Principles-Based Accounting, Measurement, Ethics & Markets – Lecture Review

Vocabulary flashcards covering major terms from lectures on judgement in accounting, measurement bases, ethics, agency theory, market efficiency, and environmental reporting.

True and Fair View

Legal requirement that financial statements give an overall faithful representation of performance and position; goes beyond mere compliance with accounting standards.

Principles-based Standard

Accounting regulation that states broad concepts and objectives, requiring professional judgement to apply them to specific situations.

Rules-based Standard

Accounting regulation that prescribes detailed rules for many scenarios, limiting the need for judgement but risking ‘box-ticking’ compliance.

Conceptual Framework (Accounting)

A set of fundamental principles—definitions, recognition and measurement criteria—that guide standard setters and preparers when no specific AASB applies.

AASB 108

Australian standard outlining the selection and application of accounting policies and the use of judgement when no specific standard addresses a transaction.

Earnings Management

Deliberate manipulation of accounting choices or estimates to achieve a desired profit or other contractual outcome.

Litigation Risk

Exposure of auditors and preparers to legal claims when users allege financial statements were misleading or not ‘true and fair.’

Creative Compliance

Meeting the literal wording of rules while violating their economic substance or intent.

Internally Generated Intangible Assets

Assets such as brand names and customer lists created by the entity; generally prohibited from recognition under AASB 138.

Professional Judgement

The application of relevant training, knowledge and experience in making accounting decisions where standards allow discretion.

Recognition Criteria

Conditions (meets definition, relevance, faithful representation, usefulness) that must be satisfied before an item is recorded in the financial statements.

Measurement Basis

The attribute (e.g., historical cost, fair value) chosen to quantify an element recognised in the financial statements.

Historical Cost

Original amount of cash or cash equivalents paid to acquire an asset or incurred to assume a liability.

Fair Value

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 (AASB 13).

Value-in-use

Present value of future cash flows expected from an asset’s continued use and ultimate disposal.

Fulfilment Value

Present value of future cash outflows to settle a liability in the normal course of business.

Capital Maintenance

Concept that profit is recognised only after the entity has preserved the capital it started with, whether defined financially or physically.

Financial Capital Maintenance (Nominal)

Profit is the increase in nominal dollar net assets; ignores inflation effects.

Financial Capital Maintenance (Real)

Profit is the increase in purchasing-power-adjusted net assets; maintains capital’s real value.

Physical Capital Maintenance

Profit is increase in the entity’s productive capacity, commonly measured using replacement cost.

Revaluation Model

Subsequent measurement option (e.g., AASB 116) that carries assets at fair value less depreciation and impairment; increases go to OCI.

Cost Model

Subsequent measurement option that carries assets at historical cost less accumulated depreciation/amortisation and impairment.

Straight-line Depreciation

Allocates an asset’s depreciable amount evenly over its useful life.

Diminishing-balance Depreciation

Accelerated depreciation method applying a fixed rate to the asset’s declining carrying amount.

Impairment

Reduction in an asset’s carrying amount when it exceeds recoverable amount (higher of fair value less costs of disposal and value-in-use) under AASB 136.

Provision

Present obligation of uncertain timing or amount that is probable and can be reliably estimated, recognised under AASB 137.

Contingent Liability

Possible obligation or present obligation not recognised because payment is not probable or cannot be reliably measured; disclosed only.

Contingent Asset

Possible asset whose existence depends on uncertain future events; disclosed when probable but not recognised.

Right-of-Use Asset

Lessee’s asset representing the right to use an underlying asset for the lease term under AASB 16.

Lease Liability

Present value of lease payments that the lessee is obliged to make, recognised under AASB 16.

Net Realisable Value (NRV)

Estimated selling price in the ordinary course of business less the estimated costs of completion and sale; inventory is carried at lower of cost and NRV (AASB 102).

Performance Obligation

Separately identifiable promise in a contract to transfer a good or service to a customer (AASB 15).

Transaction Price

Amount of consideration an entity expects to be entitled to in exchange for goods or services under AASB 15.

Control (in Revenue Recognition)

Ability to direct the use of and obtain substantially all remaining benefits from an asset; revenue recognised when control transfers to customer.

Beneficence (Ethics)

Moral principle requiring professionals to do good and avoid harm to stakeholders.

Justice (Ethics)

Ethical principle emphasising fairness and equitable treatment without exploitation.

Respect for Persons

Ethical duty to honour individuals’ rights and autonomy, including informed consent.

APES 110

Code of Ethics for Professional Accountants in Australia prescribing integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

Self-interest Threat

Risk that personal or financial interests compromise professional objectivity.

Self-review Threat

Threat that arises when an accountant evaluates or audits their own work.

Advocacy Threat

Threat arising when an accountant promotes a client’s position to the point that objectivity is compromised.

Familiarity Threat

Threat that close relationships with a client or employer impair professional scepticism.

Intimidation Threat

Threat of deterrence through actual or perceived pressures that influence an accountant’s judgement.

DECIDE Model

Six-step ethical decision framework: Define problem, Ethical review, Consider options, Investigate outcomes, Decide action, Evaluate results.

Agency Theory

Positive theory analysing conflicts between principals (owners/creditors) and agents (managers) due to information asymmetry and self-interest.

Information Asymmetry

Situation where one party (e.g., manager) possesses more or better information than another (e.g., shareholder).

Moral Hazard

Risk that an agent takes actions benefiting themselves at the principal’s expense because the principal cannot fully monitor behaviour.

Debt Covenant

Contractual restriction in loan agreements intended to protect creditors by limiting borrower actions or requiring certain financial ratios.

Bonus Plan Hypothesis

Prediction that managers with compensation tied to accounting numbers will choose policies that increase reported profits.

Earnings Smoothing

Intentional reduction of earnings volatility across periods to present stable performance.

Efficient Market Hypothesis (EMH)

Theory that security prices fully and rapidly reflect available information, preventing consistent abnormal returns.

Weak Form Efficiency

Market condition where share prices incorporate all past trading information; technical analysis cannot generate abnormal profits.

Semi-Strong Form Efficiency

Market condition where prices reflect all publicly available information; neither fundamental analysis nor public news offers persistent profit advantage.

Strong Form Efficiency

Theoretical market condition where prices reflect all public and private information; even insiders cannot earn abnormal returns.

Technical Analysis

Investment strategy using past price and volume patterns to predict future price movements; ineffective under weak-form efficiency.

Fundamental Analysis

Evaluation of securities by analysing financial statements and economic data to estimate intrinsic value; ineffective under semi-strong efficiency.

Social and Environmental Reporting

Voluntary disclosure of a firm’s social and ecological impacts and performance to stakeholders and society.

Legitimacy Theory

Explanation that firms disclose social/environmental information to align with societal values and maintain legitimacy.

Emissions Trading Scheme (ETS)

Cap-and-trade system where entities receive or buy allowances permitting a set amount of emissions, which can be traded in a market.

Emission Allowance

Tradable right under an ETS to emit a specified quantity (e.g., one tonne) of greenhouse gas; may be treated as an intangible asset or inventory.

Emission Liability

Obligation to surrender allowances equal to actual emissions; recognised as emissions occur and measured at current allowance prices.

Level 1 Inputs (Fair Value Hierarchy)

Quoted prices in active markets for identical assets or liabilities—most reliable fair value evidence.

Level 2 Inputs

Observable market data for similar items or market-based inputs such as yield curves; less reliable than Level 1.

Level 3 Inputs

Unobservable inputs derived from internal models and assumptions; lowest reliability in fair value measurement.

Orderly Transaction

Hypothetical sale or transfer under normal market conditions, not a forced or distressed sale, as assumed in fair value measurement.

Desired enhanced qualitative characteristics

Comparability, verifiability, timeliness, understandability

Impairment loss (AASB 136)

Carrying amount - recoverable amount. Impairment loss occurs when the carrying amount exceeds the recoverable amount of an asset indicating a decline in value.

Value in use

the present value of future cash flows expected from an asset

Recoverable amount

Recoverable amount is the HIGHER of value-in-use and fair value less cost to sell

Revaluation method

asset’s carrying amount is revalued to its fair value. Increases go through (OCI - equity) and decreases go to (P/L, treated as expense). Under AASB 116 and AASB 138 (subsequent measurement methods for PPE and intangible assets respectively).

Revaluation

Loss on revaluation treated as expense account (increase debited, and decrease credited).

Gain on revaluation treated as (OCI/Equity acc) (increase credited, and decrease debited).

AASB 138 Intangible Assets

Internally generated assets (e.g. goodwill, customer lists, brand names) cannot be recognised as intangible assets. These costs are expensed. E.g. costs to do with goodwill (like marketing costs, training costs) just expensed as a cost.

Research costs are always expensed, as it is too uncertain whether future economic benefits will occur.

Development-phase costs can be capitalised as an intangible asset if 6 criteria are met. Acronym FIAFRM. Feasible, intend, able to use/sell, future benefits, resources, measurable.

AASB 116: Definition/Recognition of PPE

Definition Criteria: PPE are tangible items that

1) are held for use in production or supply of goods/services, for rental to others, or for admin purposes

2) are expected to be used during multiple reporting periods

Recognition Criteria: item of PPE is recognised as an asset only when

1) it is probable future economic benefits associated with the item will occur

2) the cost of the item can be reliably measured