b) The IASB’s conceptual framework for financial reporting states that the qualitative characteristics of financial statements are the attributes that make financial information useful.
Required:
Explain the fundamental qualitative characteristic “Relevance”. (2 marks)
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The IASB Framework for the Preparation and Presentation of Financial Statements (IASB Framework) says that information is relevant ―when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. For accounting information to be relevant, ―accounting information must be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations, and goes on to define event and outcome.
c) Compare the general principles underlying Current Purchasing Power (CPP) accounting and Current Cost Accounting (CCA). (3 marks)
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CPP makes adjustments for general inflation whereas CCA allows for specific price movements (changes in the deprival value of assets).
Specific price changes (in CCA) enable a company to determine whether its operating capability has been maintained. The two concepts use different concepts of capital maintenance; namely operating capability with CCA and general purchasing power with CPP.
d) Recognition in financial reporting is the process of incorporating into the financial statements an item that meets the definition of an element of financial statements and satisfies specified criteria.
Required:
State the criteria for recognition of an element of financial statements in financial reporting. (2 marks)
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- It is probable that any future economic benefit associated with the item will flow to or from the entity.
- The item has a cost or value that can be measured with reliability.
e) It is widely argued that global harmonization of financial reporting standards will bring about uniformity in financial reporting and ensure consistency and comparability in published financial information by enterprises. However there are some barriers to global harmonization.
Required:
Explain any THREE barriers to global harmonization of financial reporting standards. (3 marks)
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- Different purposes of financial reporting
- Different legal system
- Different user groups
- Needs of developing countries
- Nationalism demonstrated in the unwillingness to accept another country’s standards
- Cultural differences resulting in different objectives for accounting systems
- Unique circumstances
- The lack of strong accountancy bodies (Any 3)