SAMPLE-FAR-IFRS Workbook

The Institute of Chartered Accountants in England and Wales
Financial Accounting
and Reporting − IFRS
Workbook
For exams in 2021
icaew.com
Financial Accounting and Reporting - IFRS
The Institute of Chartered Accountants in England and Wales
ISBN: 9781-5097-3564-8
Previous ISBN: 9781-5097-2734-6
e-ISBN: 9781-5097-3482-2
First edition 2013
Ninth edition 2020
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, graphic, electronic or
mechanical including photocopying, recording, scanning or otherwise, without the
prior written permission of the publisher.
The content of this publication is intended to prepare students for the ICAEW
examinations, and should not be used as professional advice.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Contains public sector information licensed under the Open Government Licence
v3.0
Originally printed in the United Kingdom on paper obtained from traceable,
sustainable sources.
The publishers are grateful to the IASB for permission to reproduce extracts from
the International Financial Reporting Standards including all International
Accounting Standards, SIC and IFRIC Interpretations (the Standards). The
Standards together with their accompanying documents are issued by:
The International Accounting Standards Board (IASB)
30 Cannon Street, London, EC4M 6XH, United Kingdom.
Email: info@ifrs.org Web: www.ifrs.org
Disclaimer: The IASB, the International Financial Reporting Standards (IFRS)
Foundation, the authors and the publishers do not accept responsibility for any
loss caused by acting or refraining from acting in reliance on the material in this
publication, whether such loss is caused by negligence or otherwise to the
maximum extent permitted by law.
Copyright © IFRS Foundation
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Further details of the Trade Marks including details of countries where the Trade
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© ICAEW 2020
Contents
Welcome to ICAEW iv
Financial Accounting and Reporting: IFRS v
Permitted texts vii
Key resources viii
Skills within the ACA x
1 Reporting framework and ethics 1

2 Format of financial statements 55
3 Reporting financial performance 125
4 Property, plant and equipment 183
5 Intangible assets 247
6 Revenue and inventories 281
7 Leases 323
8 Financial instruments 361
9 Other standards 395
10 Group accounts: basic principles 455
11 Consolidated statement of financial position 515
12 Consolidated statements of financial performance 563
13 Associates and joint ventures 605
14 Group accounts: disposals 653
15 Group statement of cash flows 683
16 UK GAAP – FRS 102 721
Model financial statements (IFRS) 767

Glossary of terms 777
Index 791
Questions within the Workbook should be treated as preparation questions, providing you with a
firm foundation before you attempt the exam-standard questions. The exam-standard questions are
found in the Question Bank.
ICAEW 2021 Contents iii

Welcome to ICAEW
I’d like to personally welcome you to ICAEW.
In a fast-changing and volatile world, the role of the accountancy profession has never been more
important.
As an ICAEW Chartered Accountant, you will make decisions that will define the future of global
business.
By choosing our world-leading chartered accountancy qualification, the ACA, you will acquire
exceptional knowledge and skills – with technology and ethics at the heart of your learning. A focus
on capabilities such as judgement and scepticism will enable you to make the right decisions in
diverse and often complex environments.
You will be equipped to flourish and to lead in areas that are transforming the business landscape.
This includes embracing technological change and harnessing digital disruption, to help our
profession deliver greater value. It also includes putting climate change and sustainability at the heart
of business strategy. We will equip you to be adaptable and agile in your work and all within a set of
values fundamental to trust and transparency, which will set you apart from others.
Joining over 186,500 ICAEW Chartered Accountants and students worldwide, you are now part of a
global community. This unique network of talented and diverse professionals work in the public
interest to build economies that are sustainable, accountable and fair.
You are also joining a community of 1.8m chartered accountants and students as part of Chartered
Accountants Worldwide – a family of leading institutes, of which we are a founder member.
ICAEW will support you through your studies and throughout your career: this is the start of a lifetime
relationship, and we will be with you every step of the way to ensure you are ready to face the
challenges of the global economy. Visit page viii to review the key resources available as you study.
With our training, guidance and support, you will join our members in realising your career
ambitions, developing world-leading insights and maintaining a competitive edge.
We will create a world of strong economies, together.
I wish you the best of luck with your studies.
Michael Izza
Chief Executive
ICAEW
iv Financial Accounting and Reporting − IFRS ICAEW 2021

Financial Accounting and Reporting: IFRS
If you are studying this exam as part of the ACA qualification go to icaew.com/examresources or if
you are studying the ICAEW CFAB qualification go to icaew.com/cfabstudents.
Module aim
To enable students to prepare complete single entity and consolidated financial statements, and
extracts from those financial statements, covering a wide range of International Financial Reporting
Standards (IFRS).
Students will also be required to explain accounting and reporting concepts and ethical issues, and
the application of IFRS to specified single entity or group scenarios.
On completion of this module, students will be able to:
• explain the contribution and inherent limitations of financial statements, apply the International
Accounting Standards Board’s (IASB) conceptual framework for financial reporting and identify
and explain key ethical issues;
• prepare and present financial statements from accounting data for single entities in conformity
with IFRS and explain the application of IFRS to specified single entity scenarios;
• identify the circumstances in which entities are required to present consolidated financial
statements, prepare and present them in conformity with IFRS and explain the application of IFRS
to specified group scenarios; and
• describe the principal differences between IFRS and UK GAAP and prepare simple extracts from
financial statements in accordance with UK GAAP, for both single entity and consolidated financial
statements.
Learning outcomes apply to non-specialised profit-oriented entities unless otherwise specified.
Method of assessment
The Financial Accounting and Reporting: IFRS module exam is 3 hours long. The exam contains four
written test questions. Students may use the permitted text(s) as detailed on the ICAEW website,
icaew.com/permittedtexts
The module will include questions on:
(a) preparation of single entity financial statements (excluding statement of cash flows) from trial
balance;
(b) preparation of consolidated financial statements (excluding consolidated statement of cash
flows) from single entity financial statements; and
(c) explanation of the application of IFRS to specified scenarios, with supporting calculations.
Other question types could include:
(a) preparation of a full consolidated statement of cash flows, or extracts from consolidated financial
statements, or preparation of revised extracts from a draft consolidated statement of cash flows;
and
(b) mixed or single topic questions requiring extracts from single entity or consolidated financial
statements (including from statement of cash flows) and/or explanation of financial reporting
treatment with supporting calculations and/or calculations of specified figures.
Concepts, ethics and UK GAAP will be tested in any of the questions.
Ethics and professional scepticism

Ethical thinking must be the mainstay for honest, true, fair and prudent financial accounting and
reporting. The ability to identify and explain ethical issues is examined specifically under the syllabus
area ‘Accounting and reporting concepts and ethics’. Over and above this ethical thinking and
professional scepticism will be required to be applied in the exercise of all judgements.
ICAEW 2021 Introduction v

Specification grid
This grid shows the relative weightings of subjects within this module and should guide the relative
study time spent on each. Over time the marks available in the assessment will equate to the
weightings below, while slight variations may occur in individual assessments to enable suitably
rigorous questions to be set.
Syllabus area Weighting (%)
Accounting and reporting concepts and ethics 10
Single entity financial statements 60
Consolidated financial statements 30
vi Financial Accounting and Reporting − IFRS ICAEW 2021

Permitted texts
At the Professional and Advanced Levels there are specific texts that you are permitted to use during
your exam. All information for these texts is available on icaew.com/permittedtexts.
Professional level exams Permitted text
Audit and Assurance 
Financial Accounting and Reporting 
Tax Compliance 
Business Strategy and Technology x
Financial Management x
Business Planning No restrictions
Advanced Level exams
Corporate Reporting No restrictions
Strategic Business Management No restrictions
Case Study No restrictions
The exams which have no restrictions include the following:

• Business Planning: Banking;
• Business Planning: Insurance;
• Business Planning: Taxation;
• Corporate Reporting;
• Strategic Business Management; and
• Case Study.
This information, as well as what to expect and what is and is not permitted in each exam is available
in the Instructions to Candidates. You will be sent the instructions with your exam admission details.
They can also be viewed on our website at icaew.com/exams.
ICAEW 2021 Introduction vii

Key resources
Whether you’re studying the ACA qualification with an employer, at university, independently (self-
studying), or as part of an apprenticeship, we provide a wide range of resources and services to help
you in your studies.
Take a look at the online exam resources available to you on icaew.com/examresources and discover
more resources and services at icaew.com/studentbenefits.
Syllabus, skills development and technical knowledge grids

This syllabus presents the learning outcomes for each exam and should be read in conjunction with
the relevant technical knowledge grids and, where applicable, the skills development grids.
Exam support
A variety of exam resources and support have been developed on each exam to help you on your
journey to exam success. This includes exam guidance, sample exams, hints and tips from examiners
and tutors, on-demand webinars and articles.
Past exams and mark plans

Use past exams to practise answering questions. The mark plans will help you check your answers.
The past exams and mark plans are included in your Question Bank and have been updated to
reflect the 2021 legislation and syllabus.
Errata sheets
These documents will correct any omissions within the learning materials once they have been
published. You should refer to them when studying.
Exam software
It is vital that you are familiar with the exam software before you take your exam. Access a variety of
resources, including the practice software and sample exams at icaew.com/studentresources.
Student support team

Our student support team is here to help and advise you, so do not hesitate to get in touch. Email
studentsupport@icaew.com or call +44 (0)1908 248 250. If you are browsing our website, look out
for the live help boxes. You will be able to speak directly to an adviser. Mia, our ChatBot, is also on
hand to answer your queries.
Online student community

The online student community is the place where you can post your questions and share your study
tips. Join the conversation at icaew.com/studentcommunity.
ICAEW Quarterly and Student Insights

As an ACA student, you will also receive a copy of our member magazine, Quarterly. Read more at
icaew.com/insights.
You’ll also be able to access our practical and topical student content on our dedicated online
student hub, Student Insights.
You’ll find new-look features, interviews and guides giving you fresh insights, innovative ideas and an
inside look at the lives and careers of our ICAEW students and members. No matter what stage
you’re at in your journey with us, you’ll find content to suit you.
Tuition
The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core
principles of quality course delivery. If you are not receiving structured tuition and are interested in
doing so, take a look at ICAEW recognised Partner in Learning tuition providers in your area at
icaew.com/dashboard.
viii Financial Accounting and Reporting − IFRS ICAEW 2021

CABA
It can be tough juggling your studies with work, planning for the future and finding time to unwind.
CABA are an independent charity that supports the well-being of the chartered accountant
community. So, if you need support at home or at work, CABA is there for you. They provide
information, advice and lifelong support to ACA students across the world face-to-face, over the
phone and online. All their services are completely free and strictly confidential. Find out more at
caba.org.uk.
ICAEW Business and Finance Professional (BFP)

ICAEW Business and Finance Professional (BFP) is an internationally recognised designation and
professional status. It demonstrates your business knowledge, your commitment to professionalism
and that you meet the standards of a membership organisation. Once you have completed the
ICAEW CFAB qualification or the ACA Certificate Level, you are eligible to apply towards gaining BFP
status. Start your application at icaew.com/becomeabfp.
ICAEW 2021 Introduction ix

Skills within the ACA
Professional skills are essential to accountancy and your development of them is embedded
throughout the ACA qualification.
The level of competency required in each of the professional skills areas to pass each module exam
increases as ACA trainees progress upwards through each Level of the ACA qualification. The skills
progression embedded throughout the ACA qualification ensures ACA trainees develop the
knowledge and professional skills necessary to successfully operate in the modern workplace and
which are expected by today’s forward-thinking employers.
The following professional skills areas are present throughout the ACA qualification.
Skill area Overall objective
Assimilating and using Understand a business or accounting situation, prioritise by

information determining key drivers, issues and requirements and identify any
relevant information.
Structuring problems and Structure information from various sources into suitable formats for
solutions analysis and provide creative and pragmatic solutions in a business
environment.
Applying judgement Apply professional scepticism and critical thinking to identify faults,
gaps, inconsistencies and interactions from a range of relevant
information sources and relate issues to a business environment.
Concluding, Apply technical knowledge, skills and experience to support

recommending and reasoning and conclusion and formulate opinions, advice, plans,
communicating solutions, options and reservations based on valid evidence and
communicate clearly in a manner suitable for the recipient.
The following provides further detail on the professional skills that you will develop in this particular
module. To see the full skills development grids, please go to icaew.com/examresources.
Assimilating and using information
Understand the situation and the requirements
• Demonstrate understanding of the business context
• Recognise new and complex ideas within a scenario
• Explain different stakeholder perspectives and interests
• Explain ethical issues within given scenarios
Identify and use relevant information
• Interpret information provided in various formats
• Evaluate the relevance of information provided
• Filter information provided to identify critical facts
Identify and prioritise key issues and stay on task
• Identify business and financial issues from a scenario
• Prioritise key issues
• Work effectively within time constraints
• Operate to a brief in a given scenario
How skills are assessed: students may be required to:
• Explain the inherent limitations of financial statements;
• Apply elements of the IASB conceptual framework;
• Recognise key ethical issues for an accountant undertaking work in accounting and reporting;
• Identify international financial reporting standards and other requirements applicable to the
financial statements (both single entity and consolidated); and
• Recognise specific issues that may arise in the context of the situation described.
x Financial Accounting and Reporting − IFRS ICAEW 2021

Structuring problems and solutions
Structure data
• Structure information from various sources into suitable formats for analysis
Develop solutions
• Identify and apply relevant technical knowledge and skills to analyse a specific problem
• Use structured information to identify evidence-based solutions
• Select appropriate courses of action using an ethical framework
• Identify the solution which is the best fit with acceptance criteria and objectives
• Apply the IASB conceptual framework to identify the financial effects of transactions;
• Apply knowledge of international financial reporting standards through explanation and
calculation;
• Prepare and present financial statements, or extracts (both single entity and consolidated) in
conformity with international financial reporting standards;
• Explain the principal differences between IFRS and UK GAAP; and
• Identify ethical issues and use ethical codes to formulate solutions and provide advice.
Applying judgement
Apply professional scepticism and critical thinking
• Recognise bias and varying quality in data and evidence
• Identify faults in arguments
• Exercise ethical judgement
Relate issues to the environment
• Identify related issues in scenarios
• Appraise ethical, public interest and regulatory issues
• Use judgement to assess the appropriate accounting treatment for transactions described in the
scenarios in respect of both single entity and consolidated financial statements; and
• Identify ethical issues and use ethical codes to formulate solutions and provide advice.
Concluding, recommending and communicating
Conclusions
• Apply technical knowledge to support reasoning and conclusions
• Use valid and different technical skills to formulate opinions, advice, plans, solutions, options and
reservations
Communication
• Present a basic or routine memorandum or briefing note in writing in a clear and concise style
• Communicate clearly to a specialist or non-specialist audience in a manner suitable for the
recipient
• Prepare the advice, report, or notes required in a clear and concise style
• Explain accounting and reporting concepts in non-technical language;
• Explain, with supporting calculations, the appropriate accounting treatment for transactions
described in the scenario (both single entity and consolidated financial statements);
• Prepare and present financial statements, or extracts (both single entity and consolidated financial
statements) in conformity with international financial reporting standards;
• Explain the principal differences between IFRS and UK GAAP; and
• Explain ethical issues and provide possible solutions.
To help you develop your ability to demonstrate competency in each professional skills area, each
chapter of this Workbook includes up to four Professional Skills Guidance points.
ICAEW 2021 Introduction xi

Each Professional Skills Guidance point focuses on one of the four ACA Professional Skills areas and
explains how to demonstrate a particular aspect of that professional skill relevant to the topic being
studied. You are advised to refer back to the Professional Skills Guidance points while revisiting
specific topics and during question practice.
xii Financial Accounting and Reporting − IFRS ICAEW 2021

Chapter 1
Reporting framework and

ethics
Introduction
Learning outcomes
Syllabus links
Examination context
Chapter study guidance
Learning topics
1 Financial statements
2 Purpose and use of financial statements
3 Bases of accounting
4 The IASB Conceptual Framework
5 The regulatory framework
6 Convergence process
7 Inherent limitations of financial statements
8 Ethical and professional issues
9 UK GAAP comparison
Summary
Self-test questions
Further question practice
Technical reference
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Explain the standard-setting process used by UK and international bodies and the authority of UK
and international standards, using appropriate examples as an illustration.
• Explain the objectives and inherent limitations of financial statements, giving appropriate
examples.
• Explain the qualitative characteristics of financial information and the constraints on such
information, using appropriate examples to illustrate the explanation.
• Identify the effects of transactions in accordance with the IASB Conceptual Framework.
• Discuss the concepts of ‘fair presentation’ and ‘true and fair view’ and the circumstances in which
these concepts may override the detailed provisions of legislation or of accounting standards.
• Explain the differences between financial statements produced using the accrual basis and those
produced using the bases of cash accounting and break-up, performing simple calculations to
illustrate the differences.
• Explain, in non-technical language, the different bases of measurement of the elements of the
financial statements, illustrating the explanation with simple calculations and examples.
• Identify and explain the ethical and professional issues for a professional accountant undertaking
work in financial accounting and reporting and identify appropriate action.
Specific syllabus references for this chapter are: 1a, 1b, 1c, 1d, 1e, 1f, 1g, 1i.
1
Syllabus links
The issues covered by this chapter and particularly the principles introduced by the IASB Conceptual
Framework are a fundamental part of the FAR syllabus.
This chapter takes your knowledge of current issues and particularly the progress of the
convergence process which aims to produce a set of global accounting standards much further.
These are areas which are also likely to be highly relevant at the Advanced Stage. The ethical
considerations at the end of the chapter are dealt with specifically here but will be pervasive across
all areas of the syllabus.
1
Examination context
Accounting and reporting concepts and ethics constitute 10% of the syllabus. Ethical thinking is
critical for true, fair and prudent financial accounting and reporting. Ethical thinking and using
professional scepticism will be required to be applied when exercising judgement.
In the examination, candidates may be required to:
• Discuss the purpose of accounting regulations and standards.
• Explain, with examples, the objectives and limitations of financial statements.
• Explain the qualitative characteristics of financial information and the constraints on such
information.
• Describe the financial effects of the application of the definitions of the IASB Conceptual
Framework.
• Perform simple calculations to demonstrate the difference between the accrual basis, cash
accounting and the break-up basis.
• Discuss and comment on the convergence process, including recent developments.
• Identify and explain the ethical and professional issues for a professional accountant.
1
2 Financial Accounting and Reporting − IFRS ICAEW 2021

Chapter study guidance
Use this schedule and your study timetable to plan the dates on which you will complete your study
of this chapter.
Topic Practical significance Study approach Exam approach Interactive

questions
1 Financial statements Approach You need to be able

All UK companies are Work through this to explain the terms
required to file introductory topic, ‘fair presentation’,
financial statements, noting in particular the and what is meant
and this topic requirements under the by having a ‘true
introduces the Companies Act 2006, and fair view’ in
regulatory and legal and ‘true and fair view’ your exam.
requirements. and the true and fair
override.
2 Purpose and use of Approach You may be asked

financial statements Ensure you can identify to explain the
Financial statements the different types of objectives of
are prepared to be users of the financial financial statements
used by a variety of statements and what and how the
stakeholders. This information they would financial statements
topic looks at these need. Consider the may be used to
users and their implications that base economic
requirements, management decisions decisions on. There
focusing on the have on the financial may be an ethical
primary users as statements, and finally, question which
identified by the understand what is looks at bias in the
Conceptual meant by financial preparation of the
Framework. performance and financial statements
financial position. or the impact of a
dominant
Stop and think shareholder. You
Consider the impact of need to be able to
pressure from identify different
stakeholders on the user groups and
preparers of the financial specify their
statements. information needs.
3 Bases of accounting Approach You may be asked

This is mainly revision The accounting bases to explain the
from your Accounting are covered in this topic differences between
studies, but here we briefly, as this will be financial statements
look in more detail at mainly revision. However, produced using the
the accounting bases it is important that you accrual basis and
in conjunction with understand how the those using the
the Conceptual accruals basis works in break up basis or
Framework. conjunction with the cash basis. As a
concept of going result of this, you
concern. need to be able to
explain the concept
of going concern.
4 The IASB Conceptual Approach You may be asked IQ1 Asset or

Framework It is essential that this to explain, in non- liability?
A key area of the topic is covered in detail. technical language, This question
syllabus as it is the Ensure that you are what is meant by requires you
framework upon aware of the the Conceptual to apply the
which financial fundamental and Framework and definition of
ICAEW 2021 1: Reporting framework and ethics 3

questions
statements and enhancing qualitative definitions of the the elements

accounting standards characteristics. qualitative to a number
are based. Stop and think characteristics. You of short
may be asked to scenarios.
As you progress through identify the different
your studies, consider elements and
the interaction of the provide examples
Conceptual Framework from the scenario
(such as definitions of and explain their
the elements and the measurement.
qualitative
characteristics) and the
accounting standards.
Remember, where the
two may differ, the IFRS
Standard takes
precedence.
5 The regulatory Approach You need to

framework You should read through understand the
This topic looks at the this short topic to objectives and
organisations understand the IASB and purpose of
responsible for its role in discussing and accounting
setting accounting publishing the IFRS standards as this
standards. Standards. The topic may arise in a
then looks at the UK question where you
specific requirements, must provide
including a review of the reasoning to a non-
key areas of UK GAAP. financial third party.
6 Convergence process Approach You will need to be

The globalisation of This topic develops your able to explain the
accounting standards understanding of the differences in
and the convergence development, and the accounting
process is of reason for, international standards between
continuing accounting standards. UK GAAP and IFRS.
importance in today’s Stop and think
international
businesses. Consider the
implications of differing
reporting methods on
international businesses
and their investors, eg
comparing US GAAP
with companies
reporting in IFRS.
7 Inherent limitations Approach This is a small area

of financial Think back to the users of the exam, but you
statements of the financial may get asked for 4-
Financial statements statements and what 5 marks about the
cannot provide all the they need to know. This impact on the users
information required topic will help highlight of the financial
by the users all the some of the problems statements. See the
time. This topic looks that users must face suggested Further
at some of the main when reviewing year end Question Practice at

questions
problems. accounts. the end of the

Stop and think chapter.
Think about information

users may need that is
not in the financial
statements and whether
it would be economical
(based on the cost
constraint) for a
company to provide it in
the accounts.
8 Ethical and Approach Ensure that you can IQ2 Ethical

professional issues Learn the fundamental identify the consideration
The ICAEW Code of principles and the five fundamental s
Ethics is a framework key threats to these principles, threats This question
of behaviours that principles as outlined in and suggest requires an
should be adopted the Code. Ensure you are safeguards relevant assessment
by all professional familiar with suggested to the given of the ethical
accountants safeguards to the scenario. In an exam problems
(including student identified threats. It is question, ensure applying to a
accountants). 10% of highly recommended that you address the short
your exam is based that you are familiar with given question and scenario.
on ethics, so ensure the recommendation avoid generic
that you are familiar and application sections answers.
with the Code. of the Code.
Stop and think
Consider how the public
may perceive
professional accountants
who do not adhere to
the Code. Consider the
Code in the light of your
role and your work.
9 UK GAAP Approach You may be asked

comparison Work through this short about differences
You are expected to topic making sure you between IFRS and
understand the key are familiar with the UK GAAP in your
differences between differences. exam on this topic.
IFRS and UK GAAP.
This is important as
most companies in
the UK prepare
financial statements
under UK GAAP.
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.

1 Financial statements
Section overview
• In the UK all companies must comply with the provisions of the Companies Act.
• In the UK financial statements must be prepared in accordance with either UK GAAP or IFRS. They
must also give a true and fair view.
1.1 Entity
Most accounting requirements are written with a view to use by any type of accounting entity,
including companies and other forms of organisation, such as a partnership. In this Workbook, the
term ‘company’ is usually used, because the main focus of the FAR syllabus is on the accounts of
companies and groups of companies.
1.2 Financial statements

The principal means of providing financial information to external users is the annual financial
statements. Financial statements provide a summary of the performance of an entity over a particular
period and of its position at the end of that period.
A complete set of financial statements prepared under IFRS comprises:
• the statement of financial position;
• the statement of profit or loss and other comprehensive income or two separate statements being
the statement of profit or loss and the statement of other comprehensive income (statements of
financial performance);
• the statement of changes in equity (another statement of financial performance);
• the statement of cash flows; and
• notes to the financial statements.
The notes to the financial statements include:
• accounting policies, ie, the specific principles, conventions, rules and practices applied in order to
reflect the effects of transactions and other events in the financial statements;
• detailed financial and narrative information supporting the information in the primary financial
statements; and
• other information not reflected in the financial statements, but which is important to users in
making their assessments.
The individual elements that are included in the financial statements are covered in detail later in this
chapter.
1.3 Requirement to produce financial statements

Limited liability companies are required by law to prepare and publish financial statements annually.
The form and content may be regulated primarily by national legislation, and in most cases must also
comply with Financial Reporting Standards.
In the UK, all companies must comply with the provisions of the Companies Act 2006 (CA 2006). The
key impact of this is as follows:
• Every UK registered company is required to prepare financial statements for each financial year
which give a true and fair view.
• The individual (and some group) financial statements may be prepared:
– in accordance with the CA 2006 (as regards format and additional information provided by
way of notes); and
– in accordance with international accounting standards.

1.4 Filing deadlines
Legal regulations concerning the financial statements of an entity are of course specific to the
country of incorporation. UK companies come under the Companies Act 2006.
The Companies Act establishes deadlines for the filing of financial statements:
• Private companies: nine months after the financial year end
• Public companies: six months after the financial year end
Listed companies are required by the Financial Conduct Authority to file their financial statements
within four months of the financial year end.
1.5 Financial reporting standards

Company financial statements must comply with relevant Financial Reporting Standards and other
professional guidance and although these learning materials assume the preparation of financial
statements in accordance with IFRS, in the UK these are as follows.
• Accounting Standards
The new UK accounting standards are:
FRS 100, Application of Financial Reporting Requirements
FRS 101, Reduced Disclosure Framework
FRS 102, The Financial Reporting Standard Applicable in the UK and Republic of Ireland
FRS 103, Insurance Contracts
FRS 104, Interim Financial Reporting
FRS 105, The Financial Reporting Standard Applicable to the Micro-entities Regime
• Financial Reporting for Smaller Entities
A new Section 1A has been added to FRS 102 setting out reporting requirements for smaller
entities. Micro-entities are now governed by FRS 105.
• International Financial Reporting Standards (IFRS)
These are issued by the International Accounting Standards Board (IASB). UK companies whose
securities are traded in a regulated public market, eg, the London Stock Exchange, must prepare
their group accounts in accordance with IFRS.
Unincorporated entities are exempt from the above requirements but may need to follow other
regulation, eg, charities must comply with the Charities Act. Charities which are companies must
prepare their financial statements in accordance with the CA 2006.
1.6 Fair presentation

IAS 1, Presentation of Financial Statements requires financial statements to ‘present fairly’ the financial
position and performance of an entity.
‘Present fairly‘ is explained as representing faithfully the effects of transactions. In general terms this
will be the case if IFRS are adhered to. IAS 1 states that departures from international standards are
only allowed:
• in extremely rare cases; and
• where compliance with IFRS would be so misleading as to conflict with the objectives of financial
statements as set out in the Conceptual Framework, that is to provide information about financial
position, performance and changes in financial position that is useful to a wide range of users.
1.7 True and fair view

In the UK there is an overriding Companies Act requirement that financial statements should present
‘a true and fair view’. This term is not defined in the Companies Act or Accounting Standards.
Truth is usually seen as an objective concept reflecting factual accuracy within the bounds of
materiality.
Fairness is usually seen as meaning that the view given is objective and unbiased.

True and fair is usually defined in terms of GAAP. This means:
• Compliance with Accounting Standards (which can be overridden on true and fair grounds only
very rarely);
• Adherence to the requirements of the Companies Act 2006, including its true and fair override
(see below); and
• In the absence of more specific requirements, application of general accounting principles and
fundamental concepts and, where appropriate, adherence to accepted industry practices.
Notes
1 The CA 2006 uses the term ‘a true and fair view’ rather than ‘the true and fair view’ because it is
possible for there to be more than one true and fair view. For example, financial statements
based on historical cost can be true and fair, as can financial statements which incorporate
revaluations.
2 What constitutes a true and fair view can then be restricted by stating that where a choice of
treatments or methods is permitted, the one selected should be the most appropriate to the
company’s circumstances. This restriction is likely to ensure compliance with the spirit and
underlying intentions of requirements, not just with the letter of them.
3 A further restriction is that financial statements should reflect the economic position of the
company, thereby reflecting the substance of transactions (ie, commercial reality), not merely
their legal form. In most cases this will be achieved by adhering to GAAP.
1.8 The statutory ‘true and fair override’

The CA 2006 requires that where compliance with its accounting rules would not lead to a true and
fair view, those rules should be departed from to the extent necessary to give a true and fair view.
Where the override of the statutory accounting requirements is invoked, eg, to comply with an
accounting standard, the Act requires disclosure of the particulars of the departure, the reason for it,
and the financial effect.
The CA 2006 also states that where compliance with its disclosure requirements is insufficient to give
a true and fair view, additional information should be disclosed such that a true and fair view is
provided.
1.9 Comparison of UK GAAP and IFRS

As ‘fair presentation’ is explained as representing faithfully the effects of transactions, there is unlikely
to be any substantial difference in practical terms between it and the true and fair concept.
Because international standards are designed to operate in all legal environments, they cannot
provide for departures from the legal requirements in any particular country. IAS 1 indicates that
there are few, if any, circumstances where compliance with IFRS will be fundamentally misleading. In
effect, UK companies applying IFRS cannot take advantage of the true and fair override.
Companies reporting under FRS 101 or FRS 102 are however reporting under the Companies Act, so
the true and fair override is still available to them.
1.10 Judgements and financial statements

Although IFRS narrows down the range of acceptable alternative accounting treatments, there are
still many areas which are left to the discretion of the directors of the company. On the whole, the
concept of faithful representation should result in transactions being ‘presented fairly’. However,
commercial and financial considerations may result in pressure being brought to bear to account for
and report transactions in accordance with their strict legal form. This can raise ethical questions for a
professional accountant.
Professional skills focus: Applying judgement
Applying professional judgement when preparing financial statements will require you to show that
you can identify and recommend the appropriate accounting treatment for the key issues in the
scenarios provided in the exam. This may also apply in your practical experience too, as you are
tasked with providing information or data to support the preparation of the financial statements. In

the ‘Explain…’ questions in your exam, you will need to demonstrate that you can appraise the ethical
or regulatory issues, especially where there may be a choice of presentation options available or
management are putting pressure on to report the results in a more favourable manner.
2 Purpose and use of financial statements

Section overview
• Financial statements are used to make economic decisions by a range of users. All users require
information regarding:
– financial position;
– financial performance;
– cash flows of an entity;
– changes in financial position; and
– financial statements which show management’s stewardship of the resources of an entity.
2.1 Objective of financial statements

The objective of financial statements is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions
relating to providing resources to the entity.
2.2 Users and their information needs

The Conceptual Framework identifies the primary users of financial statements as existing and
potential investors, lenders and other creditors. General purpose financial statements are directed at
satisfying the information needs of these primary users. However, the Conceptual Framework
acknowledges that other users (such as regulators and members of the public) may also find general
purpose financial statements useful, even though they are not primarily directed to these other
groups (Conceptual Framework: para. 1.10).
We can identify the following users of financial statements and their information needs.
Primary and other users Need information to
Existing and potential • Make decisions about buying, selling or holding equity and debt
investors instruments and how to exercise their right to vote, therefore
need information on:
– Risk and return on investment
– Ability of the entity to pay dividends
– How effectively management are using the resources of the
entity and how it may affect future cash flows.
Lenders • Assess how efficiently management use the entity’s resources to

service any existing or proposed debt and the related interest.
• Assess security for amounts loaned to the entity.
Other creditors • Assess the likelihood of being paid when due; and
• Assess whether any claims against the entity may affect its ability
to service any credit extended to them.
Employees • Assess their employer’s stability and profitability

• Assess their employer’s ability to provide remuneration,
employment opportunities and retirement and other benefits

Primary and other users Need information to
Customers Assess whether the entity will continue in existence – important

where customers have a long-term involvement with, or are
dependent on, the entity, eg, where there are product warranties or
where specialist parts may be needed.
Governments and their • Assess allocation of resources and, therefore, activities of entities
agencies • Assist in regulating activities
• Assess taxation and determine taxation policies
• Provide a basis for national statistics
The public Assess trends and recent developments in the entity’s prosperity and
its activities – important where the entity makes a substantial
contribution to a local economy, eg, by providing local employment
and using local suppliers.
Management may also use the financial statements to help determine distributable profits and
dividends.
In most cases the users will need to analyse the financial statements in order to obtain the
information they need. This is likely to include the calculation of accounting ratios but increasingly
involves the interpretation of non-financial information. (The calculation of accounting ratios and the
analysis of those ratios is covered in the Advanced syllabus.)
The Conceptual Framework does, however, state that general purpose financial statements cannot
provide all of the information that users may want. Therefore users must also consider other
information, such as the current industrial trends for that business, political climate and issues and
general economic conditions.
2.3 Accountability of management

Management also has a stewardship role, in that it is accountable for the safe-keeping of the entity’s
resources and for their proper, efficient and profitable use. Providers of risk capital are interested in
information that helps them to assess how effectively management has fulfilled this role, but again
this assessment is made only as the basis for economic decisions, such as those about investments
and the reappointment/replacement of management.
It is also the case that in a smaller entity the owner and manager can be the same individual.
Financial reporting helps management to meet its need to be accountable to shareholders, and also
to other stakeholders by providing information that is useful to the users in making economic
decisions.
However, financial statements cannot provide the complete set of information required for assessing
the stewardship of management (see section 7 ‘Inherent limitations of financial statements’ later in
this chapter).
2.4 Financial position, performance and changes in financial position

All economic decisions are based on an evaluation of an entity’s ability to generate cash and of the
timing and certainty of its generation. Information about the entity’s financial position, performance
and changes in financial position provides the foundation on which to base such decisions.
2.4.1 Financial position

An entity’s financial position covers:
• the economic resources it controls;
• its financial structure (ie, debt and share finance);
• its liquidity and solvency; and
• its capacity to adapt to changes in the environment in which it operates.

Investors require information on financial position because it helps in assessing:
• the entity’s ability to generate cash in the future;
• how future cash flows will be distributed among those with an interest in, or claims on, the entity;
• requirements for future finance and ability to raise that finance; and
• the ability to meet financial commitments as they fall due.
Information about financial position is primarily provided in a statement of financial position.
2.4.2 Financial performance

The profit earned in a period is used as the measure of financial performance, where profit is
calculated as income less expenses. Information about performance and variability of performance is
useful in:
• assessing potential changes in the entity’s economic resources in the future;
• predicting the entity’s capacity to generate cash from its existing resource base; and
• forming judgements about the effectiveness with which additional resources might be employed.
Information on financial performance is provided by:
• the statement of profit or loss and other comprehensive income and/or statement of profit or
loss; and
• the statement of changes in equity.
2.4.3 Changes in financial position

Changes in financial position can be analysed under the headings of investing, financing and
operating activities and are presented in a statement of cash flows.
Cash flow information is largely free from the more judgemental allocation and measurement issues
(ie, in which period to include things and at what amount) that arise when items are included in the
statement of financial position or performance statements. For example, depreciation of non-current
assets involves judgement and estimation as to the period over which to charge depreciation. Cash
flow information excludes non-cash items such as depreciation.
Cash flow information is therefore seen as being factual in nature, and hence more reliable than
other sources of information.
Information on the generation and use of cash is useful in evaluating the entity’s ability to generate
cash and its need to use what is generated.
2.4.4 Notes and supplementary schedules

Notes and schedules attached to financial statements can provide additional information relevant to
users, for example the non-current assets note (see Chapter 4).
3 Bases of accounting
Section overview
• You will have covered the accrual basis and the cash basis of financial reporting in your
Accounting studies. In this section, we briefly revise these and introduce the ‘break-up basis’. You
will need to familiar with the following:
– Accrual basis
– Cash basis
– Break-up basis
• The going concern basis is referred to by the IASB’s Conceptual Framework as the ‘underlying
assumption’.

3.1 Accrual basis
Under this basis of accounting, transactions are recognised when they occur, not when the related
cash flows into or out of the entity. You will be familiar with this basis from your Accounting studies.
The Conceptual Framework states that:
Accrual accounting depicts the effects of transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in a different period.
Application of accrual accounting means that:
• Sales are recorded in the period in which the performance obligations associated with a contract
are satisfied, which is normally when control of an asset passes from seller to buyer, not when the
seller receives full payment. While this basis has no effect on the timing of the recognition of cash
sales, it does mean that credit sales are recorded earlier than if the cash basis of accounting was
used. When credit sales are recognised, a receivable is created in the seller’s accounts.
• Expenses are recognised in the period when the goods or services are consumed, not when they
are paid for. An amount payable will be set up in the entity’s books for credit purchases, again
leading to earlier recognition than if the cash basis was used.
• The consumption of non-current assets, such as plant and machinery, is recognised over the
period during which they are used by the entity (ie, the asset is depreciated), not in the year of
purchase as they would be under the cash basis of accounting.
The IASB’s Conceptual Framework makes it clear that information in an entity’s financial statements
should be prepared on the accrual accounting basis.
3.2 Going concern basis

The accrual basis of accounting assumes that an entity is a going concern. Under this basis, financial
statements are prepared on the assumption that the entity will continue in operation for the
foreseeable future, in that management has neither the intention nor the need to liquidate the
entity by selling all its assets, paying off all its liabilities and distributing any surplus to the owners.
Going concern is referred to by the IASB’s Conceptual Framework as an ‘underlying assumption’.
3.3 Cash basis

The cash basis of accounting is not used in the preparation of a company statement of financial
position and performance statements as it is not allowed by IFRS or UK GAAP, although the cash
effect of transactions is presented in the form of a statement of cash flows. (We will look at the
statement of cash flows in Chapter 2.) The cash basis may be used, however, for small
unincorporated entities, for example clubs and societies.
In many ways the cash basis of accounting is very simple. Only the cash impact of a transaction is
recorded.
3.4 Break-up basis

As we saw in section 3.1 one of the key assumptions made under the accrual basis is that the
business will continue as a going concern. However, this will not necessarily always be the case.
There may be an intention or need to sell off the assets of the business. Such a sale typically arises
where the business is in financial difficulties and needs the cash to pay its creditors. Where this is the
case an alternative method of accounting must be used (in accordance with IAS 1, Presentation of
Financial Statements). In these circumstances the financial statements will be prepared on a basis
other than going concern, which is commonly referred to as the ‘break-up’ basis. The break-up basis
values assets and liabilities today as if the entity was about to cease trading and had to dispose of all
its assets and liabilities.
The effect of this is seen primarily in the statement of financial position as follows:
• Classification of assets
All assets and liabilities would be classified as current rather than non-current.
• Valuation of assets
Assets would be valued on the basis of the recoverable amount on sale. This is likely to be
substantially lower than the carrying amount of assets held under historical cost accounting.

4 The IASB Conceptual Framework
Section overview
A revised Conceptual Framework was issued in 2018. Its aim is to provide additional guidance on
areas of greater subjectivity, including the following:
• The definitions of elements in the financial statements
• Guidance on recognition and derecognition
• Guidance on measurement bases
• Principles for disclosure and presentation in the financial statements
4.1 Conceptual Framework

The IASB Framework for the Preparation and Presentation of Financial Statements (the Conceptual
Framework) was produced in 1989 and a new Conceptual Framework was issued in 2018 which
aimed to give clarification on areas which were the most subjective in accounting. There are eight
chapters in the Conceptual Framework:
Chapter 1: The objective of general purpose financial reporting
Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
Chapter 4: The elements of financial statements
Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance (this is outside of the FAR syllabus)
In this chapter we have already introduced some of the concepts dealt with by the Conceptual
Framework.
4.2 Status and purpose of the Conceptual Framework

The Conceptual Framework initially states a list of its purposes:
(a) to assist the International Accounting Standards Board (Board) to develop IFRS Standards
(Standards) that are based on consistent concepts;
(b) to assist to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy;
(c) to assist all parties to understand and interpret the Standards.
The Conceptual Framework is not an IFRS and so does not overrule any individual IFRS Standard. In
the (rare) case of conflict between an IFRS Standard and the Conceptual Framework, the Standard
will prevail.
4.3 Chapter 1: The objective of general-purpose financial reporting

The Conceptual Framework states that:
The objective of general-purpose financial reporting is to provide information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity (ISAB, 2018).
These users need information about:
• the economic resources of the entity;
• the claims against the entity; and
• changes in the entity’s economic resources and claims.

Information about the entity’s economic resources and the claims against it helps users to assess the
entity’s liquidity and solvency and its likely needs for additional financing.
Information about a reporting entity’s financial performance (the changes in its economic resources
and claims) helps users to understand the return that the entity has produced on its economic
resources. This is an indicator of how efficiently and effectively management has used the resources
of the entity and is helpful in predicting future returns.
The Conceptual Framework makes it clear that this information should be prepared on an accrual
basis.
Information about a reporting entity’s cash flows during a period also helps users assess the entity’s
ability to generate future net cash inflows and gives users a better understanding of its operations.
4.4 Chapter 2: Qualitative characteristics of useful financial information

4.4.1 Overview
Qualitative characteristics are the attributes that make the information provided in financial
statements useful to users.
The two fundamental qualitative characteristics are relevance and faithful representation.
There are then four enhancing qualitative characteristics which enhance the usefulness of
information that is relevant and faithfully represented. These are: comparability, verifiability,
timeliness and understandability.
4.4.2 Relevance
Relevant financial information can be of predictive value, confirmatory value or both. These roles are
interrelated.
Definition
Relevance: Relevant financial information is capable of making a difference in the decisions made by
users.
Information on financial position and performance is often used to predict future position and
performance and other things of interest to the user, eg, likely dividend, wage rises. The manner of
presentation will enhance the ability to make predictions, eg, by highlighting unusual items.
The relevance of information is affected by its nature and its materiality.
Definition
Materiality: Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that primary users of general purpose financial reports make on the
basis of financial information about a specific reporting entity.
Information may be judged as relevant either by its value (eg, large transactions that influence the
amount of the financial transactions recorded) or because of its nature (eg, remuneration of
management). Materiality is not a qualitative characteristic itself (like relevance or faithful
representation), because it is merely a threshold or cut-off point. It should be noted that materiality is
an entity specific assessment and that this will vary between companies, and that there is no
designated threshold for the definition of materiality.
4.4.3 Faithful representation

Financial reports represent economic phenomena in words and numbers. To be useful, financial
information must not only represent relevant phenomena but must faithfully represent the substance
of the phenomena that it purports to represent. The user must be able to depend on it being a
faithful representation.

Definition
Faithful representation: A perfectly faithful representation should be complete, neutral and free from
error.
A complete depiction includes all information necessary for a user to understand the information
being depicted, including all necessary descriptions and explanations.
A neutral depiction is without bias in the selection or presentation of financial information. This
means that information must not be manipulated in any way in order to influence the decisions of
users. Neutrality is supported by the exercise of prudence.
Free from error means there are no errors or omissions in the description of the phenomenon and
no errors made in the process by which the financial information was produced. It does not mean
that no inaccuracies can arise, particularly where estimates have to be made.
Definitions
Prudence: The exercise of caution when making judgements under conditions of uncertainty
(Conceptual Framework: para. 2.16). Prudence supports the concept of neutrality.
Substance over form: Substance over form is the principle that transactions and other events are
accounted for and presented in accordance with their substance and economic reality and not
merely their legal form.
Substance over form is not a separate qualitative characteristic under the Conceptual Framework.
The IASB says that it is implied in faithful representation. Faithful representation of a transaction is
only possible if it is accounted for according to its substance and economic reality. Most transactions
are reasonably straightforward and their substance, ie, their commercial effect, is the same as their
strict legal form. However, in some instances this is not the case as can be seen in the following
example.
Context example: Sale and repurchase agreement

A Ltd sells goods to B Ltd for £10,000 but is contractually obliged to repurchase the goods from B
Ltd in 12 months’ time for £11,000, regardless of their condition or value at that date.
The legal form of the transaction is that A has sold goods to B. To reflect the legal form, A Ltd would
record a sale and show the resulting profit, if any, in profit or loss for the period. In 12 months’ time
when the goods are repurchased, A Ltd would record a purchase.
The above treatment does not provide a faithful representation because it does not reflect the
economic substance of the transaction. A Ltd is under an obligation to repurchase the goods and A
Ltd bears the risk that those goods will be damaged, obsolete or unsaleable in a year’s time.
The substance is that B Ltd has made a secured loan to A Ltd of £10,000 plus interest of £1,000. To
reflect substance, A Ltd should continue to show the goods as an asset in inventories (at the lower of
cost and net realisable value) and should include a liability to B Ltd of £10,000 as a current liability. A
Ltd should accrue for the interest over the duration of the loan.
When A Ltd pays £11,000 to repurchase the goods, this should be treated as a repayment of the loan
plus accrued interest.
Other examples of accounting for substance:

• Leases
Accounting for leases under IFRS 16, Leases (which is covered in Chapter 7) is an example of the
application of substance as the lessee recognises an asset in its statement of financial position
even though the legal form of a lease is that of renting the asset, not buying it.
• Group financial statements
Group financial statements are covered in detail in Chapters 10 to 15. The central principle
underlying group accounts is that a group of companies is treated as though it were a single
entity, even though each company within the group is itself a separate legal entity.

4.4.4 Enhancing qualitative characteristics
The Conceptual Framework has additional characteristics which enhance the fundamental
characteristics of relevance and faithful representation. The following definitions are provided by the
Conceptual Framework:
Definitions
Comparability: This enables users to identify and understand similarities in, and differences among,
items.
Verifiability: This helps assure users that information faithfully represents the economic phenomena
it purports to represent. Verifiability means that different knowledgeable and independent observers
could reach consensus that a particular depiction is a faithful representation.
Timeliness: This means having information available to decision-makers in time to be capable of
influencing their decisions. Generally, the older the information is, the less useful it is.
Understandability: Classifying, characterising and presenting information clearly and concisely
makes it understandable.
Comparability
Comparability is the qualitative characteristic that enables users to identify and understand
similarities in, and differences among, items. Information about a reporting entity is more useful if it
can be compared with similar information about other entities and with similar information about the
same entity for another period or another date.
Consistency, although related to comparability, is not the same. It refers to the use of the same
methods for the same items (ie, consistency of treatment) either from period to period within a
reporting entity or in a single period across entities.
The disclosure of accounting policies is particularly important here. Users must be able to distinguish
between different accounting policies in order to be able to make a valid comparison of similar items
in the accounts of different entities.
Comparability is not the same as uniformity. Entities should change accounting policies if those
policies become inappropriate.
Corresponding information for preceding periods should be shown to enable comparison over time.
Verifiability
Information may be verified by a number of different methods, such as observing an inventory count
and physically reviewing assets, maybe with the assistance of a specialist valuation expert. There may
be a number of different tests or financial models which can assist in verifying data, such as the
recalculation of depreciation using the entity’s rates.
Timeliness
Information may become less useful if there is a delay in reporting it. There is a balance between
timeliness and the provision of reliable information.
If information is reported on a timely basis when not all aspects of the transaction are known, it may
not be complete or free from error.
Conversely, if every detail of a transaction is known, it may be too late to publish the information
because it has become irrelevant. The overriding consideration is how best to satisfy the economic
decision-making needs of the users.
Understandability
Financial reports are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently. Some information may be
inherently complex and cannot be made easy to understand. Excluding this information might make
the information easier to understand, but without it those reports would be incomplete and therefore
misleading. Therefore, matters should not be left out of financial statements simply due to their
difficulty as even well-informed and diligent users may sometimes need the aid of an advisor to
understand information about complex economic information.

4.5 Chapter 4: The elements of financial statements
4.5.1 Overview
Transactions and other events are grouped together in broad classes and in this way their financial
effects are shown in the financial statements. The five elements of financial statements are assets,
liabilities, equity, income and expenses.
4.5.2 Definitions of elements

The key definitions of ‘asset’ and ‘liability’ will be referred to again and again in these learning
materials, because they form the foundation on which so many accounting standards are based. It is
very important that you can reproduce these definitions accurately and quickly and apply them to a
given scenario.
Definitions
Asset: A present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.
Liability: A present obligation of the entity to transfer an economic resource as a result of past
events.
Equity: The residual interest in the assets of the entity after deducting all its liabilities.
Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity claims.
Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity other than
those relating to distributions to holders of equity claims.
4.5.3 Assets
We can look in more detail at the components of the definitions given above.
Assets must have the potential to produce future economic benefits either alone or in conjunction
with other items.
Definition
Potential to produce economic benefits: An economic resource is a right that has the potential to
produce economic benefits. For that potential to exist, it does not need to be certain, or even likely,
that the right will produce economic benefits.
In simple terms, an item is an asset if:

• it is cash or the right to cash in future, eg, a receivable, or a right to services that may be used to
generate cash, eg, a prepayment; or
• it can be used to generate cash or meet liabilities eg, a tangible or intangible non-current asset.
The existence of an asset, particularly in terms of control, is not reliant on:
• physical form (hence intangible assets such as patents and copyrights may meet the definition of
an asset and appear in the statement of financial position – even though they have no physical
substance); or
• legal ownership (hence some leased assets, even though not legally owned by the company, may
be included as assets in the statement of financial position. (See Chapter 7.)
4.5.4 Liabilities
The Conceptual Framework sets out the definition of a liability, as stated above, that fundamentally
the liability can only exist when all three of the following criteria have been satisfied:
• the entity has an obligation
• the obligation is to transfer an economic resource
• the obligation is a present obligation that exists as a result of past events

Definition
Obligation: A duty or responsibility that the entity has no practical ability to avoid.
As seen above, obligations may be:

• legally enforceable as a consequence of a binding contract or statutory requirement. This is
normally the case with amounts payable for goods and services received; or
• the result of business practice. For example, even though a company has no legal obligation to
do so, it may have a policy of rectifying faults in its products even after a standard warranty period
has expired.
A management decision (to acquire an asset, for example) does not in itself create an obligation,
because it can be reversed. But a management decision implemented in a way which creates
expectations in the minds of customers, suppliers or employees, becomes an obligation. This is
sometimes described as a constructive obligation. This issue is covered more fully in Chapter 9 in the
context of the recognition of provisions.
Liabilities must arise from past transactions or events. For example, the sale of goods is the past
transaction which allows the recognition of repair warranty provisions.
Settlement of a present obligation will involve the entity giving up resources embodying economic
benefits in order to satisfy the claim of the other party. In practice, most liabilities will be met in cash
but this is not essential.
Professional skills focus: Structuring problems and solutions
It is important that you thoroughly understand the Conceptual Framework, as you will be referring to
it throughout your studies. Your exam may ask you to comment on the impact of the Conceptual
Framework on other IFRS Standards, such as how the recognition of a liability is important in
assessing provisions and liabilities in IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
Interactive question 1: Asset or liability?

Requirement
Respond in each of the following scenarios, as to whether the items in question may be classified as
assets or liabilities.
Question Answer
Oak plc has purchased a patent for £25,000. The

patent gives the company exclusive use of a
specialist manufacturing process which will save
£6,000 a year for the next five years. May Oak plc
classify the patent as an asset?
Peter Ltd acts as a trustee for shares held by Piper

Ltd. Piper Ltd retains the voting rights as well as
receiving the dividends from the shares. Peter Ltd
receives a fee for the trustee services they provide
to Piper Ltd. Can Peter Ltd classify these shares as
assets?
Sycamore Ltd provides a standard warranty with

the purchase of every laptop it sells. These
standard warranties are not paid for by the
purchaser and are valid for a period of 24 months
from the date of sale. Does Sycamore Ltd have to
recognise these warranties as liabilities?

See Answer at the end of this chapter.
4.5.5 Equity
Equity is the residual interest in the assets of an entity after deducting its liabilities, so the amount at
which it is shown is dependent on the measurement of assets and liabilities. It has nothing to do with
the market value of the entity’s shares.
Equity may be sub-classified in the statement of financial position providing information which is
relevant to the decision-making needs of the users. This will indicate legal or other restrictions on the
ability of the entity to distribute or otherwise apply its equity.
In practical terms, the important distinction between liabilities and equity is that creditors have the
right to insist that the transfer of economic resources is made to them regardless of the entity’s
financial position, but owners do not. All decisions about payments to owners (such as dividends or
share capital buy-back) are at the discretion of management.
4.5.6 Performance
Profit is used as a measure of performance, or as a basis for other measures (eg, earnings per share
(EPS)). It depends directly on the measurement of income and expenses, which in turn depend (in
part) on the concepts of capital and capital maintenance adopted.
Income and expenses can be presented in different ways in profit or loss and in other comprehensive
income, to provide information relevant for economic decision-making. For example, a statement of
profit or loss could distinguish between income and expenses which relate to continuing operations
and those which do not.
Items of income and expense can be distinguished from each other or combined with each other.
Income:
• Both revenue and gains are included in the definition of income.
• Revenue arises in the course of ordinary activities of an entity. (We will look at revenue in more
detail in Chapter 6.).
• Gains include those arising on the disposal of non-current assets. The definition of income also
includes unrealised gains, eg, on revaluation of non-current assets.
• A revaluation gives rise to an increase or decrease in equity.
• Gains on revaluation, which are recognised in a revaluation surplus (which is covered in Chapter
4.)
Expenses:
• Both expenses and losses are included in the definition of expense.
• Losses will include those arising on the disposal of property, plant and machinery, as well as
intangible non-current assets.
4.6 Chapter 5: Recognition of the elements of financial statements
Definition
Recognition: The process of capturing for inclusion in the statement of financial position or
statement(s) of financial position an item that meets the definition of one of the elements of the
financial statements an asset, a liability, equity, income or expenses. The amount at which an asset,
liability or equity is recognised in the statement of financial position is referred to as its ‘carrying
amount’.
4.6.1 Recognition criteria

Recognition links the elements (assets, liabilities, income, expenses and equity) with the inclusion in
the financial statements.

The Conceptual Framework, therefore, only allows items to be recognised in the financial statements
if:
• the item meets the definition of an element; and
• recognition of that element provides users of the financial statements with information that is
useful, ie, it provides:
– relevant information about the element
– a faithful representation of the element.
However, the benefits of providing that information should justify the costs of recognising it.
Recognition is subject to cost constraints.
Definition
Cost constraint: Reporting financial information imposes costs, and it is important that those costs are
justified by the benefits of reporting that information.
When information is provided, its benefits must exceed the costs of obtaining and presenting it. This
is a subjective area and there are other difficulties: others, not the intended users, may gain a benefit;
and the cost may be paid by someone other than the users. It is therefore difficult to apply a cost-
benefit analysis, but preparers and users should be aware of the constraint.
4.7 Chapter 6: Measurement

For an item or transaction to be recognised in an entity’s financial statements it needs to be
measured as a monetary amount. IFRS use several different measurement bases but the Conceptual
Framework refers to two main measurement bases:
• Historical cost
• Current value
•
–
4.7.1 Historical cost
Definition
Historical cost: These measures provide monetary information about assets, liabilities and related
income and expenses, using information derived, at least in part, from the price of the transaction or
other event that gave rise to them.
The historical cost is the consideration paid to acquire or create an asset, plus any relevant
transaction costs. Equally, the historical cost of a liability is the value of the consideration received in
order to take on the liability, less any relevant transaction costs.
Historical cost is the most commonly adopted measurement basis, but this is usually combined with
other bases, eg, an historical cost basis may be modified by the revaluation of land and buildings.
Advantages Disadvantages
Actual costs are more difficult to manipulate, Costs may be out of date and so this may result
and so they can be verified (invoices, etc) so the in an overstatement of profit (revenues at
measurements are reliable. current values, whereas expenses associated
with them at historical costs).
The statement of financial position and the Valuation of assets may be out of date as they
statement of cash flows are consistent with each are based on their historical costs.
other.
Cost is easy to understand. It is not affected, nor representative of,

movements due to inflation. This can lead to

Advantages Disadvantages
misleading results as comparative figures for

previous years are not adjusted for inflation.
4.7.2 Current value
Definition
Current value: These measures provide monetary information about assets, liabilities and related
income and expenses, using information updated to reflect conditions at the measurement date.
Because of the updating, current values of assets and liabilities reflect changes since the previous
measurement date in estimates of cash flows and other factors reflected in those current values.
Current value seeks to correct some of the problems associated with historical cost, by providing a
number of alternative measurement bases:
• Fair value
• Value in use
• Current cost
Definition
Fair value: The price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date.
Fair value is measured in accordance with IFRS 13, Fair Value Measurement. This measurement
method has implications across much of the IFRS Standards in this module, notably in the
measurement of the values of property, plant and equipment (Chapter 4), contingent liabilities
(Chapter 10-14), business combinations and the assets and liabilities purchased (Chapters 10-14)
and non-current assets identified for sale or disposal (Chapter 4).
Fair value is calculated by taking the open market value, and where there is no active market for that
element, the following would be used:
• estimates of future cash flows; and
• time value of money (discounting the future cash flows).
Definition
Value in use: The present value of the cash flows, or other economic benefits, that an entity expects
to derive from the use of an asset and from its ultimate disposal.
Value in use considers the specific factors relevant to that entity regarding the likely future value of
the asset within that entity, eg, revenue generation or cost savings. Also relevant is fulfilment value,
which provides information about the present value of the estimated cash flows needed to fulfil a
liability. This can be used when the liability amount is known, as opposed to being subject to a
negotiation.
Definition
Current cost: The current cost of an asset is the cost an equivalent asset at the measurement date
comprising the consideration that would be paid at the measurement, plus transaction costs that
would be incurred at that date. The current cost of a liability is the consideration would be received
for an equivalent liability at the measurement date, minus the transaction costs that would be
incurred at that date.

Although this is similar in nature to historical costs, in that it takes actual costs, it is representative of
the current cost of replacing that asset or liability. The Conceptual Framework refers to this as an
‘entry cost’, whereas historical costs is an ‘exit cost’. Occasionally, it may be difficult to obtain a
current cost of an element from information currently available (eg, if only newer models are
available); instead, it is possible for the entity to adjust for the condition and age in order to buy a
similar model or asset.
4.8 Chapter 7: Presentation and disclosure

It is essential that an entity ensures that the information presented in the financial statements is
effectively communicated. Relevant disclosures giving a fair representation of the position and the
performance of the entity at the reporting date are required.
Effective communication also requires the entity to make available information that is relevant to their
entity and industry, instead of just producing the very minimum or basic information. This is often
referred to as ‘boilerplate’ whereby the standard descriptions are provided, rather than giving an
entity-specific and relevant explanation of the position and performance of the business.
Offsetting (netting off assets and liabilities of a similar nature) is discouraged.
5 The regulatory framework

Section overview
• Financial reporting is the provision of financial information to those outside the entity.
• The organisation responsible for setting IFRSs comprises the International Financial Reporting
Standards Foundation (IFRS Foundation), the Monitoring Board, the International Accounting
Standards Board (IASB), the IFRS Advisory Council (Advisory Council) and the IFRS Interpretations
Committee (Interpretations Committee).
• The process of setting IFRSs is an open dialogue involving co-operation between national and
international standard setters.
5.1 The IFRS Foundation

The IFRS Foundation and its independent standard-setting body, the IASB, provide public
accountability through the transparency of their work, the consultation with the full range of
interested parties in the standard-setting process, and their formal accountability links to the public.
The leaders of the major economies, through the G20, have confirmed the importance of an
independent standard-setter accountable to the public interest.
Public accountability, ensured by the organisation’s constitution and governance arrangements, is
vital to the organisation’s success. The Trustees of the IFRS Foundation are responsible for ensuring
that appropriate governance arrangements are in place and observed by all parts of the
organisation.
The Trustees’ effectiveness in exercising their functions is assessed annually by the Trustees’ Due
Process Oversight Committee.
The IFRS Foundation oversees the work of the IFRS Interpretations Committee and the IFRS Advisory
Council.
5.2 Membership
Membership of the IFRS Foundation has been designed so that it represents an international group
of preparers and users, who become IFRS Foundation trustees. The selection process of the trustees
takes into account geographical factors and professional background. IFRS Foundation trustees
appoint the IASB members.

5.3 The IASB
The IASB is responsible for setting accounting standards. It is made up of an independent group of
experts with an appropriate mix of recent practical experience in setting accounting standards, in
preparing, auditing, or using financial reports and in accounting education. There is no particular
geographical dominance, although geographical diversity is required. Members have a variety of
backgrounds and include:
• Auditors
• Preparers and users of financial statements
• Academics
5.4 Objectives of the IASB

The Preface to IFRSs states that the objectives of the IASB are as follows:
• To develop, in the public interest, a single set of high-quality, understandable, enforceable and
globally accepted financial reporting standards based on clearly articulated principles. These
standards should require high quality, transparent and comparable information in financial
statements and other financial reporting to help investors, other participants in the various capital
markets of the world and other users of the information to make economic decisions;
• To promote the use and rigorous application of those standards;
• In fulfilling the above objectives to take account of, as appropriate, the needs of a range of sizes
and types of entities in diverse economic settings; and
• To promote and facilitate the adoption of IFRSs through the convergence of national accounting
standards and IFRSs.
5.5 The purpose of accounting standards

The overall purpose of accounting standards is to identify proper accounting practices for the
preparation of financial statements.
Accounting standards create a common understanding between users and preparers on how
particular items, for example the valuation of property, are treated. Financial statements should
therefore comply with all applicable accounting standards.
5.6 Application of IFRS

Within each individual country local regulations govern, to a greater or lesser degree, the issue of
financial statements. These local regulations include accounting standards issued by the national
regulatory bodies or professional accountancy bodies in the country concerned.
Over the last 25 years however, the influence of IFRS on national accounting requirements and
practices has been growing. For example:
• Since accounting periods commencing on or after 1 January 2005, all EU companies whose
securities are traded on a regulated public market such as the London Stock Exchange, must
prepare their consolidated accounts in accordance with EU-endorsed IFRS. (Note that although
group financial statements must follow IFRS the individual financial statements do not need to.)
• In the UK unquoted companies are permitted (but not required) to adopt IFRS.
5.7 Setting of IFRS

The overall agenda of the IASB is initially set by discussion with the IFRS Advisory Council. The
process for developing an individual standard involves the following steps.
Step 1 During the early stages of a project, IASB may establish an Advisory Committee or working
group to give advice on issues arising in the project. Consultation with the Advisory
Committee and the Advisory Council occurs throughout the project.
Step 2 IASB may develop and publish a Discussion Paper for public comment.
Step 3 Following the receipt and review of comments, IASB would develop and publish an
Exposure Draft for public comment.

Step 4 Following the receipt and review of comments, the IASB would issue a final International
Financial Reporting Standard.
The period of exposure for public comment is normally 120 days. However, in some circumstances,
proposals may be issued with a comment period of not less than 30 days. Draft IFRS Interpretations
are exposed for a 60-day comment period.
5.8 Scope and authority of IFRS

The Preface to IFRSs makes the following points:
• IFRS apply to all general purpose financial statements ie, those directed towards the common
information needs of a wide range of users.
• The IASB’s objective is to require like transactions and events to be accounted for and reported
in a like way. The IASB intends not to permit choices in accounting treatment. The IASB is
reconsidering those transactions and events for which IFRSs permit a choice of accounting
treatment with the objective of reducing the number of those choices.
• Standards include paragraphs in bold and plain type. Bold type paragraphs indicate the main
principles, but both types have equal authority.
• Any limitation of the applicability of a specific IFRS is made clear in that standard.
5.9 UK regulatory framework

5.9.1 UK standard-setting process
All UK Financial Reporting Standards (FRS) are issued by the Financial Reporting Council (FRC).
5.9.2 Small companies and micro-entities

Under the CA 2006, a company subject to the small companies regime must deliver to the registrar a
copy of the balance sheet drawn up as at the last day of the year and may also deliver a copy of the
profit and loss account and director’s report. The balance sheet that is filed must be the same
balance sheet as that prepared for shareholders. The balance sheet notes must also be filed.
FRS 102 allows smaller companies to file abridged accounts. Both the balance sheet and the profit
and loss account can be abridged. In practice this means that items in the financial statements can be
combined. For instance, the profit and loss account can start at gross profit.
In 2013 the UK Government approved regulations that introduced simpler reporting for
micro-entities – a newly-defined sub-category of small company. FRS 105 has now been issued and
sets out the new micro-entities regime effective from 1 January 2016.
Certain types of organisation, including charities, LLPs, investment companies and insurance
companies, are excluded from being treated as micro-entities.
5.9.3 UK financial reporting

UK companies must produce their financial statements in line with the requirements of:
• the Companies Act 2006; and
• accounting standards, whether IFRS or the UK Financial Reporting Standards (FRS 100–105).
Companies whose shares or debt are traded on a regulated securities exchange (including those on
the London Alternative Investment Market (AIM)) are required to prepare their consolidated financial
statements in accordance with IFRS. (This requirement does not apply to the separate financial
statements of the parent company or the separate financial statements of any subsidiaries, although
it is permissible to use IFRS for these as well.)
All other companies can choose whether to prepare both consolidated and separate financial
statements in accordance with UK GAAP or IFRS. However, when a company chooses to change the
basis of preparation to IFRS, it cannot subsequently change back to using UK GAAP.
To date few companies have made a voluntary transition to IFRS. They have preferred to remain with
UK GAAP.
In the UK, the FRC has the following Financial Reporting Standards in issue:
• FRS 100, Application of Financial Reporting Requirements
• FRS 101, Reduced Disclosure Framework

• FRS 102, The Financial Reporting Standard Applicable in the UK and Republic of Ireland
• FRS 103, Insurance Contracts
• FRS 104, Interim Financial Reporting
• FRS 105, The Financial Reporting Standard Applicable to the Micro-entities Regime
FRS 100 sets out the financial reporting requirements for UK and Republic of Ireland entities. These
are as follows:
(a) Section 1A of FRS 102 for small entities and FRS 105 for micro-entities may be applied for
entities that meet the criteria.
(b) Other entities should apply FRS 102 or, in the case of the individual financial statements of a
qualifying entity, FRS 101.
A qualifying entity for the purposes of FRS 101 is a member of a group whose consolidated financial
statements are publicly available. FRS 101 allows group members in their individual financial
statements to apply the recognition and measurement requirements of IFRS (with some amendments
to achieve compliance with the Companies Act 2006) whilst taking advantage of exemption from a
number of IFRS disclosure requirements.
Chapter 16 of this Workbook is dedicated to FRS 102, highlighting the accounting treatment under
UK GAAP. A comparison with IFRS is summarised at the end of Chapter 16 and forms part of the
examinable FAR syllabus.
6 Convergence process
Section overview
• Groups whose shares or debt are traded on a supervised securities exchange in EU countries
prepare their consolidated financial statements under IFRS.
• The IASB Convergence programme includes collaboration with a number of national standard
setters.
• In the UK the Financial Reporting Council (FRC) has worked closely with the IASB in order to
converge UK accounting standards with IFRS. This has resulted in new standards FRS 100–FRS
105.
6.1 National and international financial reporting

Companies are required to prepare their financial statements according to the accounting
requirements of the country in which the company is registered. In the UK this now means
compliance with:
• Companies Act 2006
• FRSs 100–105
The issue of these new UK standards is the result of UK/IFRS convergence.
Many multi-national groups have their shares traded on stock exchanges in different countries
around the world and have often been required to prepare financial statements in line with the
reporting standards in each country; they have then needed to make adjustments before
consolidating them in their home country under that country’s reporting standards.
For some decades there has been increased pressure for the adoption of a single set of global
accounting standards. This drive towards worldwide harmonisation of financial reporting has two
main causes:
• Increased globalisation of trade and of capital markets, with the result that:
– management wants all group entities to produce financial statements on the same basis; and
– investors and lenders are now adopting an international approach to their activities and want to
be spared the trouble of having to understand a number of different bases for the preparation
of financial statements.

• It is also the case that the increasing pace of information technology development now provides
companies with the communications to take advantage of such harmonisation.
The benefits from the convergence of global financial reporting include:
• reducing the cost of capital as investors/lenders understand all financial statements better;
• encouraging investment growth;
• improving the quality of financial reporting; and
• reducing the time and cost of preparing financial statements.

There are some who would also argue that there are costs of global convergence, in particular:
• the cost of changing accounting practices and systems to suit IFRS;
• a perceived dilution of national sovereignty; and
• a concern that the desire to converge with US requirements (see below) will lead to standards
which are really only appropriate for the very largest, international companies, which regularly
raise finance on the capital markets. Such standards are just too complex, and compliance with
them too expensive, for companies operating only in their domestic markets and raising the
finance they need from their local banks.
6.2 The European Union

For many years the European Union (EU) has had an overall objective of creating a properly
functioning internal market. It has therefore set a specific objective in the financial arena of
developing an integrated and efficiently operating capital market. The adoption of internationally
accepted accounting standards with few measurement options, leading to a single set of global
accounting standards, is a major contribution to the achievement of this objective.
In 2000, as part of this process, the International Organisation of Securities Commissions (IOSCO)
adopted a core set of IFRS for use by multi-national entities.
In 2002 the European Commission adopted a Regulation under which, from 2005, consolidated
financial statements of listed companies were required to comply with IFRS. The consolidated
financial statements of many of Europe’s top multinationals are now prepared in conformity with
national requirements, EC directives and IFRS. Member states currently have the discretion to extend
the implementation of IFRS to include non-listed companies.
Although the IASB issues IFRS Standards, it has no legal authority to require compliance with them,
so the use of IFRS requires specific legislation in each country or on the part of the EU. Within the EU
enforcement is delegated to the regulatory authorities in member states, but must be carried out in
line with the enforcement principles set out by the European Securities and Markets Authority
(ESMA).
In 2014 the European Parliament issued a Directive on Statutory Audit. The proposed legislation
requires EU auditors to publish audit reports according to ISAs and introduces a new ‘mandatory
rotation‘ rule. Public-interest entities will be obliged to put their audit out to tender every 10 years.
EU auditors will no longer be allowed to provide certain non-audit services to their clients and the
rules establish a cap on fees generated for non-audit services to public-interest entities.
In the UK there are three main bodies which regulate financial statements:
• The Financial Conduct Authority (FCA) which is the UK regulator of financial services. The FCA
supervises the provision of information to the investing public when an entity wishes to make a
public offering of its securities.
• The Prudential Regulation Authority which regulates banks, building societies and insurance
companies. This is overseen by the Bank of England and monitors financial firms to ensure that
they maintain sufficient capital and have adequate risk controls in place.
• The Financial Reporting Review Panel (FRRP).
The FRRP is maintained by the Conduct Committee, which in turn reports to the FRC Board. It was set
up to enquire into financial statements and directors’ reports which appear not to comply with the
requirements laid down in the UK. In line with the ESMA principles it adopts a proactive approach to
the review of all financial information within its remit. If the FRRP considers that inappropriate
accounting has been adopted, its aim is to reach agreement with the directors for the voluntary
restatement of financial statements. Failing voluntary correction, the FRRP does have the power to
restate the financial statements through a court order.
Unlisted companies in the UK report under FRS 102, The Financial Reporting Standard Applicable in
the UK and Republic of Ireland, which is based on the IFRS for SMEs (see Chapter 16). FRS 102 is
effective from January 2015 and applies to entities not applying EU-adopted IFRS, FRS 101, Reduced
Disclosure Framework, or FRS 105 (see further in section 6.5 below).

6.3 IASB and US regulators
IFRS are leading the way as the generally accepted accounting standards for capital market reporting
outside of the US. However, an overwhelming volume of financial capital is traded through US
markets. The US Securities and Exchange Commission (SEC), which enforces the standards applied
by US listed companies, and the US Financial Accounting Standards Board (FASB) which sets those
standards have both been involved in efforts this century to converge US GAAP and IFRS.
After a joint meeting in September 2002, the US FASB and the IASB issued their Norwalk Agreement.
This led to a period of convergence resulting in a number of short term convergence projects and
some major joint projects. Some standards such as IFRS 13, Fair Value Measurement and IFRS 15,
Revenue from Contracts with Customers were issued as a result of the projects.
The convergence project is now at an end and it currently seems highly unlikely that US regulators
will either adopt IFRS or drop US GAAP. The current Chair of the SEC has publicly announced that
there will be no movement to IFRS for US public companies under his leadership. This contrasts with
the view of his predecessor who was a strong proponent of IFRS convergence. SEC Chair is a
political appointment, however, and this view may change again in the future.
6.4 Progress in general convergence

Although US convergence has not been achieved, the IFRS Foundation and IASB has been more
successful in promoting the use of IFRS for listed companies in other jurisdictions.
In some countries IFRS must be applied without modification, for example South Korea requires
listed companies to apply unmodified IFRS that are translated into Korean language by the Korean
Accounting Standards Board. Other countries that require domestic listed companies to apply IFRS
include Brazil, Chile, South Africa and Russia.
In other countries IFRS are adopted to be local GAAP, sometimes with small amendments to
requirements. Singapore, Hong Kong, China, New Zealand and Australia have all taken this
approach.
In IFRS is one of four GAAPs permitted to be used by listed companies, the others being US GAAP,
Japanese GAAP and Japanese Modified International Standards (JMIS), which are IFRS modified for
the local market. Given a free choice of GAAP over 200 large listed companies that represent more
than 30% of the market capitalisation of the Tokyo Stock Exchange have chosen IFRS; the number
using US GAAP continues to shrink.
6.5 Convergence of UK standards and IFRS

The FRC took the view that the optimum solution was a transition to an IFRS-based framework and
over the course of 2012 and 2013 issued three new standards.
• FRS 100, Application of Financial Reporting Requirements – issued November 2012
• FRS 101, Reduced Disclosure Framework – issued November 2012
• FRS 102, The Financial Reporting Standard Applicable in the UK and Republic of Ireland – issued
March 2013
FRS 100 provides rules and guidance on how to select the appropriate accounting framework for a
particular entity or group.
FRS 101 sets out disclosure exemptions available to UK qualifying subsidiaries and parent
companies which otherwise apply the recognition, measurement and disclosure requirements of EU-
adopted IFRS. Financial statements prepared under FRS 101 use IFRS but must comply with the
Companies Act 2006.
By using this standard, qualifying subsidiaries are able to report using the same (IFRS) recognition
and measurement principles as the group financial statements but without having to comply with the
long list of IFRS disclosure requirements. Without this standard many groups instead choose for their
subsidiaries to report under UK GAAP to minimise the reporting cost which they would incur by
complying with full IFRS. However, reporting under UK GAAP introduced additional effort, due to the
requirement to adjust their statutory financial statements in line with IFRS for group reporting
purposes.
FRS 102 replaced the majority of UK accounting standards, adopts an IFRS-based framework and
improves accounting for financial instruments. It is based on the IFRS for SMEs, amended to ensure
compliance with company law. It is intended for all UK entities other than those that are eligible to

use FRS 101, FRS 102 section 1A or FRS 105, or listed companies preparing group financial
statements, who are already required to report under IFRS and who will still be allowed to apply FRS
101 or FRS 102 in preparing their individual entity financial statements.
The objectives and intended effects of UK GAAP are stated by the FRC to be ‘to enable users of
accounts to receive high-quality understandable financial reporting proportionate to the size and
complexity of the entity and users’ ‘information needs’.
FRS 102 has 36 Sections (including Section 1A) based mainly on the IFRS for SMEs with some cross-
reference to full IFRS. The disclosure requirements are less than for full IFRS.
The FRC has issued further standards, mandatory from 1 January 2016:
Section 1A Small Entities of FRS 102
FRS 103, Insurance Contracts
FRS 104, Interim Financial Reporting
FRS 105, The Financial Reporting Standard Applicable to the Micro-entities Regime
7 Inherent limitations of financial statements

Section overview
• There are limitations inherent in financial statements, including the fact that they are:
– a conventionalised representation, involving classification, aggregation and the allocation of
items to particular accounting periods;
– historical backward-looking); and
– based almost exclusively on financial data.
• Integrated reporting attempts to deal with some of these limitations.
7.1 Conventionalised representation

Financial statements are highly standardised in terms of their overall format and presentation
although businesses are very diverse in their nature. This may limit the usefulness of the information.
Financial statements are highly aggregated in that information on a great many transactions and
balances is combined into a few figures in the accounts, which can often make it difficult for the
reader to evaluate the components of the business.
Allocation issues include, for example, the application of the accrual concept and depreciation of
non-current assets, where management’s judgements and estimates affect the period in which
expenses or income are recognised.
7.2 Backward-looking
Financial statements are backward-looking whereas most users of financial information base their
decisions on expectations about the future. Financial statements contribute towards this by helping
to identify trends and by confirming the accuracy of previous expectations, but cannot realistically
provide the complete information set required for all economic decisions by all users.
7.3 Omission of non-financial information

By their nature, financial statements contain financial information. They do not generally include
non-financial data such as:
• narrative description of the major operations;
• discussion of business risks and opportunities;
• narrative analysis of the entity’s performance and prospects; and
• management policies and how the business is governed and controlled.

Financial statements include the elements as defined in the IASB Conceptual Framework. This means
that items which do not meet those definitions are not included. For example, the value of the entity’s
internally generated goodwill ie, through its reputation, loyalty and expertise of its management and
employees, or its client portfolio. While some companies do experiment with different types of
disclosure for such items, these disclosures are considered unsuitable for inclusion in the financial
statements (precisely because such items do not fall within its definition of assets).
7.4 Other sources of information

Some of the limitations of financial statements are addressed in the other information which is often
provided along with the financial statements, especially by large companies, such as operating and
financial reviews and the Chairman’s statement.
There are also many other sources of information available to at least some users of financial
statements, for example:
• In owner-managed businesses, the owners have access to internal management information
because they are the management. This information is, potentially, available on a continuous real-
time basis and may include:
– future plans for the business;
– budgets or forecasts; and
– management accounts, including, for example, divisional analysis.
• Banks will often obtain additional access to entity information under the terms of loan agreements
• Potential investors (eg, if they are planning to take a major stake or even a controlling interest) will
often negotiate additional access to corporate information
• Publicly available information, such as entity brochures and publicity material (eg, press releases)
• Brokers’ reports on major companies
• Press reports and other media coverage (eg, television or internet)
7.5 Integrated reporting

Integrated reporting (IR) presents an organisation’s strategy, governance and performance in terms
of its wider social, environmental and economic context. By reinforcing these connections it is
thought that IR can help an organisation to take more sustainable decisions and enable stakeholders
to understand how the organisation is really performing.
The International Integrated Reporting Council (IIRC) was set up in 2010 comprising a cross-section
of leaders from corporate investment, accounting, regulatory and standard-setting bodies and the
Integrated Reporting Framework was released in December 2013.
The Framework reflects the IIRC’s view that corporate reporting must evolve to communicate the full
range of factors that affect an organisation’s ability to create value over time.
The FRC has issued guidance stating that annual reports should include information about a
company’s human rights approach, gender representation and greenhouse gas emissions. This
information should be included in a strategic report together with details about the company’s
strategy, business model and principal risks and challenges.
8 Ethical and professional issues

Section overview
• ICAEW has issued a Code of Ethics which is principles-based and centres around five
fundamental principles.
• A professional accountant is responsible for recognising and assessing the potential threats to
these fundamental principles.
• A professional accountant must then implement safeguards to eliminate these threats or reduce
them to an acceptable level.

8.1 ICAEW Code of Ethics
Chartered Accountants are expected to demonstrate the highest standards of professional conduct
and to take into consideration the public interest. Ethical behaviour by Chartered Accountants plays
a vital role in ensuring public trust in financial reporting and business practices and upholding the
reputation of the accountancy profession.
ICAEW’s Code of Ethics (the Code) applies to all its members. The Code (which was updated in
2020) is based upon the International Ethics Standard Board for Accountants (IESBA) Code of Ethics
and is split into key parts:
• Part 1: Fundamental Principles and Conceptual Framework
• Part 2: Professional Accountants in Business
• Part 3: Professional Accountants in Public Practice
• Part 4(A): Independence for audit engagements and review engagements
• Part 4(B): Independence audit assurance engagements other than audit engagements and review
engagements
• Part 5: Insolvency
This module only focuses on parts 1 to 3.
Accountants in public practice are also regulated by the FRC Ethical Standard.
The Code applies to all members, students, affiliates, employees of member firms and, where
applicable, member firms, in all of their professional and business activities, whether remunerated or
voluntary. ICAEW is committed to enforcing the Code through disciplining members who do not
meet reasonable ethical and professional expectations of the public and other members.
A copy of the Code is available at icaew.com.
Members (or students) who are in doubt as to their ethical position may seek advice from the
following ICAEW sources:
• The ethics advisory helpline (also available as an online chat facility or email) within Technical and
Ethics Advisory Services. The advisor is exempt from the normal duty to report misconduct, hence
details of the ethical problem will not be divulged to third parties, including other departments of
ICAEW.
• The Support Members Scheme. The Scheme is run by volunteer members of ICAEW from a wide
range of backgrounds. It is a confidential, free service exempt from the duty to report misconduct
and provides advice and help to members in difficulties.
• Money laundering helpline. This helpline offers advice on all aspects of complying with the
money laundering legislation. The advisors can answer calls on both general issues concerning
the regulations and reporting suspected illegal activity, and specific issues, which can be
discussed anonymously.
8.2 Conceptual framework

The Code provides a conceptual framework which professional accountants should apply in order to
identify, assess and address threats to compliance with the fundamental principles. The conceptual
framework specifies an approach for professional accountants to:
• identify threats to compliance with the fundamental principles;
• evaluate the threats identified; and
• address the threats by eliminating them or reducing them to an acceptable level.
The conceptual framework calls on the professional accountant to:
• exercise professional judgement;
• remain alert for new information and to changes in facts and circumstances; and
• use the reasonable and informed third party test.
The third party test calls on the professional accountant to consider their proposed actions and
consider whether a ‘reasonable and informed third party’ would reach the same conclusions. The
conceptual framework also provides initial guidance (which is developed in parts 2 and 3 of the
Code) on evaluating threats and addressing these threats.

Professional skills focus: Assimilating and using information
It is important that you are familiar with the Code and the following information regarding
fundamental principles, threats and safeguards. In the exam, you will be provided with a scenario and
you will need to apply your knowledge of the Code to the information presented. Ensure that your
answer is relevant to the given scenario and not a generic answer regarding ethical behaviour.
8.3 Fundamental principles

Professional accountants are expected to follow the guidance contained in the fundamental
principles in all of their professional and business activities. The professional accountant should also
follow the requirements in the illustrations. However, he/she should be guided not just by the terms
but also by the spirit of the Code.
The Code sets out five fundamental principles, the spirit of which must always be complied with:
8.3.1 Integrity
Definition
Integrity: To be straightforward and honest in all professional and business relationships. Integrity
also means that members must not knowingly be associated with misleading information.
Integrity implies fair dealing and truthfulness.

A professional accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
• contains a materially false or misleading statement;
• contains statements or information furnished recklessly; and/or
• omits or obscures information required to be included where such omission or obscurity would
be misleading.
8.3.2 Objectivity
Definition
Objectivity: Not to compromise professional or business judgements because of bias, conflict of
interest or undue influence of others.
The professional accountant needs to remain impartial and independent, and not let the potential for
any financial, professional or personal gain affect their judgement. Objectivity also requires the
accountant to not be affected by undue influence of others, such as a dominant superior or client
interests.
8.3.3 Professional competence and due care
Definition
Professional competence and due care: To attain and maintain professional knowledge and skill at
the level required to ensure that a client or employing organisation receives competent professional
service, based on current technical and professional standards and relevant legislation; and act
diligently and in accordance with applicable technical and professional standards.
The Code requires the professional accountant to be diligent in monitoring their requirements, either
on learning new skills or monitoring their progress on assignments in the workplace.
Professional competence may be divided into two separate phases:
• Attainment of professional competence – initial professional development
• Maintenance of professional competence – continuing professional development (CPD)

It is important that the accountant only undertakes work that they are qualified to do, including
ensuring that they have sufficient time and resources to do the work to the best of their abilities. It
may be that additional training from a team member or supervisor is required, or a more realistic
deadline.
CPD is a requirement for the Chartered Accountant, as it ensures that technical updates and new
accounting requirements are learnt and understood for application either in business or in practice.
8.3.4 Professional behaviour
Definition
Professional behaviour: To comply with relevant laws and regulations and avoid any conduct that the
professional accountant knows or should know might discredit the profession.
In marketing and promoting themselves, professional accountants should not bring the profession
into disrepute.
8.3.5 Confidentiality
Definition
Confidentiality: To respect the confidentiality of information acquired as a result of professional and
business relationships. Confidential information must not be disclosed outside the organisation
without authority, unless there is a duty or right to disclose, or disclosure is in the public interest and
permitted by law.
The professional accountant must maintain confidentiality even in a social environment and even
after employment with the client/employer has ended. It is also vital that there is no inadvertent
breach of confidentiality, such as if you have two clients in a similar industry, there is a risk that
information gained on one could be used to inform or influence the other, however unintended.
Exceptions to this principle are when the professional accountant is permitted by law or due to a
right to disclose to breach confidentiality:
• quality review undertaken by a professional body (such as Quality Assurance (QA) review for
those in public practice);
• in order to respond to an investigation by a professional or regulatory body (such as FCA);
• during legal proceedings against the accountant;
• to comply with technical and professional standards, including ethics requirements; or
• disclosure is required by law (such as Money Laundering disclosures in a Suspicious Activity
Report (SAR) or resulting from a criminal investigation of fraud).
The Code gives application guidance and examples of such occasions.
8.4 Threats and safeguards
Definitions
Threats: Threats to compliance with the fundamental principles might be created by a broad range
of facts and circumstances. The threats to compliance with the fundamental principles fall into one
more of the following categories: self-interest, self-review, advocacy, familiarity and intimidation
threats.
Safeguards: Safeguards are actions, individually or in combination, that the professional accountant
takes that effectively reduce threats to compliance with the fundamental principles to an acceptable
level.
Compliance with these fundamental principles may potentially be threatened by a broad range of
circumstances.

The Code provides details of a number of different threats, together with potential safeguards which
the professional accountant would need to implement in order to reduce the risk of those threats to
an acceptable level.
Where the threats cannot be reduced to an acceptable level, the professional accountant should
consider resignation from the role or the client.
The following table gives the five key threats identified by the Code, together with examples of when
the threats may arise (and the fundamental principle being threatened). Potential safeguards are then
proposed.
This list is not exhaustive and reference to the Code will provide further examples and guidance.
Ethical threat Key fundamental principle(s) Ethical safeguards

threatened
Self-interest Objectivity • Obtaining assistance or

The threat that a Significant gifts or offers of training from someone with
financial/other interest of hospitality could influence the the necessary expertise
a professional judgements made by the • Ensuring that there is
accountant will professional accountant as they sufficient time available for
inappropriately influence will create a personal bias. performing the duty
the professional Professional behaviour • Referring to the guidelines in
accountant’s judgement the Code regarding
or behaviour. The potential for an accountant to
become involved in fraud or appropriate gifts
dishonest behaviour to conceal • Reporting the offers of gifts or
any wrongdoing or to make hospitality to a senior
financial gains. member of the team or a
Professional competence and due secondary review or opinion
care on the potential conflict of
interest
An accountant may be tempted to
undertake work which they are not • Disclosure of any referral fees
qualified to do (such as complex or or commissions to the client
specialist tax work in a small or customer
practice for a significant fee). Or
potentially agreeing to undertake
a piece of work where time is
constrained.
Self-review Objectivity • If work is to be undertaken by

The threat that a The same firm of accountants the same firm, then ensuring
professional accountant producing the financial statements strict separation of teams, files
will not appropriately and then, subsequently, auditing and access to the information
evaluate the results of a that same set will threaten the (‘Chinese walls’)
previous judgement principle of objectivity (it is difficult • Having a secondary or senior
made/service performed to maintain objectivity over partner review any significant
by the professional something you yourself have decisions
accountant, or by prepared).
another individual within Confidentiality
the professional
accountant’s firm or If a company is both producing the
employing organisation information and reviewing it, there
on which the accountant may be an inadvertent breach of
will rely when forming a confidentiality, especially in
judgement as part of assurance engagements.
performing a current
activity.
Advocacy Objectivity • Any materials which promote

The threat that a This is most appropriate for those the client, such as a
professional accountant in public practice, as it is assumed prospectus for flotation,

threatened
will promote a client’s or that accountants in business will be should be reviewed by

employer’s position to expected to promote their another partner within the
the point that the employer’s position or viewpoint. firm
professional For those in public practice, this • Ensuring a firm which
accountant’s objectivity would potentially breach conflict undertakes both assurance
is compromised. of interest if there is a legal work and preparing for a
defence of a long standing or flotation (for example) should
highly profitable client (and by have separate teams and
losing it, it may adversely affect the work independently of each
finances of the firm). other
Familiarity Objectivity • Partner rotation on long

The threat that due to a Professional judgement may be standing clients
long or close affected by a potential conflict of • Review partner on significant
relationship with a client interest (client with significant fees assurance engagements
or employer, a to the firm or longstanding client) • Reporting any family,
professional accountant or undue influence by a personal or financial links to
will be too sympathetic demanding and significant client the company or client to the
to their interests or too or customer. senior team
accepting of their work. Professional competence and due • Where competing companies
care are served by the same public
Being overfamiliar with a client, practice, making each party
customer or supplier may provide aware of the situation to
the accountant with a false sense enable transparency
of security, and therefore they may • Where new customers or
not act with sufficient diligence or suppliers are engaged,
ensure that technical and ensuring that there is a
regulatory standards are met. second review (segregation
Integrity of duties) to ensure that more
Members must not be knowingly favourable terms and
associated with misleading conditions are not awarded
information. There is the risk that by a member of the team
the familiarity may affect the
judgement of the accountant and
any misleading information
ignored or deemed to be
‘immaterial’ when it should be
dealt with correctly.
Intimidation Objectivity • Increasing the client base to

The threat that a There may be a conflict of interest, reduce the impact of having a
professional accountant such as the threat of the financial reliance on one
will be deterred from professional accountant losing client
acting objectively by their job or being overlooked for • Reporting any intimidation
threats, either actual or promotion. An accountant may be (perceived or otherwise) to a
perceived, including asked, with undue influence, to senior member of the team,
attempts to exercise prepare the financial statements in another partner or to the
undue influence over the a way which provides a more ICAEW TES helpline
accountant. profitable position. • Be prepared to resign from
Professional behaviour the role or the client
Undue influence may persuade the relationship if the intimidation
accountant to prepare the financial cannot be avoided or
statements in a way which negated
breaches regulatory or legal •

threatened
regulations. • Having a secondary review of

Integrity any significant decisions
made by the entity, or a
Members need to ensure that they second reviewer of the client
are not associated with information files
which may be misleading, such as
improperly prepared financial
statements or not following
accounting standards.
(a)
–
–
8.5 Ethical conflict resolution

When evaluating compliance with the fundamental principles, a professional accountant may be
required to resolve a conflict in complying with the fundamental principles. The ICAEW have a
framework which assists members in resolving potential ethical problems. It is based upon the Code
of Ethics but is not included within it. It is a useful tool to resolving issues.
• Gather the relevant facts and identify the problems.
• Identify the affected parties.
• Consider the ethical issues involved.
• Identify which fundamental principles are affected.
• Refer to the employing organisation’s internal procedures.
• Consider and evaluate alternative courses of action.
• Implement the course of action and monitor its progress.
Professional skills focus: Structuring problems and solutions
In your exam, a good approach to answering questions which present an ethical problem would be
to:
• Identify the fundamental principle in question.
• Identify the threat.
• Suggest safeguards, relevant to the scenario.
8.6 Non-compliance with law or regulations (NoCLAR)

In the revised Code of Ethics, there are sections relevant for professional accountants in business and
practice on how to respond to non-compliance with laws and regulations. This specifically highlights
the requirement of professional accountants to raise issues when they come across them in the
normal course of their business.
As accountants work in the public interest, they are required, by the Code, to highlight to
management (or those in charge of governance) if there are any instances of identified or suspected
non-compliance with laws or regulations. Laws and regulations include money laundering
regulations, bribery, fraud, data protection, public health and safety, tax regulations and
environmental laws.
The new sections of the Code of Ethics provide guidance about the steps to be taken and what to do
if the issues need to be escalated to law enforcement or regulators outside of the entity.
Two sets of legislation which have a particular impact on the work of a professional accountant are:
• Money laundering regulations
Money laundering is the process by which money from illegal sources is made to appear legally
derived and it is a criminal offence for a person to knowingly help another person launder or
conceal the proceeds of criminal activity.

In addition, there is a duty to report. Where a person discovers in the course of their work
information which makes them believe or suspect, or where a person has reasonable grounds for
being suspicious, that money laundering is occurring, this must be reported to the National Crime
Agency. It is a criminal offence not to make such a report.
Making such a report does not breach any duty of confidentiality owed by a professional
accountant.
• Bribery Act 2010
For individuals it is a criminal offence to:
– offer, promise or give a financial or other advantage to another person where the advantage is
intended to induce improper performance of an activity or a function or as a reward for the
improper performance of an activity or a function;
– request, agree to receive or accept a financial or other advantage intending that, in
consequence (or as reward for), a relevant function or activity be performed improperly (even if
performance is by another person); or
– offer, promise or give a financial or other advantage to a foreign public official in order to
obtain or retain business or retain or gain an advantage in the conduct of business.
Worked example: Ethical considerations

You are a reporting accountant in a company. Your immediate manager is a very forceful,
domineering individual and you have accepted his views over the last two years on the level of work
in progress. He has given you specific assurance that work in progress has increased by 200% during
the current reporting period and instructed you to report this level in the monthly management
accounts. The year end draft financial accounts show that the organisation has only just met its
business plan financial targets.
Evidence then becomes available (which you were not aware of when the draft accounts were
produced) to indicate that the work in progress had not increased by anywhere near the rate advised
by your manager.
Requirement
How should you approach this? Consider the fundamental principles being threatened here and
recommend appropriate actions.
Solution
Key fundamental principles
• Integrity – Will you be able to demonstrate that the accounts are true and fair without re-drafting?
• Objectivity – How would you maintain your objectivity given that your immediate manager is such
a forceful character?
• Professional competence and due care – Are the draft accounts prepared in accordance with
technical and professional standards?
• Professional behaviour – How should you proceed so as not to discredit yourself?
Discussion
Identify relevant facts: Consider the business’ policies, procedures and guidelines, accounting
standards, best practice, Code of Ethics, applicable laws and regulations. Is the evidence that work in
progress is incorrectly stated supported by other documentation, for example, any hard copy relating
to the valuation, or analytical review of cost of sales, margins and cash flows?
Identify affected parties: Key affected parties are you and your immediate manager. Other possible
affected parties are the next levels of management, recipients of management accounts and the draft
financial accounts, finance, purchasing, accounts payable, human resources, internal audit, audit
committee, the Board, external auditors, shareholders and financial backers.
Who would be involved in resolution? Consider not just who should be involved but also for what
reason and the timing of their involvement. Have you thought of contacting ICAEW for advice and
guidance? Have you discussed this matter with your immediate line manager in light of all the
available evidence and possible consequences? Can you discuss this matter with recipients of the

management and financial accounts? At what point will you consider involving other affected
parties?
Possible course of action
Check the relevant facts by corroborating with other available documentation, for example, cost of
sales calculations, margins, previous inventory counts and other financial information.
Discuss the matter with your immediate line manager to determine an appropriate course of action,
for example, undertaking another inventory count.
If you feel that your manager’s response is not appropriate, discuss the matter with recipients of the
management accounts and draft financial accounts and the next level of management.
Next stages could include discussion with senior management, internal audit, audit committee, the
board of directors, external auditors or other actions indicated in internal whistle-blowing
procedures.
During the resolution process it may be helpful to document your involvement, the substance of the
discussions held, who else was involved, what decisions were made and why.
Interactive question 2: Ethical considerations

Your employer has put you in charge of a project which when you considered it carefully requires
expertise that you do not have. You are uneasy about doing the job given that you do not have the
necessary expertise and are uncertain about what to say to your employer.
Requirements
Consider the following points in your answer:
(a) What are the main fundamental principles being threatened in this scenario?
(b) What are your possible courses of action?
See Answer at the end of this chapter.
8.6.1 Practical significance

Accountants working within a financial reporting environment can come under pressure to improve
the financial performance or financial position of their employer. Finance managers who are part of
the team putting together the results for publication must be careful to withstand pressures from
their non-finance colleagues to indulge in reporting practices which dress up short-term
performance and position. Financial managers must be conscious of their professional obligations
and seek appropriate assistance from colleagues, peers or independent sources.
9 UK GAAP comparison
Section overview
FRS 102 Section 2, Concepts and Pervasive Principles is drawn from, and largely based upon, the
IASB Conceptual Framework.
• Under UK GAAP, there are ten qualitative characteristics outlined in the Concepts and Pervasive
Principles, whereas the IASB Conceptual Framework has six.
• UK GAAP places additional emphasis on reporting the stewardship of an entity by its
management.
UK GAAP has placed additional emphasis on the stewardship of an entity. The enhancing the
characteristics of understandability, relevance, timeliness and comparability are essentially the same
under UK GAAP. However, the following differences between IFRS and UK GAAP should be noted:

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The Institute of Chartered Accountants in England and Wales

1 Reporting framework and ethics 1

Model ﬁnancial statements (IFRS) 767

ICAEW 2021 Contents iii

iv Financial Accounting and Reporting − IFRS ICAEW 2021

Ethics and professional scepticism

ICAEW 2021 Introduction v

Syllabus area Weighting (%)

Accounting and reporting concepts and ethics 10

Single entity ﬁnancial statements 60

Consolidated ﬁnancial statements 30

vi Financial Accounting and Reporting − IFRS ICAEW 2021

Professional level exams Permitted text

Audit and Assurance 

Financial Accounting and Reporting 

Business Strategy and Technology x

Business Planning No restrictions

Advanced Level exams

Corporate Reporting No restrictions

Strategic Business Management No restrictions

Case Study No restrictions

The exams which have no restrictions include the following:

ICAEW 2021 Introduction vii

Syllabus, skills development and technical knowledge grids

Past exams and mark plans

Student support team

Online student community

ICAEW Quarterly and Student Insights

viii Financial Accounting and Reporting − IFRS ICAEW 2021

ICAEW Business and Finance Professional (BFP)

ICAEW 2021 Introduction ix

Skill area Overall objective

Assimilating and using Understand a business or accounting situation, prioritise by

Concluding, Apply technical knowledge, skills and experience to support

x Financial Accounting and Reporting − IFRS ICAEW 2021

ICAEW 2021 Introduction xi

xii Financial Accounting and Reporting − IFRS ICAEW 2021

Reporting framework and

2 Financial Accounting and Reporting − IFRS ICAEW 2021

Topic Practical signiﬁcance Study approach Exam approach Interactive

1 Financial statements Approach You need to be able

2 Purpose and use of Approach You may be asked

3 Bases of accounting Approach You may be asked

4 The IASB Conceptual Approach You may be asked IQ1 Asset or

ICAEW 2021 1: Reporting framework and ethics 3

statements and enhancing qualitative deﬁnitions of the the elements

5 The regulatory Approach You need to

6 Convergence process Approach You will need to be

7 Inherent limitations Approach This is a small area

4 Financial Accounting and Reporting − IFRS ICAEW 2021

problems. accounts. the end of the

Think about information

8 Ethical and Approach Ensure that you can IQ2 Ethical

9 UK GAAP Approach You may be asked

ICAEW 2021 1: Reporting framework and ethics 5

1.2 Financial statements

1.3 Requirement to produce ﬁnancial statements

6 Financial Accounting and Reporting − IFRS ICAEW 2021

1.5 Financial reporting standards

1.6 Fair presentation

1.7 True and fair view

ICAEW 2021 1: Reporting framework and ethics 7

1.8 The statutory ‘true and fair override’