ACCA FR

Financial Reporting
PhD. Nguyen Thi Thanh Loan, ACCA
Mobile phone: 097.3223.988
Email: [email protected]

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 Exam Format

Citeria Financial reporting Financial accounting

Provides skills to apply Develop knowledge

accounting standards, and understanding of
conceptual framework the basic principles
Purpos
in and concepts of
e
preparation of FSs and financial accounting.
how to analyze,
interpret FSs
FR exam includes 3 FA exam includes 2
sections: sections:
• Section A: Objective • Section A: Objective
test (15q x 2 marks =30 test questions
marks) • Section B: Objective
• Section B: Objective test case questions
test
Exam
(3q x 10 marks = 30
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 CBE exams

ACCA examines FR (and all Applied Skills) using computer based examination
(CBE).
- Link for exam support resources provided by ACCA
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamenta
ls-exams-study-resources/f7.html
- Link for ACCA Exam Practice Platform
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamenta
ls-exams-study-resources/f7/cbe-question-practice.html
- Link for technical articles
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamenta
ls-exams-study-resources/f7/technical-articles.html

- Reference Link for IFRSs related articles

https://www.cpdbox.com/036-contract-asset-vs-account-receivable/
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 Syllabus 1
FR syllabus contains following issues:
A. The conceptual and regulatory framework for financial reporting
1. The need for a conceptual framework and the characteristics of useful
information
2. Recognition and measurement
3. Regulatory framework
4. The concepts and principles of groups and consolidated financial statements
B. Accounting for transactions in financial statements
5. Tangible non-current assets 7. Provisions and events after the
reporting period
6. Intangible assets 8. Taxation
7. Impairment of assets 9. Reporting financial
performance
8. Inventory and biological assets 10. Revenue
9. Financial instruments 11. Government grants
10. Leasing 12. Foreign currency transactions
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 Syllabus 1
C. Analysing and interpreting the E. Employability and technology
financial statements of single entities skills
and groups 1. Use computer technology to
1. Limitations of financial statements efficiently access and manipulate
2. Calculation and interpretation of relevant information.
accounting ratios and trends to 2. Work on relevant response options,
address users’ and stakeholders’ using available functions and
needs technology, as would be required in
3. Limitations of interpretation the workplace.
techniques 3. Navigate windows and computer
4. Specialised, not-for-profit, and public screens to create and amend
sector entities responses to exam requirements,
using the appropriate tools.
D. Preparation of financial statements
4. Present data and information
5. Preparation of single entity financial
effectively, using the appropriate
statements
tools
6. Preparation of consolidated financial
statements for a simple group

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 • Conceptual framework and
Chapter 1 GAAP
• The IASB's Conceptual
The conceptual Framework
framework • The objective of general
purpose financial reporting
• Underlying assumption
• Qualitative characteristics of
financial information
• The elements of financial
statements
• Recognition and measurement
of the elements of financial
statements
• Fair presentation and
compliance with IFRS

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 Learning objectives

- The need for a conceptual framework and the

characteristics of useful information (A1)
- Recognition and measurement (A2)
- Differences between interpretation of current
value based financial statements and those
using historical cost based accounts (C2)

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 Conceptual Framework
What is a conceptual framework?
• A statement of generally accepted theoretical principles
which form a frame of reference for financial reporting.
• These provide a basis for:
- Developing new IFRS standards

- Understanding and interpretation of accounting standards.

Advantages of a conceptual framework

• Accounting standards are developed on the same theoretical
principle
• Development of accounting standards is less subject to political
pressure
• Accounting standards use a consistent approach
• A principle based approach avoid the need for large volumes of
rules
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 Conceptual Framework

Disadvantages of a conceptual framework

• Financial statements have many users all
with differing needs:
– A single framework cannot satisfy the needs
of all users.
– There may be a need for a variety of IFRS
standards, each produced for a different
purpose with different conceptual bases.
• Having a conceptual framework may not
make it any easier to prepare and
implement IFRS standards.

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 IASB’s Conceptual Framework
• IASB’s conceptual framework is issued in 2010 and
revised in March 2018
• Purpose of the framework
- Assist IASB to develop standards that are based on
consistent concepts
- Assist preparers to develop consistent accounting
policies when no standard applied to particular
transaction or event, or when a standard allows a
choice of accounting policy
- Assist all parties to understand and interpret the
standards. IFRS/IAS IFRICs

CONCEPTUAL FRAMEWORK
A statement of generally accepted theoretical principles
which form the frame of reference for financial reporting
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 IASB’s Conceptual Framework

Contents of Conceptual Framework

The Conceptual Framework deals with:
(a) The objective of financial statements
(b) The qualitative characteristics of useful financial
information
(c) Financial statements and the reporting entity
(d) The elements of financial statements
(e) Recognition and derecognition
(f) Measurement
(g) Presentation and disclosure
(h) Concepts of capital and capital maintenance

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 The objective, basis and underlying assumption

Objective of general purpose financial reporting

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 The objective, basis and underlying assumption

Basis of preparation
‘Accruals basis: The effects of transactions and other events
and circumstances on a reporting entity’s economic resources
and claims are recognised in the periods in which they occur
even if the resulting cash receipts and payments occur in a
different period.’
(Conceptual Framework, para.1.17)
Underlying assumption
• Going concern: It is assumed that the entity has neither the
intention nor the need to liquidate the business or curtail
materially the scale of its operations.
• If it did, the financial statements would be prepared on a
different basis (break-up basis) and this basis would be
disclosed.
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 Qualitative characteristics of financial
information
Qualitative characteristics of useful financial
information

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 Qualitative characteristics of financial
information
Fundamental qualitative characteristics
Faithful
Relevance
representation
Relevant financial information To be useful, financial
is capable of making a information must faithfully
difference in the decisions represent the phenomena it
made by users, ie if it has: purports to represent.
• Predictive value; and/or A perfect faithful
• Confirmatory value. representation would be:
• Complete
Materiality • Neutral
• Free from error
Information is material if
omitting it or misstating it
Prudence
could influence decisions ‘The exercise of caution
that users make on the basis when making judgements
of financial information. under conditions of
uncertainty’
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(Conceptual Framework,
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 Qualitative characteristics of financial
information
Enhancing qualitative characteristics

Comparabil Understandab
Verifiability Timeliness
ity ility
Information is Assures users Having Classifying,
more useful if it that information information characterising
can be compared faithfully available to and presenting
with similar represents the decision-makers information
information about: economic in time to be clearly and
• Other entities; phenomena it capable of concisely
and purports to influencing their
• Other periods. represent decisions
Consistency helps Verification can
achieve be direct or
comparability. indirect

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 Qualitative characteristics of financial
information
The cost constraint on useful financial reporting
This is a pervasive constraint, not a qualitative
characteristic.
When information is provided, its benefits must exceed
the costs of obtaining and presenting it.
(Conceptual Framework: para.2.39-41)

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 The elements of financial statements

The 5 elements of financial statements: Asset,

Liability, Equity, Income, Expense

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 The elements of financial statements
5 elements of financial statements: Asset,
Liability, Equity, Income, Expense
ASSET A present economic resource controlled by an
entity as a result of past events. An economic
resource is a right which has the potential to
produce economic benefits.
(Conceptual Framework, para.4.3‒4.4)

LIABILITYA present obligation of the entity to transfer an

economic resource as a result of past events.
(Conceptual Framework, para.4.26)

EQUITY The residual interest in the assets of an entity

after deducting all its liabilities
(Conceptual Framework, para.4.63)
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 The elements of financial statements 3

INCOME Increases in assets, or decreases in

liabilities, that result in increases in equity,
other than those relating to contributions
from holders of equity claims

EXPENSE Decreases in economic benefits

during the period other than distributions
to equity participants
(Conceptual Framework, para.4.68‒4.69)

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 Question?

• Consider the following situations. In each case, do we

have an asset or liability within the definitions given by
the Conceptual Framework?
(a) Pat Co has purchased a patent for $20,000. The
patent gives the company sole use of a particular
manufacturing process which will save $3,000 a year for
the next five years.
(b) Baldwin Co paid Don Brennan $10,000 to set up a car
repair shop, on condition that priority treatment is given
to cars from the company's fleet.
(c) Deals on Wheels Co provides a warranty with every
car sold.

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 Question?

• Which of the following would be classified as a liability?

A. Dexter's business manufactures a product under
license. In 12 months' time the license expires and
Dexter will have to pay $50,000 for it to be renewed.
B. Reckless purchased an investment 9 months ago for
$120,000. The market for these investments has now
fallen and Reckless's investment is valued at $90,000.
C. Carter has estimated the tax charge on its profits for
the year just ended as $165,000.
D. Expansion is planning to invest in new machinery and
has been quoted a price of $570,000

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 Question

• Which of the following items should be recognised as an

asset in the statement of financial position of a
company?
A. A secret formula for the manufacture of a best selling
sauce. The recipe is kept secure at the company
premises and known only by the company directors.
B. A highly lucrative contract signed during the year
which is due to commence shortly after the year end
C. Items that are to be sold via a third party agent which
the company can no longer control and cannot be
returned to the company of they are unsold
D. A receivable from a customer which has been sold
(factored) to a finance company. The finance company
has full recourse to the company for any losses.

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 Recognition and measurement

Recognition of the elements of financial statements

• Recognition is the process of recording or showing an
item in the financial statements
• An item can only be recognised in the financial
statements when it satisfies the following criteria:
- Meet the definition of an element
- Recognition of the element provide users useful
information which is relevant and faithful representation.
• Recognition is subject to cost constraints
• Question: Are transfer fees paid for footballers an
asset?

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 Recognition and measurement

Are the recognition criteria satisfied?

• Firstly, is there an asset?
- Control
- Past event
- Expected generation of future economic
benefit
• Secondly, is the recognition of this asset
provide useful information for the users?
• Thirdly, is the recognition within the cost
constraints?

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 Recognition and measurement

Question: Consider the following situations:

(a) Company A reports under IFRS Standards and
provides a scheme of training for all of its staff
(b) The directors of Company B, a publicly listed
company reporting under IFRS standards,
propose a dividend at the board meeting on 28
Dec. The dividend is communicated to the
markets on 10 Jan once the Financial statements
for the year ended 31 Dec have been prepared.
Required: Discuss what (if anything) should be
recognised in the financial statements of company A
and company B relating to these situations
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 Recognition and measurement

Derecognition
Derecognition is the removal of all or part of a
recognised asset or liability from an entity's
statement of financial position.
Derecognition normally occurs when that item
no longer meets the definition of an asset or
liability.
- For an asset: when control is lost
- For a liability: when there is no longer a present
obligation

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 Recognition and measurement

Measurement of the elements of financial

statements
• The process of determining the monetary
amounts at which the elements of the financial
statements are to be reported.
• There are 2 measurement bases:
– Historical cost
– Current value
The choice between them depends on the
needs of information users

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 Recognition and measurement
Historical cost
• Historical cost measures provide monetary information about assets, liabilities and related
income and expenses, using information derived, at least in part, from the price of the
transaction or other event that gave rise to them.
• Advantages:
– Amounts used are objective and reliable
– SOFP and SOCF figures are consistent with each other
– Less possibility for manipulation by creative accounting
– Measure by cost is readily understood
• Disadvantages
– Out of date cost, overstatement of profit
– Out of date asset value
– ROA and ROCE is distorted
– Holding gain/loss are not measured separately
– Not measuring gain/loss arising from inflation
– Giving a misleading trend of results since comparative figures are
not restated for the effects of inflation
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 Recognition and measurement
Current value
• Current value measures provide monetary information about assets, liabilities and
related income and expenses, using information updated to reflect conditions at the
measurement date.
• This include: Fair value, Value in use for assets and fulfilment value for liabilities,
Current cost
− Fair value: is the price that would be received to sell an asset, or paid to transfer a liability, in
an orderly transaction between market participants at the measurement date.
− Value in use for assets: is the present value of the cash flows, or other economic benefits, that
an entity expects to derive from the use of an asset and from its ultimate disposal.
− Fulfillment value for liabilities: is the present value of the cash, or other economic resources,
that an entity expects to be obliged to transfer as it fulfils a liability.
− Current cost: current cost of an asset is the cost of an equivalent asset at the measurement
date, comprising the consideration that would be paid at the measurement date plus the
transaction costs that would be incurred at that date. The current cost of a liability is the
consideration that would be received for an equivalent liability at the measurement date minus
the transaction costs that would be incurred at that date.
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 Recognition and measurement

Example:
Ergo Co acquired an equipment on 1 Jan 20X3 at a cost of
$140,000. Ergo Co depreciates its plant at a rate of 25% per
annum using reducing balance method.
As at 31 Dec 20X4, the equipment is still available and its
list price is $180,000, although the current model is 20%
more efficient than the old model.
It is estimated that the equip could be sold secondhand for
$44,000, although the company would have to spend about
$500 in advertising cost to do so.
The asset is expected to generate net cash inflows of
$20,000 for the next 5 years after which time it will be
scrapped. The company borrowing cost is 6%. The
cumulative present value of $1 in 5 year time is $4.212.
Required:
– Calculate all the applicable values of this plant at 31 dec
20X4
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Chapter 2 • The need for a regulatory
framework
• The International
The regulatory Accounting Standards
framework Board (IASB)
• Setting of International
Financial Reporting
Standards (IFRS)

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 Learning objectives 1

• Explain why a regulatory framework is needed,

including the advantages and disadvantages of
IFRS over a national regulatory framework
• Explain why IFRS Standards on their own are not a
complete regulatory framework
• Distinguish between a principles based and a rules
based framework and discuss whether they can be
complementary
• Describe the IASB's Standard setting process
including revisions to and interpretations of
Standards
• Explain the relationship of national standard-
setters to the IASB in respect of the standard
setting process
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 The need for a regulatory framework

• A regulatory framework is required for two

main reasons:
– To act as a central source of reference of
generally accepted accounting practice
(GAAP) in a given market
– To designate a system of enforcement of that
GAAP to ensure consistency between
companies
• Its aim is to narrow the areas of difference
and choice in financial reporting and to
improve comparability.

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 The need for a regulatory framework

Principles-based vs rules-based approach

• IFRSs use a principles-based approach: these
standards are written based on the definitions of
the elements of financial statements, recognition
and measurement principles as detailed in the
IASB’s Conceptual Framework
• These principles are designed to cover a wide
range of scenarios without the need for a set of
rules which govern every eventuality.
• Some other GAAP (eg. US GAAP, Vietnam GAAP)
are rules based, which means that accounting
standards contain rules that apply to specific
scenarios.

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 The need for a regulatory framework

Advantages and disadvantages of a principles -based

system:
• Advantages:
– This approach based on a single conceptual framework
ensures that standards are consistent with each other.
– Rules can be broken and 'loopholes' found. Principles
offer a 'catch all' scenario.
– Principles reduce the need for excessive detail in
standards.
• Disadvantages:
– Principles can become out of date as practices change
– Principles can be overly flexible and subject to
manipulation.

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 The IASB

• The International Accounting Standards Board (IASB) is an

independent accounting standard setter established in 2001.
Its predecessor, IASC, is founded in 1973.
• It has three formal objectives:
– To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards
that require high quality, transparent and comparable
information in general purpose financial statements
– To promote the use and vigorous application of those
standards
– To work actively with national accounting standard setters
to bring about convergence of national accounting standards
and IFRS to high quality solutions

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 Setting of IFRS
Below are the key steps in the process used to issue an
International Financial Reporting Standard.

Issues Paper IASB staff prepare an issues paper including

studying the approach of national standards
setters.
The IFRS Advisory Council is consulted about
the advisability of adding the topic to the
IASB's agenda.
Discussion
Paper
A Discussion Paper may be published for
public comment.
Exposure Draft
An Exposure Draft is published for public
International comment.
Financial
Reporting After considering all comments received, and
Standard IFRS is approved by a majority of the IASB. The
final standard includes both a basis for
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 Setting of IFRS

Current standards examinable in the FR exam

are: • IAS 21 • IAS 40
• IAS 1 • IAS 23 • IAS 41
• IAS 2 • IAS 27 • IFRS 3
• IAS 7 • IAS 28 • IFRS 5
• IAS 8 • IAS 32 • IFRS 7
• IAS 10 • IAS 33 • IFRS 9
• IAS 12 • IAS 36 • IFRS 10
• IAS 16 • IAS 37 • IFRS 13
• IAS 20 • IAS 38 • IFRS 15
• IFRS 16

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 Question: IFRS (Specimen CBE 2016)
Which of the following statements are true or false
regarding the duties of the IFRS Interpretations
Committee?
1.To interpret the application of IFRS Standards
2.To work directly with national standard setters to bring
about convergence with IFRS Standards
3. To provide guidance on financial reporting issues not
specifically addressed in IFRS Standards
4.To publish draft interpretations for public comment

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