ACCT 2014 - Unit 1: Harmonization of Accounting Standards & The IASB Conceptual Framework

Flashcards covering the importance, advantages, disadvantages, and barriers to harmonization of accounting standards, the IASB standard-setting structure and due process, and Levels 1–3 of the IASB Conceptual Framework.

What is the primary objective of financial reporting?

To provide useful financial information about an entity to present and potential users to enable them to make informed capital allocation decisions.

How are financial statements defined in financial accounting?

They are a set of structured summary reports that show the financial position, financial performance, and other pertinent details of an entity for a period of time.

What are the four major financial statements required under IAS 1?

The Statement of financial position, Income statement (Statement of comprehensive income), Statement of cash flows, and Statement of changes in equity.

What are four additional means of financial reporting used outside of financial statements?

President's letter in the annual report, supplementary schedules in the annual report, prospectuses, and press releases.

What primary purpose do financial statement disclosures serve?

They present additional explanatory notes for information that cannot be presented directly on the face of the financial statements.

What are the key dimensions of the role of a financial accountant?

Collation of financial information, rigorous interrogation for accuracy, clear presentation of useful reports, commitment to adopt current reporting standards, and advocacy of the highest ethical standards.

What are two main reasons high-quality accounting standards are needed?

To ensure comparability among financial statements of different entities and to minimize bias, ambiguity, inexactness, and misinterpretation.

What is meant by the harmonization of accounting standards?

Establishing financial reporting based on international accounting standards accepted globally to reduce differences in financial reporting processes and achieve comparability.

How does international standard harmonization benefit global investors?

It improves investor confidence and knowledge, makes investment decisions less risky through greater intelligence, and facilitates better decision-making across borders.

What cost-saving advantages does harmonization provide to multi-national corporations?

It reduces overall reporting costs and increases auditing efficiency because companies are required to follow only one set of reporting standards.

Why is creating a level playing field considered an advantage of harmonization?

It ensures that no country is privileged or underprivileged by its domestic generally accepted accounting principles (GAAP).

What is a significant disadvantage of standard harmonization regarding national circumstances?

International accounting standards may lack the flexibility needed to deal with the unique dilemmas, problems, and circumstances faced by individual nations.

Why might some countries resist compliance with international accounting standards?

They may view compliance as a threat to their nationalism and as submission to the will of other nations.

How does the 'spirit of nationalism' act as a barrier to harmonization?

National pride prevents accounting professionals from accepting compromises or admitting that their national accounting principles might be inferior to those of another country.

Why do differing legal environments present a hurdle to global standard harmonization?

Legal systems exert a strong influence over accounting practices, so harmonization is difficult without achieving uniformity in national statutory laws.

How does competition among international standard setters hinder harmonization?

Unwanted competition occurs when multiple international bodies (such as the IASB, OECD, and IFAC) attempt to reduce accounting diversities independently in their own ways.

According to Obradovic (2014), what major issue accompanies the adoption of IFRS across countries?

Inconsistent application of IFRS from country to country, which undermines the global comparability of financial statements.

Why do countries with rules-based accounting standards struggle to align with IASB standards?

IASB standards are principles-based, making harmonization difficult for jurisdictions accustomed to rigid, rules-based systems.

What is the 'expectations gap' in financial reporting standard setting?

The gap between the public's perspective of what accountants should do versus what is actually performed.

Where is the International Accounting Standards Board (IASB) based?

London, United Kingdom.

What were standards developed by the International Accounting Standards Committee (IASC) called?

International Accounting Standards (IASs).

What role does IOSCO play in the standard-setting process?

The International Organization of Securities Commissions (IOSCO) plays a key role by regulating the world's securities and futures markets.

What are the four organizations comprising the international standard-setting structure?

The IFRS Foundation, the International Accounting Standards Board (IASB), the IFRS Advisory Council, and the IFRS Interpretations Committee.

What is the specific function of the IFRS Advisory Council?

To advise and counsel the IASB on policy decisions and technical issues.

What is the role of the IFRS Interpretations Committee?

To assist the IASB through the timely identification, discussion, and resolution of emerging financial reporting issues.

What is the IASB 'Due Process'?

A thorough, open, and transparent system used by the IASB to develop and issue new financial accounting standards.

What is the final step in the IASB's Due Process before a standard takes effect?

The issuance of the final standard.

What is the primary purpose of the IASB Conceptual Framework?

To serve as a practical guide for developing and reviewing accounting standards, resolving emerging problems consistently, and assisting preparers when no specific standard applies.

Does the IASB Conceptual Framework override specific IFRS Standards?

No, the Conceptual Framework is not a standard itself and does not override any specific IFRS Standard.

What are the three levels of the IASB Conceptual Framework?

Level 1: Basic Objectives; Level 2: Fundamental Concepts (Qualitative Characteristics and Elements); Level 3: Recognition, Measurement, and Disclosure Concepts.

According to Level 1 of the Conceptual Framework, what information do lenders and creditors need?

Lenders need information to assess an entity's ability to repay loans, while creditors need information to assess the entity's ability to repay debts in a timely manner.

What are the two fundamental qualitative characteristics of accounting information in Level 2?

Relevance and Faithful representation.

Which three qualities make accounting information relevant?

Predictive value, confirmatory value, and materiality.

Which three qualities are required for accounting information to achieve faithful representation?

Completeness, neutrality, and freedom from error.

What are the four enhancing qualitative characteristics in Level 2 of the Conceptual Framework?

Comparability, verifiability, timeliness, and understandability.

What are the five basic elements of financial statements according to the IASB?

Assets, Liabilities, Equity, Revenue or Income, and Expenses.

What five accounting assumptions are identified in Level 3 of the Conceptual Framework?

Economic Entity, Going Concern, Monetary Unit, Periodicity, and Accrual Basis of Accounting.

What four measurement bases for assets are specified in Level 3 of the Conceptual Framework?

Historical cost, current cost, realizable value, and present value.

What does the Expense Recognition principle mandate?

That expenses must be matched with their related revenues.

How does the accounting constraint of Conservatism guide an accountant when in doubt?

It directs the accountant to select the method least likely to overstate assets and income.