q

G H

ACCA

Approved

Workbook

Foundations in Accountancy/ACCA

Financial Accounting (FFA/FA)

For exams from 1 September 2021

to 31 August 2022

Free access to eBook & additional digital content

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Foundations in

Accountancy/ACCA

Applied knowledge

Financial

Accounting

(FFA/FA)

G H

Workbook

For exams from 1st

September 2021 to 31st

August 2022

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Firstedition2021
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Contents

Introduction
Helping you to pass vi
Introduction to the Essential reading viii
Introduction to Financial Accounting (FFA/FA) x
Essential skillsareas to be successful in Financial Accounting (FFA/FA) xiv

1 Introduction to accounting 1
2 The regulatory framework 19
3 The qualitative characteristics of financial information 29
4 Sources, records and books of prime entry 43
5 Ledger accounts and double entry 63
Skillscheckpoint 1 83
6 From trial balance to financial statements 91
7 Inventory 107
8 Tangible non-current assets 123
9 Intangible non-current assets 153
Skillscheckpoint 2 167

G
10 Accruals and prepayments 177 H

11 Provisionsand contingencies 193

12 Irrecoverable debts and allowances 209
13 Sales tax 223
14 Control accounts 237
Skillscheckpoint 3 259
15 Bank reconciliations 265
16 Correction of errors 277
17 Incomplete records 291
18 Preparation of financial statements for sole traders 307
Skillscheckpoint 4 321
19 Introduction to company accounting 327
20 Preparation of financial statements for companies 347
21 Events after the reporting period 367
22 Statements of cash flows 375
Skillscheckpoint 5 397
23 Introduction to consolidated financial statements 403
24 The consolidated statement of financial position 423
25 The consolidated statement of profit or loss 453

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26 Interpretation of financial statements 471

Essential Reading
Introduction to accounting 489
The regulatory framework 495
Ledger accounts and double entry 501
From trial balance to financial statements 509
Inventory 517
Tangible non-current assets 523
Sales tax 529
Correction of errors 533
Incomplete records 541
Preparation of financial statements for sole traders 551
Introduction to company accounting 559
Preparation of financial statements for companies 573

Further question practice 581

Further question solutions 610
Glossary 630
G
Index 639 H

Bibliography 643

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Helping you to pass

BPP Learning Media – ACCA Approved Content Provider

Asan ACCAApprovedContentProvider,BPPLearningMediagivesyou the opportunityto use
study materialsreviewedby the ACCAexaminingteam. Byincorporatingthe examiningteam’s
commentsand suggestionsregardingthe depth and breadth of syllabuscoverage,the BPP
LearningMediaWorkbookprovidesexcellent,ACCA-approved supportforyourstudies.
Thesematerialsare reviewedby the ACCAexaminingteam. Theobjectiveof the reviewis to
ensurethat the materialproperlycoversthe syllabusand study guideoutcomes,used by the
examiningteam insettingthe exams,inthe appropriatebreadth and depth. Thereviewdoes not
ensurethat everyeventuality,combinationor applicationof examinabletopicsis addressed by
the ACCAApprovedContent.Nordoes the reviewcomprisea detailedtechnicalcheckof the
contentas the ApprovedContentProviderhas its ownqualityassurance processesinplace inthis
respect.
BPPLearningMediado everythingpossibleto ensurethe materialis accurate and up to date
whensendingto print.Inthe eventthat any errorsare foundafter the printdate, they are
uploadedto the followingwebsite:www.bpp.com/learningmedia/Errata.
The PER alert
Beforeyou can qualifyas an ACCAmember,you not onlyhaveto pass allyourexamsbut also
fulfila three-yearpracticalexperiencerequirement(PER).Tohelpyou to recogniseareas of the
syllabusthat you mightbe able to apply inthe workplaceto achievedifferentperformance
objectives,wehaveintroducedthe ‘PERalert’feature (seethe nextsection).Youwillfindthis
feature throughoutthe Workbookto remindyou that what you are learningto pass your
FoundationsinAccountancyand ACCAexamsisequallyusefulto the fulfilmentof the PER
requirement.Yourachievementof the PERshouldbe recordedinyouronlineMyExperience
record.
G H

Introduction vi
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Chapter features
Studyingcan be a dauntingprospect,particularlywhenyou havelotsof othercommitments.This
Workbookis fullof usefulfeatures,explainedinthe keybelow,designedto helpyou get the most
out of yourstudiesand maximiseyourchances of examsuccess.
Keyto icons
Keyterm
Centralconceptsare highlightedand clearlydefinedinthe Keytermsfeature.
Keytermsare also listedinboldinthe Index,forquickand easy reference.

Formulato learn
Thisboxedfeature willhighlightimportantformulawhichyou need to learnfor
yourexam.

PERalert
Thisfeature identifieswhensomethingyou are readingwillalso be usefulforyour
PERrequirement(see‘ThePERalert’sectionaboveformoredetails).

Realworldexamples
Thesewillgivereal examplesto helpdemonstratethe conceptsyou are reading
about.

Illustration
Illustrationswalkthroughhowto apply keyknowledgeand techniquesstep by step.
G H

Activity
Activitiesgiveyou essentialpracticeof techniquescoveredinthe chapter.

Essentialreading
Linksto the Essentialreadingare giventhroughoutthe chapter. TheEssential
readingis includedinthe freeeBook,accessed viathe ExamSuccessSite(seeinside
coverfordetailson howto access this).
Atthe end of each chapter you willfinda Knowledgediagnostic,whichis a summaryof the main
learningpointsfromthe chapter to allowyou to checkyou haveunderstoodthe keyconcepts.You
willalso finda Furtherstudy guidancewhichcontainssuggestionsforwaysinwhichyou can
continueyourlearningand enhance yourunderstanding.Thiscan include:recommendationsfor
questionpracticefromthe Furtherquestionpracticeand solutions,to test yourunderstandingof
the topicsinthe Chapter; suggestionsforfurtherreadingwhichcan be done,such as technical
articles;and ideas foryourownresearch.

vii Financial
Accounting
(FFA/FA)
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Introduction to the Essential reading

Theelectronicversionof the Workbookcontainsadditionalcontent,selectedto enhance your

studies.Consistingof revisionmaterialsand furtherexplanationsof complexareas (including
illustrationsand activities),it is designedto aid yourunderstandingof keytopicswhichare
coveredinthe mainprintedchapters of the Workbook.TheEssentialreadingsectionof the eBook
also includesfurtherillustrationsof complexareas.
Asummaryof the contentof the Essentialreadingis givenbelow.
Chapter Summary of Essential reading content
1 Introductionto accounting • Advantagesand disadvantagesof the three
businesstypes – soletrader, partnershipand limited
liabilitycompany
• Legalresponsibilitiesof directors
2 Theregulatoryframework • Adetailedlistof the currentIFRSand IASs
3 Thequalitative • Thereis no essentialreadingforthischapter.
characteristicsof financial
information
4 Sources,recordsand books • Thereis no essentialreadingforthischapter.
of primeentry
5 Ledgeraccounts and double • Whydo weneed ledgeraccounts?
entry • Accountingforcash and creditsales
6 Fromtrialbalance to • Afullexamplefromledgeraccounts to financial
financialstatements statements
7 Inventory • Cost of inventories
G H

8 Tangiblenon-currentassets • Revaluations
9 Intangiblenon-current • Thereis no essentialreadingforthischapter.
assets
10 Accrualsand prepayments • Thereis no essentialreadingforthischapter.
11 Provisionsand contingencies • Thereis no essentialreadingforthischapter.
12 Irrecoverabledebts and • Thereis no essentialreadingforthischapter.
allowances
13 Salestax • Howto recordsales tax inthe day books
14 Controlaccounts • Thereis no essentialreadingforthischapter.
15 Bankreconciliations • Thereis no essentialreadingforthischapter.
16 Correctionof errors • Essentialreadingprovidesmoredetailon the types
of errorsthat can be foundinaccountingand the
use of journalentries.
17 Incompleterecords • Theessentialreadinggoes intomoredetailabout
the cash bookand howit is used inincomplete
records.
• Italso coversthe impactof accruals and
prepaymentson incompleterecords.
18 Preparationof financial • Additionalquestionpracticeinthisarea

Introduction viii
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Chapter Summary of Essential reading content
statementsforsoletraders
19 Introductionto company • Moredetailof the regulationsurroundinglimited
accounting companies
• Expandson the informationgiveninthischapter on
the varioustypes of shares and reserves
20 Preparationof financial • Moredetailof the terminologyused inthischapter
statementsforcompanies and also includesextrapracticequestions
21 Eventsafter the reporting • Thereis no essentialreadingforthischapter.
period
22 Statementof cash flows • Thereis no essentialreadingforthischapter.
23 Introductionto consolidated • Thereis no essentialreadingforthischapter.
financialstatements
24 Theconsolidatedstatement • Thereis no essentialreadingforthischapter.
of financialposition
25 Theconsolidatedstatement • Thereis no essentialreadingforthischapter.
of profitor loss
26 Interpretationof financial • Thereis no essentialreadingforthischapter.
statements

G H

ix Financial
Accounting
(FFA/FA)
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Introduction to Financial Accounting (FFA/FA)

Overall aim of the syllabus

FFA/FAaimsto developyourknowledgeand understandingof the underlyingprinciples,concepts
and regulationsrelatingto financialaccounting.Youwillneed to demonstratetechnical
proficiencyinthe use of double-entrytechniques,includingthe preparationof basic financial
statementsforincorporatedand unincorporatedentities,as wellas simpleconsolidatedfinancial
statementsforgroups.Youalso need to be able to conducta basic interpretationof financial
statements.Ifyou plan to progressthroughthe ACCAqualification,the skillsyou learnat FFA/FA
willbe builton inFinancialReporting(FR)and StrategicBusinessReporting(SBR).
Brought forward knowledge
Thereis no broughtforwardknowledgerequiredforthisexam.
The syllabus
Thebroad syllabusheadingsare:
A Thecontextand purposeof financialreporting
B Thequalitativecharacteristicsof financialinformation
C Theuse of double-entrysystems
D Recordingtransactionsand events
E Preparinga trialbalance
F Preparingbasic financialstatements
G G Preparingsimpleconsolidatedfinancialstatements H

H Interpretationof financialstatements

Maincapabilities
On successfulcompletionof thisexam,you shouldbe able to:
A Explainthe contextand purposeof financialreporting.
B Definethe qualitativecharacteristicsof financialinformation.
C Demonstratethe use of double-entryand accountingsystems.
D Recordtransactionsand events.
E Preparea trialbalance (includingidentifyingand correctingerrors).
F Preparebasic financialstatementsforincorporatedand unincorporatedentities.
G Preparesimpleconsolidatedfinancialstatements.
H Interpretationof financialstatements.

Introduction x
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Linkswithother exams

Strategic Business Reporting (SBR)

Financial Reporting (FR) ACCA

FFA Financial Accounting (FA)

Foundations in
Accountancy FA2

FA1

Thediagramshowswheredirect(solidlinearrows)and indirect(dashedlinearrows)linksexist
betweenthisexamand otherexamsprecedingor followingit.
AchievingACCA’sStudyGuideLearningOutcomes
ThisBPPWorkbookcoversallthe FinancialAccounting(FA/FFA) syllabuslearningoutcomes.The
tables belowshowinwhichchapter(s)each area of the syllabusis covered.
A Thecontextand purposeof financialreporting
G H

A1 Thescope and purposeof financialstatementsfor Chapter 1

externalreporting
A2 Users’and stakeholders’needs Chapters 1,2
A3 Themainelementsof financialreports Chapters 1,3
A4 Theregulatoryframework(legislationand Chapters 2, 3
regulation,reasonsand limitations,relevanceof
accountingstandards)
A5 Dutiesand responsibilitiesof those charged with Chapter 1
governance

B Thequalitativecharacteristicsof financialinformation

B1 Thequalitativecharacteristicsof financial Chapter 3

information

C Theuse of double-entryand accountingsystems

Double-entrybook-keepingprinciplesincludingthe Chapters 4, 5C1

maintenanceof accountingrecordsand sourcesof
accountinginformation

xi Financial
Accounting
(FFA/FA)
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C2 Ledgeraccounts,booksof primeentry, and Chapters 4, 5
journals

D Recordingtransactions and events

D1 Salesand purchases Chapters 4, 5, 12

D2 Cash Chapters 4, 5, 6
D3 Inventory Chapter 7
D4 Tangiblenon-currentassets Chapter 8, 20
D5 Depreciation Chapter 8, 20
D6 Intangiblenon-currentassets and amortisation Chapter 9
D7 Accrualsand prepayments Chapter 10
D8 Receivablesand payables Chapter 4, 12,14,20
D9 Provisionsand contingencies Chapter 11
D10 Capital structureand financecosts Chapters 19,20

E Preparinga trial balance

E1 Trialbalance Chapter 6, 18
G
E2 Correctionof errors Chapter 16,18 H

E3 Controlaccounts and reconciliations Chapter 14

E4 Bankreconciliations Chapter 15
E5 Suspenseaccounts Chapter 16,18

F Preparingbasic financialstatements

F1 Statementof financialposition Chapters 1,6, 18,19,20

F2 Statementof profitor lossand othercomprehensive Chapters 1,6, 18,19,20
income.
F3 Disclosurenotes Chapters 9, 11,19,20
F4 Eventsafter the reportingperiod Chapter 21
F5 Statementof cash flows Chapter 22
F6 Incompleterecords Chapter 17

G Preparingsimpleconsolidatedfinancialstatements

G1 Subsidiaries Chapters 23, 24, 25

G2 Associates Chapters 23, 24, 25

Introduction xii
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H Interpretationsof financialstatements

H1 Importanceand purposeof analysisof financial Chapter 26

statements
H2 Ratios Chapter 26
H3 Analysisof financialstatements Chapter 26

Thecompletesyllabusand study guidecan be foundby visitingthe examresourcefinderon the

ACCAwebsite:www.accaglobal.com/gb/en.html.

The exam
Computer-basedexams
Computer-basedexaminations(CBEs)are availableforallof the FoundationsinAccountancy
exams.TheCBEexamsforthe firstsevenmodulescan be takenat any time;these are referredto
as ‘examson demand’.TheOptionexamscan be sat inJune and Decemberof each year; these
are referredto as ‘examson sitting’.Formoreinformationon CBEexamsand to access Specimen
examsinthe CBEsoftware,please visitthe ACCAwebsite.
Howdo CBEswork?
• Questionsare displayedon a monitor.
• Candidates enter theiranswerdirectlyontothe computer.
• Candidates havetwohoursto completethe examination.
• Candidates sittingexamson demand are providedwitha ProvisionalResultNotification
showingtheirresultsbeforeleavingthe examinationroom.
G H

• TheCBELicensedCentreuploadsthe resultsto the ACCA(as proofof the candidate’s

performance)within72hours.
• Candidates sittingthe Optionexamswillreceivetheirresultsapproximatelyfiveweeksafter
the examsittingonce they havebeen expertmarked.
• Candidates can checktheirexamstatus on the ACCAwebsiteby loggingintomyACCA.
Benefits
• Flexibility– the firstsevenmodules,examson demand can be sat at any time.
• Resitsforthe firstsevenmodulescan also be takenat any timeand there is no restrictionon
the numberof timesa candidate can sit a CBE.
• Instant feedback forthe examson demand as the computerdisplaysthe resultsat the end of
the CBE.
Formoreinformationon computer-basedexams,visitthe ACCAwebsite.
www.accaglobal.com/gb/en/student/exam-entry-and-administration/computer-based-
exams.html

xiii Financial
Accounting
(FFA/FA)
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Essential skills areas to be successful in Financial
Accounting (FFA/FA)

Wethinkthere are three areas you shoulddevelopinorderto achieveexamsuccessinFFA/FA:

(a) Knowledgeapplication
(b) SpecificFinancialAccountingskills
(c) Examsuccessskills
Theseare showninthe diagrambelow.

msuccess
Exa skills
swe
An r plann
ing
Co
tion eci
Sp ficFA/FFA
skills rr
rma freectin
o
fo
in
qu te
iremrp
g Approach Approach
to multi-task to
ign objective
test questions enreta
a (OT)
questions (MTQ) ts tio
an
M n

G Correction Excelskills
oo oferrors inthe sis
d realworld lny
a
tim Irrecoverable a
em debts
and al
c
i
an
ag allowance
for
receivables umer
em
ent ntn
ie
c
Effi
Effectivewriting
G andpresentation H

Specific FFA/FA skills

Theseare the skillsspecificto FFA/FAthat wethinkyou need to developinorderto pass the exam.
InthisWorkbook,there are fiveSkillsCheckpointswhichdefineeach skilland showhowit is
appliedinansweringa question.Abriefsummaryof each skillis givenbelow.
Skill1:Approachto objectivetest (OT)questions
TheFFAexamcontainstwosections.SectionAconsistsof 35 objectivetest (OT)questionsworth2
markseach and SectionBcontains2 multi-taskquestionsworth15markseach. Themulti-task
questionsare made up of OTquestionsand thereforebeingable to answerOTquestions
effectivelyis extremelyimportant.
Thisskillscheckpointwillfocuson SectionAquestions,explainingthe best wayto tacklethese
questionsand illustratingthe techniquethroughworkedexamples.
BPPrecommendsa step-by-steptechniqueforapproachingobjectivetest questions:
Step 1 Readthe requirementfirst!
Step 2 Applyyourtechnicalknowledgeto the data inthe question.
Step 3 Answerthe questionsyou knowfirst– flag the ones you don’tknowand
comeback to themlater.
Step 4 Answerallquestions– there is no penaltyforan incorrectanswer

Introduction xiv
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Skill2: Approachto multi-taskquestions(MTQs)
MTQsinSectionBmightask you to prepare financialstatementsfora singleentityor fora group
of companies.Theremay also be someelementof ratiocalculation/interpretation.Youmay not
alwaysbe requiredto prepare the fullfinancialstatementand may insteadbe askedto complete
a partial statement.Inthissituationthere willbe additionalelementsto the question.
Inthisskillscheckpoint,wewillfocuson the specificskillsrequiredina multi-taskquestion.We
take you throughthe techniqueyou shouldadopt and illustratethat throughthe use of questions.
BPPrecommendsa step-by-steptechniqueforapproachingmulti-taskquestions:
Step 1 Readthe requirementsof alltasks
Step 2 Recallany relevanttechnicaltheory.
Step 3 Answerthe questionsyou knowfirst.
Step 4 Answerallquestions.

Skill3: Excelskillsin the real world

Asyou movethroughyourACCAexaminationsand youraccountancy career you willneed good
spreadsheetskills.Itis crucialthat you havea good workingknowledgeof spreadsheetsand that
you are able to use themquicklyand effectively.Manypeopledo not use Excelto its full
potential,forexamplethey type intotals rather than askingExcelto sumit forthem.Thisoften
leads to errors.
Thisisa practicalskillaimedat yourworkingliferather than beingdirectlyrelatedto a skillthat
you need to pass thisexam.
Whilstthissectionis not examfocussed,spreadsheetswillbe a keypart of youraccountancy
career. Futureemployerswillalwayslookforgood corespreadsheetskillswhenselectinga
G
candidate fora role. H

Skill4: Irrecoverabledebts and allowancefor receivables

The2018/2019examiners’reportcommentedthat the topicof ‘irrecoverabledebts and allowance
forreceivables’continuesto be an area of the syllabuswhereperformanceis mixedwithmany
candidates not providingthe correctresponse.Thereis oftena lotof detailinthese questionsand
they need to be read verycarefully.
Inthisskillscheckpointwewillrecap someof the keyareas and identifywherestudentstypically
strugglewiththistopicand howto get to gripswithit.
SkillsCheckpoint4 coversthistechniqueindetailthroughapplicationto an exam-standard
question.
Skill5: Correctionof errors
Thecorrectionof errorsarea of the examinationoftencauses difficultiesforcandidates as they
are requiredto thinkaround the subjectrather than justrote learning.
Astep-by-steptechniqueforattemptingthese questionsis outlinedinthe checkpointalongwitha
reminderof the keyareas of thistopic.
Questionsare used to highlightthe problemsstudentsface and howto address them.Itis similar
to the structurewehaveseen forour otherskills.
Examsuccess skills
Passingthe FFAexamrequiresmorethan applyingsyllabusknowledgeand demonstratingthe
specificFFAskills;it also requiresthe developmentof excellentexamtechniquesthroughquestion
practice.
Weconsiderthe followingsixskillsto be vitalforexamsuccess.TheSkillsCheckpointsshowhow
each of these skillscan be appliedinthe exam.

xv Financial
Accounting
(FFA/FA)
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1 Exam success skill 1
Managinginformation
Youwillnot haveto deal withlarge amountsof informationineach individualquestioninFFA.
Someof the questionsinthe examwillpresentyou witha short scenario,particularlyinthe
SectionBquestions.Theskillis howyou handlethisinformationwhileworkingundertime
pressure.
Youmusttake an activeapproach to readingeach scenario.Focuson the requirementfirst,
underlining/highlightingkeyinstructions,includingwordslike‘NOT’.Thenthinkabout any
technicalknowledgethat is relevantbeforereadingthe scenarioforthe question.Doingthis
means that yourmindwillbe focussedas you read the scenario,whichmeans you willtake inthe
informationbetter.
2 Exam success skill 2
Correct interpretationof the requirements
Itis importantto note the requirementcarefully.Lookout forthe numberof optionsyou haveto
choose,as not allquestionsrequireonlyone option.Also,bewareof challenges,such as the
informationbeingpresentedinone particularorderinthe scenario,but beingpresentedina
differentorderinthe options.
3 Exam success skill 3
Answerplanning:Priorities,structureand logic
Thisskillis not so relevantforthe AppliedKnowledgeexams.
4 Exam success skill 4
Efficientnumericalanalysis
Animportanttip innumericalquestionsis not to lookat the optionsuntilyou havecompletedthe
calculationas you thinkit shouldbe done.Thereason forthisis that the ‘wronganswers’are
G
chosencarefullyto lookveryrealistic,and you may be temptedto chooseone of these ifyou H

don’tdo the calculationfirst.

5 Exam success skill 5
Effectivewritingand presentation
Thisskillis not relevantforFA/FFAas allthe questionsare objectivetest and multi-taskquestions
so you willnot haveto write.
6 Exam success skill 6
Good timemanagement
Theexamis twohourslong.Youshouldthereforespend 1.2minutesper mark.Itis best to work
throughSectionAfirst,whichshouldtake you 84 minutes,beforespendingthe remaining36
minuteson SectionB.
Don’tget stuckon difficultquestions– ifa particularquestiondoes appear difficult,moveon, and
comeback to it after you haveansweredallthe easierquestions.
Don’ttimeyourselfforeach question,but do checkeveryhalfhourthat you haveanswered25
marksworthof questions.
Twominutesbeforethe end of yourtimeforSectionA,go back and answeralloutstanding
questions,evenifyou haveto guess.Thereis no harm inguessingas there is no negativemarking
inACCAexams,so the worstthat can happen is you don’tgain twomarksforthe question.
Ifyou findthat thisapproach doesn’tworkforyou, don’tworry– you can developyourown
technique.
Keepan eye on the clock
Aimto attempt allrequirements,but be ready to be ruthlessand moveon ifyouransweris not
goingas planned.Thechallengeformany is stickingto plannedtimings.Beaware thisis difficult
to achieveinthe earlystages of yourstudiesand be ready to let thisskilldevelopovertime.

Introduction xvi
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Questionpractice
Questionpracticeis a corepart of learningnewtopicareas. Whenyou practicequestions,you
shouldfocuson improvingthe Examsuccessskills– personalto yourneeds – by obtaining
feedbackor througha processof self-assessment.

G H

xvii Financial
Accounting
(FFA/FA)
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1
Introduction to

accounting

1
Learning objectives
On completionof thischapter, you shouldbe able to:
Syllabusreference
no.
Definefinancialreporting– recording,analysingand summarising A1(a)
financialdata.
Identifyand definetypes of businessentity– soletrader, partnership, A1(b)
limitedliabilitycompany.
Recognisethe legaldifferencesbetweena soletrader, partnershipand A1(c)
a limitedliabilitycompany.
Identifythe advantages and disadvantagesof operatingas a limited A1(d)
G H

liabilitycompany, soletrader or partnership.

Understandthe nature, principlesand scope of financialreporting. A1(e)
Identifythe usersof financialstatementsand state and differentiate A2(a)
betweentheirinformationneeds.
Understandand identifythe purposeof each of the mainfinancial A3(a)
statements.
Defineand identifyassets, liabilities,equity, revenueand expenses. A3(b)
Explainwhat is meant by governancespecificallyinthe contextof the A5(a)
preparationof financialstatements.
Describethe dutiesand responsibilitiesof directorsand otherparties A5(b)
coveringthe preparationof the financialstatements.
1
Exam context
Thischapter introducesthe subjectof accounting.Questionson thisarea willmostlikelyfocuson
the differentcharacteristicsof the three types of businessentity:soletrader, partnershipand
limitedliabilitycompany, the usersof financialstatementsand the definitionsof assets, liability,
income,expenseand capital.

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1
Chapter overview

Introduction to accounting

Financial statements Types of business entities

Statementofprofitorloss

Statementoffinancialposition

Users of financial statements Corporate governance

G H

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1 Nature, principles and scope of financial reporting

Youmay havea broad understandingof what accountingand financialreportingis allabout, but

yourjobmay be injustone area or type of accounting.Itis importantto understandthe breadth
of workwhichan accountant undertakes.

Financialreporting:Financialreportingis a wayof recording,analysingand summarising

KEY
TERM transactionsof a business.
Thetransactionsare recordedand analysed inthe booksof primeentry. Thetotals are then
postedto the ledgeraccounts and finallythe transactionsare summarisedinthe financial
statements.
1.1 Financial accounting
Financialaccountingis mainlya methodof reportingthe financialperformanceand financial
positionof a business.Itis not primarilyconcernedwithprovidinginformationtowardsthe more
efficientrunningof the business.Althoughfinancialaccounts are of interestto management,their
principalfunctionis to satisfythe informationneeds of personsnot involvedinrunningthe
business.Theyprovidehistoricalinformation.
1.2 Management accounting
Theinformationneeds of managementgo far beyondthose of otheraccount users.Managers
havethe responsibilityof planningand controllingthe resourcesof the business.Therefore,they
need muchmoredetailedinformation.Theyalso need to plan forthe future(egbudgets,which
predictfuturerevenueand expenditure).

Management(orcost) accounting:Management(orcost)accountingis a management

KEY
TERM informationsystemwhichanalyses data to provideinformationas a basis formanagerial
action.Theconcernof a managementaccountant is to presentaccountinginformationinthe
G H

formmosthelpfulto management.

Itis importantthat you understandthe distinctionbetweenmanagementaccountingand

financialaccounting.

2 Financial statements

Theprincipalfinancialstatementsof a businessare the statementof profitor lossand the

statementof financialposition.
2.1 Statement of profit or loss

Statementof profitor loss:Astatementof profitor lossis a recordof incomegenerated and

KEY
TERM expenditureincurredovera givenperiod.Thestatementshowswhetherthe businesshas had
morerevenue(sales)than expenditure(profit)or viceversa(loss).
Revenue:Revenueis the incomegenerated by the operationsof a businessfora period.
Expenses:Expensesare the costs of runningthe businessforthe same period.

TheIASB’sConceptualFrameworkforFinancialReporting2018definesincomeand expensesas
follows:

Income:“Incomeis increasesinassets or decreases inliabilitiesthat resultinincreasesin

KEY
TERM equity, otherthan those relatingto contributionsfromholdersof equityclaims”(Conceptual
FrameworkforFinancialReporting2018,para. 4.68).

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Expenses:“Expensesare decreases inassets or increasesinliabilitiesthat resultindecreases
inequity, otherthan those relatingto distributionsto holdersof equityclaims”(Conceptual
FrameworkforFinancialReporting2018,para. 4.69).

2.1.1 Form of the statement of profit or loss

Thestatementof profitor losswhichformspart of the publishedannual financialstatementsof a
limitedliabilitycompanywillusuallybe forthe periodof a year, commencingfromthe date of the
previousyear’sstatements.On the otherhand, managementmightwantto keepa closereye on
a company’sprofitabilityby makingup quarterlyor monthlystatements.
2.1.2 Statement of profit or loss – sole trader
$ $
200,000Sales
Less: Cost of sales
Openinginventories 40,000
Purchases 110,000
Carriageinwards 20,000
170,000
inventories (50,000)Closing
(120,000)
Grossprofit 80,000
Sundryincome 5,000
G
Discountsreceivable 3,000 H

88,000
Less: Expenses
Rent 11,000
Carriageoutwards 4,000
Telephone 1,000
Electricity 2,000
Wagesand salaries 9,000
Depreciation 7,000
Badand doubtfuldebts 3,000
Motorexpenses 5,000
Insurance 1,000
(43,000)
Profitforthe year 45,000
Keyfeatures of statement of profitor loss:
• Thisis headed up withthe periodforwhichthe incomeand expensesare beingincluded.
• Thetop part is calledthe tradingaccount as it recordsjustthe tradingactivities(buyingand
selling)of the business:SaleslessCost of sales =Grossprofit.
• Sundryincomeincludesitemslikebank account interestreceived.
• Donot includenilvaluecaptions.

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2.2 Statement of financial position

Statementof financialposition:Thestatementof financialpositionis simplya listof allthe

KEY
TERM assets ownedand allthe liabilitiesowedby a businessas at a particulardate.
Itis a snapshot of the financialpositionof the businessat a particularmoment.Monetary
amountsare attributedto each of the assets and liabilities.
Activity 1: Idea generation

Listout everythingyou ownand owe.

Solution

G H

2.2.1 Assets
Anasset is somethingvaluablewhicha businessownsor can use. TheInternationalAccounting
StandardsBoard(IASB) definesan asset inthe ConceptualFrameworkforFinancialReporting
2018,as follows:

Asset:“Anasset isa presenteconomicresourcecontrolledby the entityas a resultof past

KEY events.Aneconomicresourceis a rightthat has the potentialto produceeconomicbenefits.”
TERM (ConceptualFrameworkforFinancialReporting2018,paras. 4.3and 4.4)

Examplesof assets are factories,officebuildings,warehouses,deliveryvans,lorries,plant and

machinery,computerequipment,officefurniture,cash and goodsheldinstoreawaitingsale to
customers.
Someassets are heldand used inoperationsfora longtime.Anofficebuildingis occupiedby
staff foryears. Similarly,a machinehas a productivelifeof many years beforeit wearsout.
Otherassets are heldforonlya short time.Theownerof a newsagentshop,forexample,has to
selltheirdailynewspaperson the same day that they get them.Themorequicklya businesscan
sellthe goodsit has instore,the moreprofitit is likelyto make;provided,of course,that the goods
are soldat a higherpricethan what it cost the businessto acquirethem.

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2.2.2 Liabilities
Aliabilityis somethingwhichis owedto somebodyelse.‘Liabilities’
is the accountingtermforthe
debts of a business.TheIASB’sConceptualFrameworkforFinancialReporting2018definesa
liabilityas follows:

Liability:“Aliabilityis a presentobligationof the entityto transfereconomicresourceas a

KEY resultof past events.Anobligationis a duty of responsibilitythat the entityhas no practical
TERM abilityto avoid.”(ConceptualFrameworkforFinancialReporting2018,paras. 4.26and 4.29)

Examplesof liabilitiesare amountsowedto a supplierforgoodsboughton credit,amountsowed

to a bank (orotherlender),a bank overdraftand amountsowedto tax authorities(eginrespect of
sales tax).
Someliabilitiesare due to be repaidfairlyquickly(egsuppliers).Otherliabilitiesmay take some
years to repay (ega bank loan).

Activity 2: Assets

Whichof the followingis an asset accordingto the definitioninthe ConceptualFramework?

 Bankoverdraft
 Factorybuildings
 Payables
 Amountsowedto tax authorities

Activity 3: Liabilities
G H

Whichof the followingis an exampleof a liability?

 Inventory
 Receivables
 Plantand machinery
 Loan

2.2.3 Capital or equity

Theamountsinvestedina businessby the ownerare amountsthat the businessowesto the
owner.Thisis a specialkindof liability,calledcapital.Ina limitedliabilitycompany, capital
usuallytakes the formof shares.Sharecapital is also knownas equity.TheIASB’s Conceptual
FrameworkforFinancialReporting2018definesequityas follows:

Equity:“Equityis the residualinterestinthe assets of the entityafter deductingallits

KEY
TERM liabilities”
(ConceptualFrameworkforFinancialReporting2018,para. 4.63).

2.2.4 Statement of financial position – sole trader

$ $
Assets
Non-currentassets
Landand buildings 100,000
Officeequipment 50,000

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$ $
Motorvehicles 30,000
Furnitureand fixtures 20,000
200,000
Currentassets
Inventories 50,000
Tradereceivables 30,000
Less:allowanceforreceivables (2,000)
28,000
Prepayments 5,000
Cash inhand and at bank 7,000
90,000
Totalassets 290,000

Capital and liabilities

Capital 170,000
Profit 45,000
Less:drawings (25,000)
190,000
G H

Non-currentliabilities
Bankloans 40,000

Currentliabilities
Bankoverdraft 16,000
Tradepayables 40,000
Accruals 4,000
60,000
Totalcapital and liabilities 290,000
Keyfeatures of statement of financialposition:
• Theheadingis always,as at, a certaindate.
• Non-currentassets – assets heldand used inthe businessoverthe longterm(iemorethan one
year).
• Currentassets – not non-currentassets!Conventionallylistedinincreasingorderof liquidity
(ieclosenessof assets to cash).
• Capital– what the businessowesthe proprietor/owner.Inthiscase, the soletrader ownsallof
the business,ie its total net worth:Capital=Assets– Liabilities= NetAssets.
• Donot includea caption(itemheading)ifthere is not a valueforit.

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PER alert
One of the competencesyou requireto fulfilPerformanceObjective5 (PO5)Leadershipand
managementof the PERis the abilityto manage timeand tasks effectivelyto meet business
needs and professionalcommitments,and be capable of workingunderpressure.Inthe
courseof you FFA/FAstudies,you willbe demonstratingthiscompetence.

2.2.5 Relationship between the statement of financial position and the statement of profit
or loss
Statementof financialpositionshowsthe worthof businessat a pointintime.
Statementof profitor lossshowsthe tradingactivitiesovera periodof time(financial
performance).
Theaccountingperiodis the periodforwhichthe statementof profitor losswas prepared.Thisis
usuallya year.
Therefore,there willbe a statementof financialpositionat the beginningof the year (prioryear
end)and at the end of the accountingperiod.
Thestatementof profitor lossis forthe interveningperiod.
Statementofprofitorlossfortheyearended31.12.X7

Statement Statement
offinancial offinancial
position position
asat asat
31.12.X6 31.12.X7

G
3 Users of financial information H

Financialinformationhas to be usefulto a widerange of users.

Activity 4: Users of financial information

Whatinformationwouldthese usersof financialinformationbe interestedin?

• Investors
• Employees
• Lenders
• Suppliers
• Customers
• Governmentand theiragencies
• Public

Solution

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Activity 5: Managers

Whichof the followingsourcesof informationwouldbe mostusefulformanagersto use when

makingdecisionsforthe year ahead?
 Financialstatementsforthe last financialyear
 Taxrecordsforthe past fiveyears
 Budgetsforthe comingfinancialyear
 Bankstatementsforthe past year

Exam focus point

Theneeds of userscan be examinedeasily.Forexample,you couldbe givena listof types of
informationand askedwhichuser groupwouldbe mostinterestedinthisinformation.
G H

4 Accounting records
Inorderto be able to producea statementof profitor lossand a statementof financialposition,a
businessneeds to keepa recordof allits transactions.
Thisprocessiscalledbookkeeping.
Accountingrecordsshouldbe complete,accurate and validifthe informationproducedis to be
usefulforthe usersof financialinformation.
Themechanicsof bookkeepingand the accountingrecordsa businessshouldkeepwillbe covered
inChapters 4, 5 and 6.

5 Types of business entities

5.1 Three main types of businesses

Businessesfallintothree maintypes:
• Soletrader – Asoletrader is a businessownedand run by one individual,perhaps employing
one or twoassistantsand controllingtheirwork.Theindividual’sbusinessand personalaffairs
are, forlegaland tax purposes,identical.
• Partnership– Theseare arrangementsbetweenindividualsto carry on businessincommon
witha viewto profit.Apartnership,however,involvesobligationsto others,and so a
partnershipisusuallygovernedby a partnershipagreement.Unlessit is a limitedliability
partnership(LLP),partners willbe fullyliablefordebts and liabilities,forexampleifthe
partnershipissued.

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• Limitedliabilitycompany– Limitedliabilitystatus means that the business’sdebts and the
personaldebts of the business’sowners(shareholders)are legallyseparate. Theshareholders
cannot be sued forthe debts of the businessunlessthey havegivensomepersonalguarantee.
Thesoletrader is the simplestof these forms.
Inlaw,soletraders and partnershipsare not separate entitiesfromtheirowners.However,a
limitedliabilitycompanyislegallya separate entity fromits owners.Contractscan thereforebe
issuedinthe company’sname.
Foraccountingpurposes,allthree entitiesare treated as separate fromtheirowners.Thisis called
the businessentity concept.
5.1.1 Limited liability companies
Limitedliabilitycompaniesare formedunderspecificlegislation(eginthe UK,the CompaniesAct
2006).Alimitedliabilitycompanyis legallya separate entityfromits owners,and can confer
variousrightsand duties.
Thereis a cleardistinctionbetweenshareholdersand directorsof limitedcompanies.
(a) Shareholdersare the owners,but havelimitedrightsas shareholdersoverthe day-to-day
runningof the company. Theyprovidecapital and receivea return(dividend).
(b) Theboard of directorsare appointedto run the companyon behalfof shareholders.In
practice,they havea great deal of autonomy.Directorsare oftenshareholders.
Thereportingrequirementsforlimitedliabilitycompaniesare muchmorestringentthan forsole
traders or partnerships.Inthe UK,there is a legalrequirementfora companyto:
• Beregisteredat CompaniesHouse;
• Completea Memorandumof Associationand Articlesof Associationto be depositedwiththe
Registrarof Companies;
• Haveat least one director(twofora publiclimitedcompany(PLC))whomay also be a
shareholder;
G • Preparefinancialaccounts forsubmissionto CompaniesHouse; H

• Haveits financialaccounts audited (largercompaniesonly);and

• Distributethe financialaccounts to allshareholders.

Essential reading

Advantagesand disadvantages of businesstypes

Thereare numerousadvantages and disadvantagesof the three businesstypes. SeeChapter 1of
the Essentialreadingformoredetail.
TheEssentialreadingis availableas an Appendixof the digitaleditionof the Workbook.

Activity 6: True or false

Markthe followingstatementsas true or false.

Shareholdersreceiveannual accounts,prepared inaccordance withlegaland
professionalrequirements.
Theaccounts of limitedliabilitycompaniesare sometimesfiledwiththe Registrarof
Companies.
Employeesalwaysreceivethe company’saccounts and an employeereport.
Thetax authoritiesreceiveas muchsupplementarydetailas they need to assess the
tax payable on profits.
Banksfrequentlyrequiremoreinformationthan is suppliedinthe published

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accounts whenconsideringapplicationsforloansand overdraftfacilities.

6 The concept of business entity ( s eparate entity)

Abusinessisconsideredto be a separate entityfromits ownerand so the personaltransactionsof

the ownershouldneverbe mixedwiththe businesstransactions.
Whenconsideringa limitedliabilitycompany, thisdistinctionis laiddowninlaw– the company
has a separate legalidentity.
Inpreparingaccounts,any type of businessis treated as beinga separate entityfromits
owner(s).

7 Governance

Governance:Thosecharged withgovernanceof a companyare responsibleforthe

KEY
TERM preparationof the financialstatements.
Corporate governanceis the systemby whichcompaniesand otherentitiesare directedand
controlled.Goodcorporategovernanceis importantbecause the ownersof a companyand the
peoplewhomanage the companyare not alwaysthe same, whichcan lead to conflictsof
interest.
Theboard of directorsof a companyare usuallythe top managementand are those whoare
charged withgovernanceof that company. Theresponsibilitiesand dutiesof directorsare usually
laiddowninlawand are wideranging.
G
7.1 Legal responsibilities of directors H

Directorshavea duty of care to showreasonablecompetenceand may haveto indemnifythe

companyagainst losscaused by theirnegligence.Directorsare also said to be ina fiduciary
positioninrelationto the company, whichmeans that they mustact honestlyinwhat they
considerto be the best interestof the companyand ingood faith.
Inthe UK,the CompaniesAct2006 sets out sevenstatutory dutiesof directors.Directorsshould:
• “Actwithintheirpowers;
• Promotethe successof the company;
• Exerciseindependentjudgement;
• Exercisereasonableskill,care and diligence;
• Avoidconflictsof interest;
• Notaccept benefitsfromthirdparties;and
• Declareinterestina proposedtransactionor arrangement.”
(CompaniesAct2006, Sections171–177)

Anoverridingthemeof the CompaniesAct2006 is the principlethat the purposeof the legal

frameworksurroundingcompaniesshouldbe to helpcompaniesdo business.Adirector’smain
aimshouldbe to create wealthforthe shareholders.
Inessence,thisprinciplemeans that the lawshouldencouragelong-termismand regard forall
stakeholdersby directorsand that stakeholderinterestsshouldbe pursuedinan enlightenedand
inclusiveway.
Whenexercising,thisduty directorsshouldconsider:
• Theconsequencesof decisionsinthe longterm
• Theinterestsof theiremployees

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• Theneedtodevelop goodrelationships
withcustomersandsuppliers
• Theimpact ofthecompany onthelocalcommunity andtheenvironment
• Thedesirabilityofmaintaininghighstandards ofbusiness
conduct
anda goodreputation
• Theneedtoactfairlyasbetween allmembers ofthecompany
Thislistidentifies
areasofparticular
importance andmodern-dayexpectations
ofresponsible
business behaviour,forexample
theinterests
ofthecompany’s employeesandtheimpact
ofthe
company’s operationsonthecommunity andtheenvironment.
7.2 Responsibility for the financial statements
Directors
areresponsible forthepreparation ofthefinancialstatements ofthecompany.
Specifically,
directors areresponsible for:
• Thepreparation ofthefinancial statements ofthecompany inaccordance withtheapplicable
financial
reporting framework (egIFRSs)
• Theinternal controlsnecessary toenable thepreparationoffinancial
statements thatarefree
frommaterial misstatement, whetherduetoerror orfraud
• Theprevention anddetection offraud
Itisthedirectors’responsibilitytoensure thattheentitycomplies withtherelevantlawsand
regulations.
Directors
should explain theirresponsibilityforpreparing accountsinthefinancialstatements.
Theyshould alsoreport thatthebusiness isa goingconcern,withsupporting assumptions and
qualifications
asnecessary.
Directors
should present a balanced andunderstandable assessmentofthecompany’s position
andprospects intheannual accounts andotherreports, suchasinterim reports
andreports to
regulators.
Thedirectors should alsoexplainthebasisonwhichthecompany generates or
preservesvalueandthestrategy fordeliveringthecompany’s longer-term objectives.
Companies overa certain sizelimitaresubjected toanannual auditoftheirfinancialstatements.
Anauditisanindependent examination oftheaccounts toensure thattheycomply withlegal
G H

requirementsandaccounting standards. Notethattheauditors arenotresponsibleforpreparing

thefinancialstatements. Thefindings ofanauditarereported totheshareholders ofthe
company. Anauditgivestheshareholders assurancethattheaccounts, whicharethe
responsibility
ofthedirectors, fairlypresent thefinancial
performance andposition ofthe
company. Anaudittherefore goessomewayinhelping theshareholdersassesshowwell
management havecarried outtheirresponsibilityforstewardshipofthecompany’s assets.

Examfocus point
TheACCAexamining teamreported
thatquestions
ongovernancehadbeenparticularly
poorly
answeredinthepast.Makesureyoureadthissection
carefully
andbepreparedto
answerquestions
onitintheexam.

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Chapter summary

Introductionto accounting

Financial
statements Typesofbusiness
entities

Statement ofprofit
orloss • Soletrader
• Astatementofprofit
orloss
isarecordof – Asole tradership
isabusiness
ownedand
revenue(income)
generatedandexpenditure runbyone individual.
incurred
overagivenperiod. • Partnership
• Revenueistheincomegenerated
bythe – Thesearearrangements between
operations
ofabusinessforaperiod. individuals
tocarryonbusiness
incommon
• Expensesarethecosts
ofrunningthebusiness withaview toprofit.
forthesame period. • Limitedliability
company
– Limitedliability
status
meansthatthe
business'sdebtsandthepersonal
debts
of
Statement offinancial
position thebusiness'sowners(shareholders)
are
• Thestatement offinancial
position issimply legallyseparate.
alistofalltheassets
owned andallthe
liabilities
owed byabusiness asata
particulardate.
• Anasset isapresenteconomic resource
controlledbytheentity
asaresult ofpast
events.Aneconomic resourceisaright that
hasthepotentialtoproduceeconomic
benefits.
G
• Aliability
isapresentobligation
oftheentity H

totransfereconomicresourceasaresult of
pastevents. Anobligation
isaduty of
responsibility
thattheentity
hasnopractical
ability
toavoid.
• Equityistheresidual
interest
intheassets of
theentityafterdeducting
allitsliabilities.

Usersoffinancial
statements Corporate
governance

• Management • Corporate
governance
isthesystem
bywhich
• Government companies
andother
entities
aredirected
and
• Public controlled.
• Lenders
• Analysts
andadvisers
• Third
parties
• Employees
• Shareholders

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Knowledge diagnostic

1.Financialreporting
Financialreportingis a wayof recording,analysingand summarisingfinancialdata.
2. Typesof businessentities
Thereare three types of businessentities– soletrader, partnershipand limitedliabilitycompany.
3. What is the separate entity concept?
The‘separateentity’concept is that a businessisconsideredto be a separate entityfromits
ownerso the personaltransactionsof the ownershouldneverbe mixedwiththe business
transactions.
4. Thestatement of financialposition
Thestatementof financialpositionis simplya listof allthe assets ownedand allthe liabilities
owedby a businessas at a particulardate.
Itis a snapshot of the financialpositionof the businessat a particularmoment.Monetary
amountsare attributedto each of the assets and liabilities.
5. Anasset
Anasset is a presenteconomicresourcecontrolledby the entityas a resultof past events.An
economicresourceis a rightthat has the potentialto produceeconomicbenefits.
6. Aliability
Aliabilityisa presentobligationof the entityto transfereconomicresourceas a resultof past
events.Anobligationis a duty of responsibilitythat the entityhas no practicalabilityto avoid.
G H

7. Capital or equity
Equityis the residualinterestinthe assets of the entityafter deductingallits liabilities.
8. Thestatement of profitor loss
Astatementof profitor lossis a recordof incomegenerated and expenditureincurredovera given
period.Thestatementshowswhetherthe businesshas had morerevenuethan expenditure(a
profit)or viceversa(loss).
9. Income
Incomeis increasesinassets or decreases inliabilitiesthat resultinincreasesinequity, otherthan
those relatingto contributionsfromholdersof equityclaims.
10.Expenses
Expensesare decreases inassets or increasesinliabilitiesthat resultindecreases inequity, other
than those relatingto distributionsto holdersof equityclaims.
11.Corporate governance
Corporategovernanceis the systemby whichcompaniesand otherentitiesare directedand
controlled.Goodcorporategovernanceis importantbecause the ownersof a companyand the
peoplewhomanage the companyare not alwaysthe same, whichcan lead to conflictsof
interest.

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Further study guidance

Question practice
Nowtry the followingfromthe Furtherquestionpracticebank (availableinthe digitaleditionof
the Workbook):
Questions1to 5

G H

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Activity answers

Activity1:Idea generation
Examples:
Own:house,car, cash
Owe:loan,creditcard, mortgage

Activity2: Assets
Thecorrectansweris:Factorybuildings
Factorybuildingsis the onlyone whichthe businessownsrather than owes.

Activity3: Liabilities
Thecorrectansweris:Loan
Theotheroptionsare assets (owned)rather than liabilities(owed).

Activity4: Users of financial information

Investors
• Profitability
• Futureprospects
• Likelyriskand return
• Chance of capital growth
• Abilityto pay dividends
G
Employees H

• Profitability
• Long-termgrowth
• Securityof theirjob
• Likelihood of bonus
• Numberof employees
• Abilityto pay retirementbenefits
Lenders
• Whetherreturnon financewillcontinueto be met
• Otherprovidersand securityof theirdebt
• Likelihood of repaymentof capital amount
Suppliers
• Likelihood of paymenton time
• Likelihood of paymentat all
• Whetherthey shouldcontinueto supply
• Customers
• Abilityof entityto continuesupplying
• Profitabilityas a measureof valueformoneyof goodsbought
Governmentand their agencies
• Statistics
• Sizeof company
• Growthrates

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• Average payment periods
• Foreigntrade
• Profits
made
• Corporate income taxliability
• Salestaxliability
Public
• Contributiontolocaleconomy
• Informationabouttrends intheprosperity
oftheentity
• Rangeofproducts andservices provided

Activity5: Managers
Thecorrect answeris:Budgets
forthecoming financial
year
Managers needtolookforwardandmakeplanstokeepthebusiness profitable.
Therefore,
the
mostuseful information
forthemwould bethebudgets forthecoming
financial
year.
Theothersources ofinformation
– financial
statements,bankstatements
andtaxrecords– areall
historic.
Whilethesemayhelpmanagers toplanandmaketheirbudgets,theseareoflessusefor
future
decision making.

Activity6: Trueorfalse

Shareholders
receive
annual
accounts,
prepared
inaccordance
withlegaland True
professional
requirements.
Theaccounts
oflimited
liability
companies
aresometimes
filedwiththeRegistrar
of False
G
Companies. H

Employees
alwaysreceive
thecompany’s
accounts
andanemployee
report. False
Thetaxauthorities
receive
asmuchsupplementary
detailastheyneedtoassessthe False
taxpayable
onprofits.
Banks
frequently
require
moreinformation
thanissupplied
inthepublished True
accounts
whenconsidering
applications
forloansandoverdraft
facilities.

Shareholdersreceiveannual accounts, prepared inaccordance withlegalandprofessional

requirementsandinaddition, companies listed
onthestockexchange havetocomply withthe
regulations
inthestockexchange’s listingrules.
Theaccounts oflimitedliability
companies mustalwaysbefiledwiththeRegistrar ofCompanies
andbeavailable forpublicinspection. Inaddition, thecompany itselfwilloftendistribute
these
accountsonrequest topotential shareholders, thebankandfinancial analysts.These accounts
areallthatisusuallyavailabletosuppliers andcustomers.
Employees willnotnecessarilyreceivecompany accounts (unless
theyareshareholders, for
example)butmanycompanies dodistribute theaccounts toemployees asa matter ofpolicy.
Somecompanies produce employee reports whichsummarise andexpand onmatters whichare
coveredintheannual accounts andareofparticular interest
tothem.
Thetaxauthoritiesreceivea copyofthefinancial statements
iniXBRLformat, thetaxreturn anda
copyofthetaxcalculation.
Banks mayrequire cashflowandprofit forecasts andbudgetsprepared toshowmanagement’s
estimatesoffutureactivityinthebusiness.

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G H

18 Financial
Accounting
(FFA/FA)
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framework2
The regulatory

2
Learning objectives
On competitionof thischapter, you shouldbe able to:
Syllabusreference
no.
Understandthe roleof the regulatorysystemincludingthe rolesof the A4(a)
IFRSFoundation(IFRSF), the InternationalAccountingStandardsBoard
(IASB®),the IFRSAdvisoryCouncil(IFRSAC)and the IFRS
InterpretationsCommittee(IFRIC®).
Understandthe roleof InternationalFinancialReportingStandards. A4(b)
2
G Exam context H

Questionson thischapter are likelyto be knowledgebased and focuson the roleof each of the
bodieswithinthe regulatoryframework.

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2
Chapter overview

The regulatory framework

IFRSF IFRSAC IASB

IFRIC IFRS

G H

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1 Introduction

Thepurpose ofthissection
istogivea generalpicture
ofsomeofthefactors whichhaveshaped
financial
accounting.Wewillconcentrate
ontheaccounts oflimited
liability
companies,
asthese
aretheaccounts mostcloselyregulated
bystatute orotherwise.
Financial
statementsareproduced byanentity’smanagers inordertoshowitsownershowthe
entityhasperformedovera periodoftime.
Company financial
statementsparticularly
needtoshowa trueandfairview.
Thismeans a systemofregulation
isnecessarytoensure thatfinancial
statements
areproduced
toa highstandardandarecomparable acrossdifferent
companies.

2 The Regulatory System

2.1 National/local legislation

Inmostcountries,
limited
liability
companies
arerequired
bylawtoprepare
andpublishaccounts
annually.
Theformandcontent oftheaccounts
isregulated
primarily
bynational
legislation.
2.2 Accounting concepts and individual judgement
Manyfigures infinancial
statementsarederived
fromtheapplication ofjudgement inapplying
fundamentalaccountingassumptionsandconventions.
Thiscanleadtosubjectivity.
Workingfromthesamedata,differentgroupsofpeople couldproduce verydifferent
financial
statements.
Iftheexercise
ofjudgement iscompletely
unfettered,therewillbenocomparability
betweentheaccounts ofdifferent
organisations.
Thiswillbeallthemoresignificant
incases
wheredeliberatemanipulation
occurs,
inordertopresent accountsinthemostfavourable light.
2.3 Accounting standards
Inanattempt todealwithsomeofthesubjectivity,
andtoachieve comparability
between
G H

different
organisations,
accountingstandardsweredeveloped.Thesearedevelopedatbotha
national
level(inmostcountries)
andaninternational
level.TheFFA/FAsyllabus
isconcerned
with
International
FinancialReporting
Standards(IFRSs).
2.4 International Financial Reporting Standards Foundation (IFRSF)
TheIFRSFoundation isa not-for-profit,
publicinterest organisation
established
todevelopa single
setofhigh-quality, understandable, enforceable andglobally accepted accountingstandards—
IFRSs—and topromote andfacilitate
adoption ofthestandards.
ItsTrusteesappoint members totheIASB,IFRICandIFRSAC.Theyalsooversee theregulatory
system andraisethefinance necessary tosupport it.
Ithasnoinvolvement inthestandard settingprocess.
Theobjectives oftheIFRSFoundation, takenfromitsdocument IFRSFoundation Constitution,
2018are:
(a) Todevelop inthepublicinterest a singlesetofhighquality, understandable,enforceableand
globallyaccepted financial
reporting standards baseduponclearlyarticulatedprinciples.
These standards should requirehighquality,transparent andcomparable informationin
financialstatements andotherfinancial reporting tohelpinvestors,
otherparticipantsinthe
world’scapitalmarkets andotherusersoffinancial information
makeeconomic decisions.
(b) Topromote theuseandrigorous applicationofthosestandards.
(c) Infulfilling
theobjectives associated with(a)and(b),totakeaccount of,asappropriate, the
needsofa rangeofsizesandtypesofentities indiverse economicsettings.
(d) Topromote andfacilitateadoption oftheIFRSs,beingthestandards andIFRIC®
interpretationsissued bytheboard,through theconvergence ofnationalaccounting
standards andIFRSs.
TheIFRSFcomprises of22trusteesfromdiverse geographical andprofessional backgrounds.

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2.5 International Accounting Standards Board (IASB)
TheInternationalAccountingStandardsBoard(IASB) isan independent,privatelyfundedbody
whoseprincipalaimis to developa singleset of high-qualityaccountingstandards: International
FinancialReportingStandards(IFRSs).
Italso liaiseswithnationalaccountingstandard setters (forexample,the UK’sASB)to achieve
convergenceinaccountingstandards around the world.
Priorto 2003, standards wereissuedas InternationalAccountingStandards(IASs).In2003, IFRS1
was issuedand allnewstandards are nowdesignatedas IFRSs.Therefore,the termIFRSs
encompassboth IFRSsand IASsstillinforce(egIAS7 Statementof Cash Flows).
Themembersof the IASBcomefromseveralcountriesand havea varietyof backgrounds,witha
mixof auditors,preparersof financialstatements,usersof financialstatementsand academics.
TheIASBoperates underthe oversightof the IFRSFoundation.
2.6 IFRS Interpretations Committee (IFRIC)
TheIFRSInterpretationsCommittee(IFRIC) comprises14votingmembers,appointedby the
trusteesof the IFRSFoundation.
TheIFRICissuesguidance on both howto apply existingIFRSsincompanyfinancialstatements
and howto account fornewfinancialreportingissueswhereno IFRSsexists.Themembersprovide
the best availabletechnicalexpertiseand diversityof internationalbusinessand market
experiencerelatingto the applicationof IFRSsand it reportsto the IASB.
TheIFRIChas twomainresponsibilities:
• Toreview,on a timelybasis,newlyidentifiedfinancialreportingissuesnot specifically
addressed inInternationalFinancialReportingStandards;and
• Toclarifyissueswhereunsatisfactoryor conflictinginterpretationshavedeveloped,or seem
likelyto developinthe absence of authoritativeguidance,witha viewto reachinga consensus
on the appropriatetreatment.
G H

2.7 International Financial Reporting Standards Advisory Council (IFRS AC)

TheIFRSAdvisoryCouncil(IFRSAC)(formerlycalledthe StandardsAdvisoryCouncilor SAC)is
essentiallya forumused by the IASBto consultwiththe outsideworld.Itconsultswithnational
standard setters,academics,user groupsand a host of otherinterestedparties to advisethe IASB
on a range of issues,fromthe IASB’s
workprogrammefordevelopingnewIFRSsto givingpractical
adviceon the implementationof particularstandards.
TheIFRSACmeetsthe IASBat least three timesa year and puts forwardthe viewsof its members
on currentstandard-settingprojectsand advisesthe IASBon its agenda and timetablefor
developingIFRSs.

Essential reading

Thereare currently28 IASsand 16IFRSs.Afulllistcan be foundinChapter 2 of the Essential

reading(youdo not haveto learnthese).
TheEssentialreadingis availableas an Appendixof the digitaleditionof the Workbook.

2.8 Scope and application of IFRSs

Scope
Anylimitationof the applicabilityof a specificIFRSismade clearwithinthat standard. IFRSsare
not intendedto be appliedto immaterialitems,nor are they retrospective.Eachindividual
standard lays out its scope at the beginningof the standard.

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Accounting
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Application
Withineach individualcountrylocalregulationsgovern,to a greater or lesserdegree,the issueof
financialstatements.Theselocalregulationsincludeaccountingstandards issuedby the national
regulatorybodiesand/or professionalaccountancy bodiesinthe countryconcerned.
Standard setting process
TheIASBpreparesIFRSsinaccordance withdue process. Youdo not need to knowthisforyour
exam,but the followingdiagrammay be of interest.
Theprocedurecan be summarisedas follows.

IFRSFoundation Key:
(IFRSF) Appoints
(22Trustees) Reports
to
Advises

IFRSAdvisory International
Accounting IFRSInterpretations
Council StandardsBoard Committee
(IFRS
AC) (IASB) (IFRIC)

3 The role of IFRSs

IFRSsprovideguidanceas to howtransactionsand eventsshouldbe:
• Recognised– whenand whererecorded?
• Measured– what amount?
• Presented– what heading?
G
• Disclosed– what informationshouldbe showninthe notes to the accounts? H

ina set of financialstatements.

Forexample:IAS2 Inventorystates at what amounta companyshouldvalueits inventoryand
also requiresthat the financialstatementsbreakdownthe inventoryfigurebetweenits
componentssuch as rawmaterials,workinprogressand finishedgoods.
Ifa companyfollowsthe relevantaccountingstandards, its financialstatementsshouldshowa
true and fairview.
Activity 1: The role of the IFRSF

Whatis the roleof the InternationalFinancialReportingStandardsFoundation?

 Toappointthe membersof the IASB
 Toadvisethe IASBon newaccountingstandards they shouldconsiderissuing
 Togiveguidanceto businessesregardinghowto apply accountingstandards intheirfinancial
statements
 ToissueInternationalFinancialReportingStandards

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