Chapter 2 – The IFRS Framework Page 28
11 Self Test Questions
Chapter 2
1. Which ONE of the following statements best describes the term liability?
A
An excess of equity over current assets
B
Resources to meet financial commitments as they fall due
C The residual interest in the assets of the entity after deducting all its
liabilities
D
A present obligation of the entity arising from past events
2. Are the following statements regarding the term profit true or false?
1 Profit is any amount over and above that required to maintain the capital at the beginning of the period.
2 Profit is the residual amount that remains after expenses have been deducted from income.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D
True True
3. Which ONE of the following statements best describes the term financial
position?
A
The net income and expenses of an entity
B
The net of financial assets less liabilities of an entity
C The potential to contribute to the flow of cash and cash equivalents to
the entity
D
The assets, liabilities and equity of an entity
4. Which ONE of the following statements best describes the term going
concern?
A When current liabilities of an entity exceed current assets
B
The ability of the entity to continue in operation for the foreseeable future
C The potential to contribute to the flow of cash and cash equivalents to
the entity
D The expenses of an entity exceed its income
Chapter 2 – The IFRS Framework Page 29
5. Which ONE of the following terms best describes the relationship of the
assets, liabilities and equity of an entity?
A
Financial performance
B
Financial position
C Future economic benefit
D
Obligation
6. Which ONE of the following terms best describes assets recorded at the
amount that represents the immediate purchase cost of an equivalent asset?
A Historical cost
B Realisable value
C
Present value
D Current cost
7. Which ONE of the following is true of the qualitative characteristic of
understandability in relation to information in financial statements?
A
Users should be willing to study the information with reasonable diligence
B Users are expected to have significant business knowledge
C
Financial statements should exclude complex matters
D
Financial statements should be fee from material error
8. Which ONE of the following terms best describes information in financial
statements that is neutral?
A Understandable
B
Reliable
C Relevant
D
Unbiased
9. Which ONE of the following terms best describes the amount of cash or cash
equivalents that could currently be obtained by selling an asset in an orderly disposal?
A Fair value
B
Realisable value
C
Residual value
D Value in use
Chapter 2 – The IFRS Framework Page 30
10. Which ONE of the following terms best describes financial statements whose
basis of accounting recognises transactions and other events when they occur?
A
Accrual basis of accounting
B Going concern basis of accounting
C
Cash basis of accounting
D
Invoice basis of accounting
11. Which ONE of the following is the best description of reliability in relation to
information in financial statements?
A Influence on the economic decisions of users
B
Inclusion of a degree of caution
C Freedom from material error
D Comprehensibility to users
12. Which ONE of the following terms best describes information that influences
the economic decisions of users?
A
Reliable
B Prospective
C
Relevant
D
Understandable
13. Are the following statements regarding recognition true or false?
1 Recognition is the process of incorporating in the financial statements
an item that meets the definition of an element. 2
Recognition is the process of determining the amounts at which elements of the financial statements are to be recognised.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D True
True
14. According to the IASB Framework for the preparation and presentation of
financial statements, which TWO of the following are examples of expenses?
A
A loss on the disposal of a non-current asset
B
A decrease in equity arising from a distribution to equity participants
C A decrease in economic benefits during the accounting period
D
A reduction in income for the accounting period
Chapter 2 – The IFRS Framework Page 31
15. IFRSs approved by the IASB include paragraphs in bold type and plain text.
In relation to the IFRS paragraphs in bold type, are the following statements true or false?
1 Bold-type paragraphs should be given greater authority than the
paragraphs in plain text. 2
Bold-type paragraphs indicate the main principles of the standard. Statement 1
Statement 2
A
False False
B False
True
C
True False
D
True True
16. Financial statements include a statement of financial position, a statement of
comprehensive income and a statement of changes in equity. According to the Preface to international financial reporting standards, which
TWO of the following are also included within the financial statements?
A A statement of cash flows
B
Accounting policies
C An auditors report
D A directors report
17. As regards the relationship between IFRSs and the Framework for the
preparation and presentation of financial statements, are the following statements true or false?
1 The Framework is a reporting standard.
2 In cases of conflict, the requirements of the Framework prevail over
those of the relevant IFRS. Statement 1
Statement 2
A
False False
B False
True
C
True False
D
True True
Chapter 2 – The IFRS Framework Page 32
18. Which TWO of the following are listed in the IASB Framework as underlying
assumptions regarding financial statements?
A
The financial statements are reliable
B
Any changes of accounting policy are neutral
C The financial statements are prepared under the accrual basis
D
The entity can be viewed as a going concern
19. Which TWO of the following statements concerning the provisions of the IASB
Framework are correct?
A The Framework provides that transactions must be accounted for in
accordance with their legal form
B
Primary responsibility for the preparation and presentation of the financial statements of the entity rests with management
C Financial statements must not exclude complex matters in order to
achieve understandability
D Where any conflict arises between the Framework and an IAS, the
requirements of the Framework prevail
20. According to the IASB Framework, which TWO of the following characteristics
are described as principal qualitative characteristics that make the information provided in financial statements useful to users?
A Going concern
B
Relevance
C Accrual
D Understandability
21. Which of the following statements about the IASB Framework are correct?
1 The Framework deals with the qualitative characteristics of financial
statements. 2
The Framework normally prevails over International Accounting Standards where there is a conflict between the two.
3 The Framework deals with the objectives of financial statements.
A All of them
B
Statement 1 and Statement 3 only
C
Statement 2 and Statement 3 only
D Statement 1 and Statement 2 only
Chapter 2 – The IFRS Framework Page 33
22. Which TWO of the following are roles of the International Accounting
Standards Committee Foundation?
A
Issuing International Financial Reporting Standards
B
Determining the basis of funding the standard-setting process
C Reviewing broad strategic issues affecting accounting standards
D
Providing technical advice to other IASB bodies
23. Which TWO of the following are parts of the due process of the IASB in
issuing a new International Financial Reporting Standard?
A Establishing an advisory committee to give advice
B Reviewing compliance and enforcement procedures
C
Issuing an interpretation as authoritative interim guidance
D Developing and publishing a discussion document for public comment
Chapter 3 – Presentation of Financial Statements Page 35
Chapter 3 PRESENTATION OF FINANCIAL STATEMENTS
1 Business Context
To ensure that financial statements are prepared to an adequate level it is important that entities are provided with a basic framework for the preparation of their financial statements.
Financial statements should provide users with relevant information. To meet this requirement a number of key statements have been identified which allow users to assess the financial
performance and position of an entity as well as its liquidity. The broad structure of financial statements is standardised so that this information is presented in a similar manner by all
entities, allowing meaningful comparisons to be made across different entities.
Although a basic framework has been identified in IAS 1 Presentation of financial statements, entities also have the flexibility to adapt formats and headings to present their information in a
way that aids understanding.
2 Chapter Objectives
This chapter deals with: the purpose of financial statements;
what makes up a complete set of financial statements; the overall considerations when preparing financial statements; and
the content of each element within the financial statements. On completion of this chapter you should be able to:
identify each element of a complete set of financial statements and the items which must appear in each one;
demonstrate an understanding of the key concepts of fair presentation, going concern, accrual, consistency, materiality, aggregation and offsetting; and
demonstrate a knowledge of which items should be presented in each statement and which can be presented in the notes.
3 Objectives, Scope and Definitions of IAS 1
The purpose of financial statements is to provide information about financial position, financial performance and cash flows.
The objective of IAS 1 is to set out the basis for the presentation of financial statements and to ensure comparability with previous periods and with other entities. The standard identifies a
minimum content of what should be included in a set of financial statements as well as guidelines as to their structure, although rigid formats are not prescribed. Examples of the key
statements are presented in an appendix to IAS 1, but are clearly identified as being for illustrative purposes only.
IAS 1 applies to all general purpose financial statements prepared and presented in accordance with international standards. [IAS 1.2]
Chapter 3 – Presentation of Financial Statements Page 36
“General purpose” financial statements are statements that have been prepared for use by those who are not in a position to require an entity to prepare reports tailored to their own
information needs. Reports prepared at the request of an entity’s management or bankers are not general purpose financial statements, because they are prepared specifically to meet the
needs of managementbankers.
IAS 1 requires that the financial statements should be presented at least annually. If, for example, the entity changes its year end and therefore reports a shorter or longer period, the
entity should explain why such a change has been made. Where a shorter or longer period is reported, comparative information will not be entirely comparable and it is important that this
is clearly highlighted. [IAS 1.36]
A revised version of IAS 1 was issued in 2007, although its adoption is only mandatory for accounting periods beginning on or after 1 January 2009.
The main objective of the IASB in revising IAS 1 was to aggregate information in the financial statements on the basis of similar characteristics i.e. to present transactions with
shareholders in their capacity as owners of the entity separately from other transactions. As part of the IASB’s commitment to the convergence of US and international accounting
standards, the IASB also adopted a similar presentation of the statement of comprehensive income as required by the US standard, SFAS 130, in its revised standard.
As discussed below, the revised version of IAS 1 permits a choice of how to present comprehensive income by using either a single statement or two separate statements. This
manual has been written based on the approach that an entity will present a single statement of comprehensive income rather than two separate statements.
The rest of this chapter is based on the 2007 revised version of IAS 1.
4 The Complete Set of Financial Statements
As well as setting out what makes up a complete set of financial statements, as shown below, IAS 1 also highlights items that have been identified as being of significant importance and
therefore should be disclosed in a particular statement, for example the statement of financial position.
Complete set of financial statements [IAS 1.10]
Statement of financial
position Statement of
comprehensive income
Statement of changes in
equity Statement of
cash flows Notes
Assets, liabilities
equity Income
including gains and
expenses including
losses All changes
in equity Summary of
major cash inflows and
outflows dealt with in
IAS 7 Significant
accounting policies and
other explanatory
notes
IAS 1 requires the individual components of the financial statements to be presented with equal prominence in an entity’s complete set of financial statements. [IAS 1.11]
Although the financial statements may be included as part of a wider document, IAS 1 requires that they should be clearly identified and distinguished from other information
Chapter 3 – Presentation of Financial Statements Page 37
presented, to ensure that there is no confusion over what is within their scope. Additional information is identified in IAS 1 as being important to ensure the correct interpretation of
information presented. Such information includes, for example, the name of the reporting entity, whether the financial statements are for an individual entity or a group, the period
which the financial statements cover, the currency used to present the financial statements and the level of rounding used, for example, thousands or millions. [IAS 1.51]
4.1 The statement of financial position
Although no prescribed format for the statement of financial position is required by IAS 1, it does set out the minimum information which is required to be presented in the statement, as
set out below: [IAS 1.54]
property, plant and equipment; investment property;
intangible assets; financial assets not disclosed in other headings below;
investments accounted for using the equity method; biological assets;
inventories; assetsdisposal groups classified as held for sale;
trade and other receivables; cash and cash equivalents;
liabilities included in disposal groups classified as held for sale; trade and other payables;
provisions; financial liabilities not disclosed in other headings above;
liabilities and assets for current tax; deferred tax liabilities and assets;
non-controlling interest, presented within equity; and issued capital and reserves attributable to owners of the parent.
The above information is considered to be sufficiently different in nature or function to warrant separate presentation. The descriptions used and the ordering of items may be amended if by
doing so the new presentation provides more relevant information to the users of the financial statements. Additional line items, headings and subtotals should be added where relevant to
the understanding of the financial statements. Generally an entity will separate current and non-current assets and liabilities see below for information on these categorisations in the
statement of financial position. Where this presentation is followed, IAS 1 specifically states that deferred tax balances should be reported as non-current items. [IAS 1.55, 1.56]
Further sub-classifications of headings should be presented either in the statement of financial position or within the notes and are generally necessary to meet the requirements of
Chapter 3 – Presentation of Financial Statements Page 38
other standards. For example, IAS 16 Property, plant and equipment requires information to be disaggregated into classes of assets, for example freehold buildings, plant and machinery
and office equipment.
IAS 1 also requires that specific information is presented in relation to the share capital of the entity. These disclosures include identifying: [IAS 1.79]
the number of shares authorised; the number of shares issued and fully paid, and issued but not fully paid; and
the par nominal value per share, or that the shares have no par value. In addition, a full reconciliation of the movement during the year in the number of shares
outstanding is required, specifying any rights, preferences and restrictions attaching to the shares. Disclosure should also be made of any shares in the entity, held by the entity or by its
subsidiaries or associates and any shares reserved for issue under options and contracts for the sale of shares.
Where an entity does not have share capital, equivalent information should be disclosed. An illustrative statement of financial position is set out in the Guidance accompanying the
standard.
4.2 The statement of comprehensive income
IAS 1 states that, as a minimum, the following information is required to be presented in the statement of comprehensive income for the period: [IAS 1.82, 1.83]
revenue; finance costs;
share of the profit or loss of associates and joint ventures accounted for using the equity method;
tax expense; an aggregate figure for the profit or loss of discontinued operations and the gain or
loss in relation to the remeasurement, or disposal, of discontinued operations; profit or loss;
share of other comprehensive income of associates and joint ventures accounted for using the equity method;
each component of other comprehensive income classified by nature; total comprehensive income;
the profit or loss attributable to non-controlling interest and that attributable to owners of the parent; and
the total comprehensive income attributable to non-controlling interest and that attributable to owners of the parent.
Other comprehensive income comprises items of income and expense which are not required by other IFRS to be recognised in profit or loss. Examples are changes in revaluation surplus
measured in accordance with IAS 16 or IAS 38 Intangible assets, actuarial gains and losses on defined benefit plans measured in accordance with IAS 19 Employee benefits and gains
