-
Explain the benefits of having a conceptual framework for financial reporting
Accounting standards would be more consistent and logical because they are developed from an orderly set of concepts.
Increased international comparability of accounting standards should occur, as they are based on a CF that is similar in other jurisdictions (e.g. IASB and FASB).
The IASB and AASB would be more accountable for their decisions, as specific requirements should be more explicit, as should any departures.
The process of communication should be enhanced between IASB and AASB.
The development of accounting standards should be more economical as CF provides a guide for decision making.
-
Discuss main arguments for recognising share based payments?
- While it is true that no sacrifice of cash is required up front, main arguments for recognising share based payments as cost are:
- 1. Share based payment is an outflow of future economic benefits
- 2. Goods and services acquired should be treated in a manner consistent with goods and services acquired with cash.
- 3. If not recognised, profit is overstated for entities acquiring goods and services using share based payment.
-
Describe one argument in favour of and two arguments against the mandatory disclosure of earnings per share
- For: provides useful data to user that is more readily understood than conventional financial statements.
- Against: Calculations adds arbitrariness and estimates.
- The EPS figure is no improvement on profit for comparing performance of companies.
- The risk that accounting support for EPS may imply support for price-earnings ratio. Some doubt usefulness of price-earnings ratio. (More debt?)
-
With reference to the Framework for the Preparation and presentation of financial statements describe which approach is consistent with the definition and recognition criteria and why
- Expense and Reinstate approach: recognises the costs as expenses in the period they are incurred; but reinstates them as assets if the costs subsequently give rise to economically recoverable reserves.
- Arguments for: it defers the recognition of an asset until the future economic benefits are probable.
- It provides an entity with the opportunity of matching the pre production costs with the with the associated revenues.
- Therefore this approach fits in with the Framework definitions of the elements assets and expenses.
-
Distinguish between simple and compound financial instruments providing examples
- Simple financial instruments comprise a single financial asset, liability or equity instrument.
- Eg. a loan receivable, loan payable or ordinary share
- Whereas compound financial instruments comprise a combination of characteristics of financial asset, liability and equity instruments.
- Eg. a debt security convertible into ordinary shares comprises two components: they are an arrangement to deliver cash or other financial assets and an option granting the holder the right, for a specified period, to convert the debt security into the ordinary shares of the issuer.
-
Briefly explain how the issue of compound financial instruments would be accounted for under AASB139 Financial instruments: recognition and measurement
- Initial recognition: split the debt and equity elements so that they can be separately accounted for.
- The FV of the option is highly subjective, but the FV of the debt element is more easily measured by discounting the future cash flows.
- The assumption is then made that the FV of the option is the balancing figure.
-
Functional currency- things to consider
- Functional currency: the main currency used by a business or unit of a business.
- eg. Look at source of debt financing
- Look at equity financing (which stock exchange)
- Cash collections from operations
- Currency used by customers to settle accounts, pay suppliers
- Priority is given to the currency customers use to settle accounts and used to pay suppliers
|
|