Financial Reporting standards(Reading 24)

Exercise Problems:

1.Which of the following is least likely to be a general feature underlying the preparation of financial statements within the IFRS Conceptual Framework?

A. Matching.

B. Materiality.

C. Accrual basis.

Ans: A.

The IFRS Conceptual Framework specifies a number of general features underlying the preparation of financial statements, including materiality and accrual basis. Matching is not one of those general features; it is a general principle of expense recognition.

The general features for preparing financial statements are stated in IAS No. 1:

·         Fair presentation

·         Going concernbasis

·         Accrual basis

·         Consistency

·         Materiality

·         Aggregation

·         No offsetting

·         Reporting frequency (must be at least annually)

·         Comparative information

·          

2. Under the IASB Conceptual Framework, one of the qualitative characteristics of useful financial information is that different knowledgeable users would agree that the information is a faithful representation of the economic events that it is intended to represent. This characteristic is best described as:

A. verifiability.

B. comparability.

C. understandability.

Ans: A.

Under the International Accounting Standards Board’s Conceptual Framework, verifiability is the qualitative characteristic that means that different knowledgeable and independent users would agree that the information presented faithfully represents the economic events that it is intended to represent.

B is incorrect. Comparability: financial statement presentation should be consistent among firms and across time periods.

C is incorrect. Understandability: users with a basic knowledge of business and accounting and who make a reasonable effort to study the financial statements should be able to readily understand the information the statements present. Useful information should not be omitted just because it is complicated.

3.Which of the following statements best describes the role of the International Organization of Securities Commissions (IOSCO)? The IOSCO:

A. is responsible for regulating financial markets of member nations.

B. is the oversight body to which the International Accounting Standards Board (IASB) reports.

C. assists in attaining the goal of cross-border cooperation in combating violations of securities laws.

Ans: C.

To ensure consistent application of international financial standards, it is important to have uniform regulation and enforcement across national boundaries. IOSCO assists in attaining this goal of uniform regulation as well as cross-border cooperation in combating violations of securities and derivatives laws.

C is incorrect.The IOSCO is not a regulator of financial markets.

B is incorrect doesn’t need to report to IOSCO.

4. Under IFRS, which of the following is most likely one of the fundamental principles underlying the preparation of financial statements?

A. Reliability.

B. Consistency.

C. Understandability.

Ans. B.

Based on International Accounting Standard (IAS) general requirements for financial statements, fundamental principles include fair presentation, going concern, accrual basis, consistency and materiality.

A is incorrect. Reliability is a qualitative characteristic of financial information under the IFRS Framework for the Preparation and Presentation of Financial Statement (the ‘Framework’). The Framework outlines four qualitative characteristics of financial information: Understandability, Relevance, Reliability and Comparability.

C is incorrect. Understandabilityis a qualitative characteristic of financial information under the IFRS Framework for the Preparation and Presentation of Financial Statement.

5. To be recognized as a financial statement element under the IFRS Framework for the Preparation and Presentation of Financial Statements an element most appropriately needs to:

A. have a cost or value that can be measured with reliability.

B. normally be carried at historical cost, current cost or fair market value.

C. provide certainty that any future economic benefit associated with the item will flow to or from the enterprise.

Ans: A.

An item should be recognized in its financial statement element if a future economic benefit from the item (flowing to or from the firm) is probable and the item’s value or cost can be measured reliably.

B is incorrect. The amounts at which items are reported in its financial statement elements depend on their measurement base. Measurement bases include historical cost, amortized cost, current cost, realizable value, present value and fair value. But measurement base is not a requirement an item needs to satisfy to be reported on the financial statements.

C is incorrect. An item should be recognized in its financial statement element if a future economic benefit from the item (flowing to or from the firm) is probable. Certainty is not a requirement for economic benefits associated with an item to flow to or from the enterprise.

6. According to the IFRS framework, which of the following is the least likely qualitative characteristic that makes financial information useful?

A. Materiality.

B. Comparability.

C. Understandability.

Ans: A.

The four principal qualitative characteristics that make financial information useful are understandability, relevance, reliability and comparability. Materiality relates to the level of detail of the information needed to achieve relevance – whether the omission or misstatement of the information would impact the decision maker's decision.

B is incorrect. Comparability is one of the qualitative characteristics.

Comparability – financial information should be consistent from period to period and should be comparable between companies.

C is incorrect. Understandability is one of the qualitative characteristics.

Understandability – financial statement should be understandable to users with basic business, accounting, and economic knowledge who are willing to study the information.

7. Which of the following is a constraint as defined in the International Financial Reporting Standards (IFRS) Framework for the Preparation and Presentation of Financial Statements?

A. Neutrality

B. Timeliness

C. Going concern

Ans: B.

There are three primary financial reporting constraints: (1) trade offs desirable characteristics (e.g. timeliness and accuracy), (2) cost/benefit of providing the information, and (3) omission of nonquantifiable information.

A is incorrect. Neutrality is a factor that contributes to reliability. (The IFRS framework identifies five factors that contribute to reliability: faithful representation, substance over form, neutrality, prudence and completeness. Consistency is not one of them.)

C is incorrect. Going concern is an important underlying assumption of financial statements. (the other assumption is accrual accounting)

8. According to the International Financial Reporting Standards framework, which of the following qualities of financial information is least likely to improve its reliability?

A. Neutrality

B. Consistency

C. Substance over form

Ans: B.

The IFRS framework identifies five factors that contribute to reliability: faithful representation, substance over form, neutrality, prudence and completeness. Consistency is not one of them.

But any effective financial accounting framework, including IFRS and U.S.GAAP, should have the characteristics of transparency, comprehensiveness and consistency.

9. Under International Financial Reporting Standards (IFRS) the preparation of a complete set of financial statements is best described as a(n):

A. objective of financial reporting.

B. general requirement for financial statements.

C. qualitative characteristic of the IFRS Framework.

Ans: B.

The preparation of a complete set of financial statements is a general requirement for financial statements.

A is incorrect. According to the IASB Conceptual Framework for Financial Reporting 2010 (the “Framework”), the objective of financial reporting is to provide information about the firm to current and potential investors and creditors that is useful for making their decisions about investing in or leading to the firm.

C is incorrect. The Framework outlines four qualitative characteristics of financial information: understandability, relevance, reliability and comparability.

10. The settlement value for a liability is best described as:

A. the amount of proceeds received in exchange for the obligation.

B. the discounted value of the future cash flows that are required to satisfy the obligation.

C. the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the obligation.

Ans: C.

The settlement value for a liability is the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

11. Financial reporting standards are most likely enforced by:

A. both standard-setting bodies and regulatory bodies.

B. regulatory authorities, such as the SEC and IOSC, only.

C. standard-setting bodies, such as the FASB and IASB, only.

Ans: B.

Generally, standard setting bodies make the rules and regulatory authorities enforce the rules.

12. Which of the following is least likely to be a characteristic of an effective financial reporting framework?

A. Consistency.

B. Comparability.

C. Comprehensiveness.

Ans: B.

The characteristics of a coherent financial reporting network are transparency, comprehensiveness and consistency. Comparability (along with understandability, relevance, and reliability) is a qualitative characteristic of financial statements.

13. Accounting to the International Accounting Standards Board’s Conceptual Framework for Financial Reporting, the two fundamental qualitative characteristics that make financial information useful are best described as:

A. timeliness and accrual accounting

B. understandability and verifiability

C. relevance and faithful representation

Ans: C.

Relevance and faithful representation are the two fundamental qualitative characteristics that make financial information useful according to the IASB Conceptual Framework.

14. Which of the following statements is most accurate respect to financial reporting requirements?

A. Regulatory authorities are typically private sector, self-regulated organizations.

B. Standard-setting bodies have authority because they are recognized by regulatory agencies.

C. The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of standard-setting bodies.

Ans: B.

Without the recognition of the standards by the regulatory authorities, such as the U.S. Securities and Exchange Commission, the private sector standard-setting bodies, such as U.S.FASB, would have no authority.

A is incorrect. Regulatory authorities are government agencies that have the legal authority to enforce compliance with financial reporting standards.

C is incorrect. Standard-setting bodies are professional organizations of accountants and auditors that establish financial reporting standards.

15. Under IFRS, the preparation of a complete set financial statement is best describe as a(n):

A. objective of financial reporting.

B. general requirement of financial statements.

C. qualitative characteristic of the IFRS Framework.

Ans: B.

The preparation of a complete set of financial statements is a general requirement of financial statements.

A is incorrect. According to the IASB Conceptual Framework for Financial Reporting 2010, the objective of financial reporting is to provide information about the firm to current and potential investors and creditors that is useful for making their decisions about investing in or lending to the firm.

C is incorrect. The Framework outlines four qualitative characteristics of financial information: Understandability, Relevance, Reliability and Comparability.

16. Which of the following is least likely to be considered a barrier to developing one universally recognized set of reporting standards?

A. Differences of opinion among various regulatory bodies.

B. Reluctance of rims to adhere to a single set of reporting standards.

C. Political pressure from stakeholders affected by reporting standards.

Ans: B.

Firms usually support the idea of having a single set of reporting standards because having one set of standards would reduce the cost and the time spent on reporting. Disagreement among different standard-setting bodies and regulatory authorities does hamper agreement on a single set of standards, as does political pressure from business groups and other who would be affected by changes in reporting standards.

17. Which of the following is least likely to be considered an objective of financial market regulation according the International Organization of Securities Commissions (IOSCO)?

A. Reduce systemic risk.

B. Ensure the fairness, efficiency and transparency of markets.

C. Develop individual financial regulatory standards for each country to reflect the unique needs of each market.

Ans: C.

The three objectives of financial market regulation according to IOSCO are to (1) protect investors; (2) ensure the fairness, efficiency and transparency of markets; (3) reduce systemic risk. Because of the increasing globalization of securities markets, IOSCO seeks to arraign uniform financial regulations across countries.

18. The two primary assumptions in preparing financial statements under IFRS are:

A. accrual and going concern.

B. reasonable accuracy and accrual.

C. going concern and reasonable accuracy.

Ans: A.

In the IFRS framework, the two assumptions that underlie the preparation of financial statements are the accrual basis and the going concern assumption.