Topic: The IASB’s Conceptual Framework

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 20 Marks

FA – May 2019 – L1 – Q5 – Accruals and prepayments The IASB’s Conceptual Framework

Discuss internal and external users of accounting information, elements of financial statements, benefits of financial statements, accrual and going concern basis.

The conceptual framework for financial reporting sets out the concepts that underlie the preparation and presentation of financial statements for users. The objectives of financial statements are to provide information about the financial position, performance, and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions. Users of accounting information are classified into internal and external users.

According to the Framework of IAS/IFRS, the underlying assumptions for the preparation of financial statements are accrual basis and going concern basis.

Required:
a) State TWO (2) internal users and TWO (2) external users of accounting information and their information needs.
(4 marks)

b) Identify and explain FOUR (4) elements of financial statements.
(8 marks)

c) Identify FOUR (4) benefits that financial statements provide to its users.
(4 marks)

d) Explain what is meant by accrual basis of accounting. Illustrate your answer with a suitable example.
(2 marks)

e) Explain what is meant by going concern basis.
(2 marks)

a) Internal Users of Accounting Information

  • Management: Needs accounting information to ensure that the different functional areas of the organization are working together as a corporate body to achieve overall objectives rather than their individual objectives.
  • Employees: Interested in job security and fair remuneration, which are linked to the company’s financial health and profit generation.
    (2 marks)

External Users of Accounting Information

  • Shareholders: Interested in how their funds are being used (stewardship) and making decisions on buying or selling shares (investment).
  • Bankers: Assess the liquidity of the company to determine its ability to repay loans.
    (2 marks)

b) Elements of Financial Statements

  • Asset: A resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity.
  • Liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
  • Equity: The residual interest in the assets of the entity after deducting all its liabilities.
  • Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
    (8 marks)

c) Benefits of Financial Statements

  • Provide information for decision-making regarding the value of shareholders’ investments and income derived from shareholding.
  • Allow employees to assess the financial health of the company for job security, pay increases, and promotions.
  • Help trade payables and banks assess the company’s ability to meet financial obligations.
  • Provide information to government agencies for statutory obligations like tax payments.
    (4 marks)

d) Accrual Basis of Accounting
Financial statements are prepared on the basis of recognizing income and expenses when they are earned or incurred, not necessarily when cash is received or paid. For example, sales are recorded when goods are delivered, not when payment is received.
(2 marks)

e) Going Concern Basis
Financial statements should be prepared on the basis that the entity will continue in operation for the foreseeable future. For example, inventory is valued at the lower of cost or net realizable value, assuming the business will continue operating.
(2 marks)

  • 20 Marks

FA – Nov 2018 – L1 – Q5 – The IASB’s Conceptual Framework

Explain the reasons for not preparing financial statements on a going concern basis and treat events after the reporting period under IAS 10.

a) The financial controller of Kantanka Ltd, a technology company, has asked you, a trainee financial accountant within the company, for an explanation of some accounting terminologies and for advice on how to account for various transactions that occurred after the financial year-end date of 31 December 2016.

Required:
Explain TWO (2) reasons why a company would not prepare its financial statements on a going concern basis. (4 marks)

b) In accordance with IAS 10: Events after the Reporting Period, explain what is meant by an ‘event after the reporting period’. (4 marks)

c) How should the information in (b) above be dealt with in the financial statements? (3 marks)

d) i) Kantanka purchased a motor vehicle on 30 December 2016 and paid a non-refundable deposit of GH¢5,000 on that date. He also wrote a cheque on that date for the balance of GH¢20,000. The seller cashed the cheque on 3 January 2017. (3 marks)

ii) Kantanka Ltd was sued by a customer who was unhappy with the quality of a product delivered to him in June 2016. The court case was heard in late October 2016 but it was not until 8 January 2017 that the judge ruled in favor of Kantanka Ltd and awarded it damages of GH¢20,000 to cover its solicitor’s fees. The legal costs were paid by the customer to Kantanka Ltd on 12 January 2017. Kantanka Ltd was unsure of winning the case and had previously included a provision in its financial statements for the year ended 31 December 2016 for compensation and legal costs as follows:

GH¢ GH¢
Dr Legal Fees – Administrative Expenses 25,000
Dr Cost of Sales 35,000
Cr Provisions – Current Liabilities 60,000
(4 marks)

iii) One of Kantanka’s Ltd customers was declared bankrupt on 5 January 2017, owing GH¢4,000 to Kantanka Ltd. (2 marks)

Required:
How should the issues raised in (i) to (iii) be treated in the financial statements of Kantanka Ltd?

a) Reasons for not Preparing Financial Statements on a Going Concern Basis:

Per paragraph 14 of IAS 10, a company would not prepare its financial statements on a going concern basis if management determines after the reporting period either that:

  • It intends to liquidate the company, or
  • It intends to cease trading, or that it has no realistic alternative but to do so. (4 marks)

b) Events after the Reporting Period:

Paragraph 3 of IAS 10 states that events after the reporting period are those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Two types of events can be identified:

  • Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period.
  • Non-adjusting events are those that are indicative of conditions that arose after the reporting period. (4 marks)

c) Dealing with Events after the Reporting Period:

Per paragraph 19 of IAS 10, if a company receives information after the reporting period about conditions that existed at the end of the reporting period, it shall update disclosures that relate to these conditions in light of the new information. (3 marks)

d) Treatment of Specific Issues:

i) Purchase of Motor Vehicle: Per paragraph 9(c) of IAS 10, this is an adjusting event. The determination after the statement of financial position date of the cost of assets purchased before the end of the reporting period is an adjusting event after the reporting period. Therefore, the full cost of the motor vehicle needs to be reflected in the financial statements for the year ended 31 December 2016. (3 marks)

ii) Legal Case: Per paragraph 9(a) of IAS 10, this is an adjusting event. The event took place during the reporting period and the settlement after the reporting period of the court case confirms that there was a present obligation at the end of the reporting period. Therefore, the previous provision should be reversed, and the money received for legal fees should be netted against any legal costs that Kantanka Ltd bore in defending the case in the financial statements for the year ended 31 December 2016. (4 marks)

iii) Customer Bankruptcy: Per paragraph 9(b)(i) of IAS 10, this is an adjusting event. The receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, such as the bankruptcy of a customer, confirms that a loss existed at the end of the reporting period on a trade receivable. Therefore, Kantanka Ltd should write off the amount as a bad debt in its financial statements for the year ended 31 December 2016. (2 marks)

  • 20 Marks

FA – Nov 2018 – L1 – Q4 – Inventory | The IASB’s Conceptual Framework

Explain the going concern concept, value inventory under different conditions, and outline the responsibilities of directors in preparing financial statements.

a) The Conceptual Framework for Financial Reporting is a set of principles which underpin the foundation of financial accounting. The Conceptual Framework sets out the going concern concept as one of the important underlying assumptions for the preparation of financial statements.

Required:
Explain the going concern concept, illustrating your answer with suitable examples. (5 marks)

b) A trader who trades in computers commences business on 1 January 2018 and buys 100 computers, each costing GH¢3,500. During the year, he sells 80 machines at GH¢5,000 each.

Required:
How should the remaining machines be valued at the end of the year if:
i) He is forced to close down his business at the end of the year and the remaining machines will realize only GH¢2,000 each in a forced sale. (2 marks)
ii) He intends to continue the business into the next year. (2 marks)

c) One of the fundamental qualitative characteristics of useful financial information in the Conceptual Framework for Financial Reporting is ‘faithful representation’.

Required:
Explain what is meant by ‘faithful representation’. (5 marks)

d) Those charged with governance of a company are responsible for the preparation of the financial statements. The board of directors of a company are usually the top management in a Small and Medium Enterprise and are those who are charged with governance of the company. The responsibilities and duties of directors are usually laid down in law and are wide-ranging.

Required:
State THREE (3) responsibilities of directors towards the preparation of financial statements. (6 marks)

a) Going Concern Concept:
The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

The main significance of the going concern concept is that the assets should not be valued at their ‘break-up’ value (the amount they would sell for if they were sold off piecemeal and the business were broken up). Example: If a company is known to be in financial difficulty and is unlikely to continue trading, then its assets should be valued at their liquidation value rather than their historical cost.
(5 marks)

b) Inventory Valuation:
i) If the trader is forced to close down his business, the remaining machines should be valued at GH¢2,000 each, which is the realizable value in a forced sale. The value will be:

c) Faithful Representation:
Faithful representation means that financial reports should represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it purports to represent.

For financial information to be considered faithfully representative, it must be complete, neutral, and free from error. A complete report includes all information necessary for the user to understand the financial information presented. Neutrality means that the information is presented without bias. Being free from error means that there are no errors or omissions in the description of the phenomena, and the process used to produce the information has been applied with no errors in the process.
(5 marks)

d) Responsibilities of Directors towards the Preparation of Financial Statements:
Directors are responsible for the preparation of the financial statements of the company. They are specifically responsible for:

  1. The preparation of the financial statements of the company in accordance with the applicable financial reporting framework (e.g., IFRSs).
  2. Ensuring that internal controls are in place to enable the preparation of financial statements that are free from material misstatement, whether due to error or fraud.
  3. The prevention and detection of fraud. (6 marks)
  • 20 Marks

FA – May 2018 – L1 – Q7 – Preparation of Partnership accounts | The IASB’s Conceptual Framework

Identify key issues in a partnership agreement and advise on the accounting treatment of subsequent events.

a) When two or more individuals come together to form a Partnership, it is advisable to have a correctly drafted Partnership Agreement carefully detailing the terms of the business relationship. A partnership agreement is a contract between partners in a partnership that sets out the terms and conditions of the relationship between the partners.

Required:
Identify and explain FIVE key issues that should be covered in a partnership agreement when setting up a partnership. (10 marks)

b) Ashiyie Ltd is a telecommunication company that prepares accounts in accordance with International Financial Reporting Standards (IFRS). A meeting of the Directors of Ashiyie Ltd is scheduled for 5 December 2017 to discuss the following matters with a view to finalizing the accounts for the year ending 30 October 2017:

i) A fire occurred in one of the warehouses of Ashiyie Ltd on 3 November 2017, destroying inventory that had a cost price of GH¢100,000 and a net realizable value of GH¢150,000.
ii) On 9 November 2017, Ashiyie Ltd received information that one of their largest customers had gone bankrupt. At 30 October 2017, this customer owed Ashiyie Ltd GH¢235,000. It is anticipated that Ashiyie Ltd can only receive 10 pesewas for every GH¢1 they were owed.
iii) In November 2017, Ashiyie Ltd sold inventory that had been in one of their warehouses for the past two years for GH¢75,000. This had been included in the financial statements, for the year ended 30 October 2017, at its cost price of GH¢105,000.
iv) On 30 October 2017, an employee of Ashiyie Ltd fell and injured her arm at work. This employee has commenced legal action. The Solicitors for Ashiyie Ltd informed the company on 10 August 2017 that it is probable they will be found liable and have to pay this employee GH¢33,000. The employee has worked for Ashiyie Ltd for the past four years.

Required:
Advise the board on the accounting treatment of these issues. Your answer should give a detailed reason for the accounting treatment that you have chosen. (10 marks)

 

a) Key Issues in a Partnership Agreement:

  1. Capital Contributions:
    The partnership agreement should state how much each partner is contributing in terms of capital and whether any additional capital contributions are expected in the future.
  2. Profit-Sharing Ratio:
    The agreement should clearly define how profits and losses will be shared among the partners. This could be in proportion to their capital contributions or any other agreed ratio.
  3. Partners’ Salaries and Drawings:
    If partners are entitled to salaries or regular withdrawals (drawings) from the business, the agreement should specify the amounts and frequency. It should also state how these drawings will be treated concerning profit-sharing.
  4. Interest on Capital and Drawings:
    The agreement should specify if any interest will be paid on the capital invested by the partners and if interest will be charged on drawings made by the partners.
  5. Decision-Making and Dispute Resolution:
    The agreement should outline the decision-making process, including how decisions will be made (e.g., majority vote) and how disputes will be resolved (e.g., arbitration or mediation).
  6. Admission of New Partners and Exit of Existing Partners:
    The agreement should include provisions for admitting new partners and the process for a partner to exit the partnership. It should also address the valuation of the partner’s share in the business.
  7. Dissolution of the Partnership:
    The agreement should outline the circumstances under which the partnership may be dissolved and the process for winding up the partnership’s affairs.

(Any 5 points, 2 marks each = 10 marks)

b) Accounting Treatment of Subsequent Events:

i) Fire in Warehouse (Non-adjusting Event):

  • The fire occurred after the reporting period (3 November 2017), so it is a non-adjusting event. The inventory loss should not be reflected in the financial statements for the year ending 30 October 2017. However, if the amount is material, it should be disclosed in the notes to the financial statements to inform users of the financial statements of the event and its potential impact.

ii) Bankruptcy of a Customer (Adjusting Event):

  • The bankruptcy of the customer provides evidence of conditions that existed at the reporting date (30 October 2017). As a result, Ashiyie Ltd should recognize an impairment loss in the financial statements. The receivable of GH¢235,000 should be written down to its recoverable amount of GH¢23,500 (10% of GH¢235,000), with a loss of GH¢211,500 recognized in the income statement.

iii) Sale of Old Inventory (Adjusting Event):

  • The sale of the old inventory after the reporting period provides evidence about the net realizable value of the inventory at the reporting date. The inventory should be written down to its net realizable value of GH¢75,000, with a loss of GH¢30,000 (GH¢105,000 – GH¢75,000) recognized in the financial statements.

iv) Employee Injury Claim (Adjusting Event):

  • The injury occurred before the reporting date, and it is probable that Ashiyie Ltd will be found liable. Therefore, Ashiyie Ltd should recognize a provision of GH¢33,000 in the financial statements for the year ending 30 October 2017. This provision should be recognized as an expense in the income statement, with a corresponding liability in the statement of financial position.

(2.5 marks each for 10 marks)

  • 20 Marks

FA – May 2017 – L1 – Q2 – Preparation of limited liability company financial statements | The IASB’s Conceptual Framework

Preparation of financial statements for Adepa Ltd, including income statement and statement of financial position from trial balance and additional information.

Adepa, a limited liability Company, has the following Trial balance as at 31 December 2016:

Dr (GH¢’000) Cr (GH¢’000)
Cash at bank 100
Inventory at January, 2016 2,400
Administrative expenses 2,206
Distribution costs 650
Non-current assets at cost:
– Buildings 10,000
– Plant and equipment 1,400
– Motor vehicles 320
Suspense 1,500
Accumulated depreciation:
– Buildings 4,000
– Plant and equipment 480
– Motor vehicles 120
Retained earnings 560
Trade receivables 876
Purchases 4,200
Dividend paid 200
Sales revenue 11,752
Sales tax payable 1,390
Trade payables 1,050
Capital surplus 500
GH¢ 1 ordinary shares 1,000
Totals 22,352 22,352

The following additional information is relevant:

  1. Inventory at 31 December, 2016 was valued at GH¢1,600,000. While doing the inventory count, errors in the previous year’s inventory count were discovered. The inventory brought forward at the beginning of the year should have been GH¢2,200,000 not GH¢2,400,000 as stated above.
  2. Depreciation is to be provided as follows:
    • Buildings at 5% straight line, charged to administrative expenses
    • Plant and equipment at 20% on the reducing balance basis, charged to cost of sales
    • Motor vehicles at 25% on the reducing balance basis, charged to distribution costs.
  3. No final dividend is being proposed.
  4. A customer has gone bankrupt owing GH¢76,000. This debt is not expected to be recovered and an adjustment should be made. 5% provision for bad debt is to be made.
  5. 1 million new ordinary shares were issued at GH¢1.50 on 1 December 2016. The proceeds have been left in a suspense account.

Required: a) Prepare an Income Statement for Adepa Ltd for the year ended 31 December, 2016. (10 marks)

b) Prepare a Statement of Financial Position as at 31 December, 2016. (10 marks)

Workings:

Depreciation (W1):

  • Buildings: GH¢ 10,000 x 5% = GH¢ 500
  • Plant: (GH¢ 1,400 – GH¢ 480) x 20% = GH¢ 184
  • Motor vehicles: (GH¢ 320 – GH¢ 120) x 25% = GH¢ 50

Cost of sales (W2):

  • Opening inventory: GH¢ 2,200
  • Purchases: GH¢ 4,200
  • Depreciation – Plant: GH¢ 184
  • Closing inventory: GH¢ (1,600)
  • Total: GH¢ 4,984

Administrative expenses (W3):

  • Per T/B: GH¢ 2,206
  • Depreciation – Buildings: GH¢ 500
  • Irrecoverable debt: GH¢ 76
  • Receivable allowance: (GH¢ 876 – GH¢ 76) x 5% = GH¢ 40
  • Total: GH¢ 2,822

  • 20 Marks

FA – May 2016 – L1 – Q7 – The IASB’s Conceptual Framework

Identify users of financial statements and explain their needs, and discuss qualitative characteristics of financial information.

(a) Identify any FOUR users of financial statements and explain their needs for accounting information. (8 marks)
(b) The conceptual framework of accounting recognizes qualitative characteristics of financial information that is useful for decision-making.

Required:
Identify and explain FOUR qualitative characteristics of financial information recognized by the conceptual framework. (12 marks)

(a) Users of Financial Statements and Their Needs

  1. Investors: They provide risk capital, primarily as shareholders, and are concerned with the risk and return associated with their investment. Investors need information to decide whether to buy, hold, or sell shares and assess the company’s ability to pay dividends.
  2. Employees: Employees and their representatives are interested in the company’s stability and profitability. They need information to evaluate the likelihood of continued employment, potential for salary increases, retirement benefits, and career advancement opportunities.
  3. Lenders: This group includes banks, debenture holders, and other financial institutions. They require information to assess the company’s ability to repay loans and the interest due, thus determining the creditworthiness of the business.
  4. Suppliers and Trade Payables: Suppliers need to know if they will be paid on time and the company’s ongoing viability as a customer. This group is interested in information that can help them assess the company’s liquidity and credit risk.

(b) Qualitative Characteristics of Financial Information

  1. Understandability: Financial information should be presented clearly and concisely, making it accessible to users with reasonable knowledge of business and economic activities. The goal is to ensure that users can comprehend the information provided without unnecessary complexity.
  2. Relevance: Relevant information is capable of influencing users’ economic decisions by helping them evaluate past, present, or future events or confirm, or correct, their past evaluations. It includes materiality, which refers to the significance of information to decision-making.
  3. Reliability/Faithful Representation: Information is reliable when it is free from material error and bias, representing faithfully what it purports to depict. Reliable information is essential for users to trust the accuracy and integrity of financial reports.
  4. Comparability: Users must be able to compare the financial statements of an entity over time and with those of other entities. Comparability helps users identify trends and differences, thus supporting more informed decision-making.
  • 20 Marks

FA – Nov 2015 – L1 – Q2 – Preparation of not-for-profit accounts | The IASB’s Conceptual Framework

Define IFRS Foundation, list its objectives, and prepare accounting statements for a not-for-profit club.

(a) What is International Financial Reporting Standard (IFRS) foundation? Mention two (2) objectives of the foundation. (5 marks)

(b) The following information relates to “God will Provide” Youth Club for the accounting period of 2014.

  • Subscription owing for 2014: GH¢40,000
  • Payable for End of Year Party: GH¢1,500
  • Payables for Repairs – Equipment: GH¢1,000
  • Payables for Repairs – Vehicle: GH¢2,000

Payments:

  • Vehicle running Expenses: GH¢6,000
  • Electricity Expenses: GH¢3,000
  • End of Year Party Expenses: GH¢10,000
  • Salaries and Wages: GH¢25,000
  • Printing and Stationery: GH¢3,000
  • Cleaning Expenses: GH¢6,000

Receipts:

  • Car Park Renting: GH¢10,000
  • Sales of Party Tickets: GH¢6,000
  • Donation from friends of the club: GH¢15,000

Subscription Received:

  • 2013: GH¢6,000
  • 2014: GH¢30,000

Additional Information:
i. Cash in hand as at 01/01/14: GH¢18,000
ii. Subscription owing as at 01/01/14: GH¢8,000
iii. Any subscription outstanding is written off in the following year if it is not paid.

You are required to prepare:
i. Receipts and Payments Account for the year ended 31st December, 2014 (5 marks)
ii. Subscription Account (3 marks)
iii. Income and Expenditure for the year ended 31st December, 2014 (7 marks)

(a) IFRS foundation is a non-profit making Private Sector body that oversees the International Accounting Standards Board (IASB) activities.
The Objectives are:

  • Develop a single set of high-quality, understandable, enforceable, and globally accepted standards.
  • Promote the use and rigorous application of those standards.
  • Take account of the financial reporting needs of emerging economies and small and medium-sized entities.
  • Bring about convergence of national accounting standards and IFRS(s) to high-quality solutions.

(b)i. God will Provide Youth Club
Receipts and Payments for the year ended 31st December, 2014

ii. Subscription Account for the year ended 31st December 2014

iii. God will Provide Youth Club
Income and Expenditure Account for the year ended 31st December, 2014

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope