash to a specific organization and to see the capacity of the borrower to pay back all credited finances and related premium charges.
4. Governments and Regulatory Authorities:
A government in whose ward an organization is found will ask for money related proclamations with a specific end goal to decide if the business paid the proper measure of taxes.
A regulatory authority needs this information for guaranteeing that the organization’s revelation of bookkeeping data is as per the standards and directions set with a specific end goal to secure the interests of the partners who depend on such data in framing their choices.
At the point when a client is thinking about which provider to choose a noteworthy contract, it needs to audit their financial statement to start with, keeping in mind the end goal to judge the money related capacity of a provider to stay in business sufficiently long to give them the goods or services commanded in the agreement.
Q3. Explain the characteristics that enhance the usefulness of financial information. (10marks)
Fundamental Qualitative Characteristics –
Relevance: the information provided to its end clients should be relevant and should help them in settling financial choice otherwise it will be considered as useless information
Faithful representation: the report should consist of all the business deals with a valid proof and it should indicate what truly is available and what truly happened
There are three components of faithful representation which are as follows
Completeness: satisfactory or full exposure of all necessary information
Neutrality: fair and free from bias
Free from error: it should be free from errors and exclusions
Enhancing Qualitative Characteristics
Compatibility: it enables its user to do comparison within the entity or across entities
Verifiability: the information provided to its user should have proper evidence in case the user wants to verify it.
Understandability: information that may be difficult for its user to understand should be made more useful by showing and clarifying it as simple as possible.
Timeliness: information should be conveyed to its investors, lenders and other creditors in a timely manner so it helps them in their decision-making process. If the information is delayed so it will have a little or no value
Q4. Discuss what is meant by the ‘definition’ and the ‘recognition’ of an element. Give an illustrative example. (10 marks)
Financial statement shows the financial effects of transaction and different occasions by gathering them into two broad classes as indicated by their financial qualities
These broad classes are termed as elements of financial statement framework para 47).
There are two principle gatherings of components:
• The first is related to the estimation of a substance’s financial position:
resources, liabilities, and value.
• The second is identified with the estimation of execution: income and expenses.
In order for an element to be recognized in the financial statement, it should meet the definition of an element provide in the conceptual framework and should satisfy the following criteria
a. it is likely that any future monetary advantage is associated with the item and it will flow to or from the entity; and
b. The expenses of an item or the value of the item can be measured with unwavering quality.
Example of Recognition of an asset
entity X goes into a lawful course of action to be as trustee for entity Y by holding recorded shares for entity Y’s sake. entity Y will make all the investments decision and entity X will follow as entity Y will act according to the saying of entity X will win a trustee expense for holding the shares on behalf of entity Y. Any profits or benefit or loss from the investment belongs to entity X cannot recognize this listed share as his own assets even though the shares are in entity X possession. Entity X will not get any benefit from this share. The benefits from this investment will flow to entity Y no matter how the shares perform entity X will only get his trustees fees for holding the shares The listed shares, therefore, do not meet the criteria of an asset in entity X’s balance sheet.
In evaluating whether an item meets the definition of an asset (or a liability or equity), consideration should be given to its fundamental substance and financial reality and not only its authoritative document.
Q5. ‘At Habib, our loyal employees are our greatest asset. We are true to our core values in encouraging personal development and giving our employees the experience that Habib offers.’ – Group Managing Director, Habib Jewels Sdn Bhd.
Discuss why Habib Jewels Sdn Bhd does not include employees in its Statement of Financial Position, although the Group Managing Director refers to the employees as ‘our greatest asset.’ (30 marks )
An asset is a resource with the financial esteem that an individual, company or nation possesses or controls with the desire that it will give a future advantage. Resources are accounted for on a company’s balance sheet, and they are purchased or made to expand the estimation of a firm or advantage the company’s operations. An advantage can be thought of as something that later on can create income, lessen costs, enhance deals, paying little heed to whether it’s an organization’s assembling hardware or a patent on a specific innovation. Employees of the companies are not the assets because assets can be bought and employees are a human being which cannot be bought. Employees are investors in the firm because they invest their talents skills and time and energy in the organization instead of money in return the money which they get from the organization is mentioned as salary and bonuses ad it is mentioned in the organization expense account of the organization
The above discussions clearly show that an employee is not an asset to the company as it cannot be bought as a property or a thing which can give a future benefit to the organization. Employees are just under a contract to invest its skill for the profit of the organization due to which they are known as investors instead of assets
Therefore, the Group Managing Director of Habib Jewels ltd may name laborers as “our most important assets” inconsistency with regular fairness but in practical employees does not fall into any category of assets. However, many organizations consider their employees as an asset because they are the one who invests their skill for getting an asset for the organization.