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The document contains theory past questions and answers of the ICA (Ghana) Professional Program.
  ICA PROFESSIONALFINANCIAL REPORTINGEXAMINATION QUESTIONS AND ANSWERS (THEORY)MAY 20101. Explain the principles and reasoning for the use of equity accounting in preparingconsolidated financial statements. ANS: Equity accounting is one of the methods for a company with subsidiaries to account for investments in its subsidiaries. The investment is initially recorded in the consolidated statement of financial position atcost to the group which is also the fair value of the group share of the acquired assetsand liabilities including goodwill arising on the investment. The carrying amount isadjusted for any write-off or impairment of goodwill and is increased or decreased torecognize its share of the profits or losses after the date of acquisition. The equitymethod of accounting for investments in subsidiaries is suitable for interest greater than2! but less than ! of the net assets in the subsidiary. #t is normally referred to as $ssociates where there is significant influence%interest but not controlling interest. 2. &hat are the advantages of international harmonization '(are size fits all( globalstandard) to*i) #nvestors%lendersii) +ultinational companiesiii) ,thers i.In! #$% &L!n'!% a)y using common sets of accounting standards/ cross border investors will be ableto compare apples with apples0 with a minimal adjustment of nearly transparentcompany financial statements. b)+ost non-domestic investors made by public investment companies and 1.. 11are made by using analysts who specialize in examination of financial statementsfrom different countries leading to higher cost of communication. c)y using international standards/ investors comparability and understanding ability ‟ of financial statements will be enhanced leading to better investment decisions. ii.M#in*#i$n* C$+,*ni! y using international standards/ companies will improve their image and thus avoidfinancial principle shopping0 syndrome. The benefits of harmonization are as follows* a)reparation of consolidated accounts will be easier b)#nternal communication and comparison of results would be enhanced leading toimproved management control c)$ccess to international funds will be easier with an added benefit of lower cost of capital d)$ppraisal of foreign enterprises for ta3eover will be more straightforward4 and e)5ost savings and efficiency will result from less staff training in accountingdepartments. iii.O#-!% a)Tax authorities* harmonization will lead to greater efficiency and productivityregarding collection of taxes and problems regarding transfer pricing. b)6eveloping countries* taxing and regulating multinationals will be easier. c)#nternational economic groupings* gross-border trade and investments will beeasier/ eg. E7/ 78$/ 5hina/ 9apan/ etc.  . riefly state and describe five ' ) main wea3nesses of the :istorical 5ost 5onvention infinancial report ing.;.<eturn on 5apital Employed '<,5E) can be distorted as a result of profits beingoverstated in real terms and assets such as fixed assets being understated.2.:istorical 5ost $ccounts may fail to show whether a company is earningsufficient funds to enable it to maintain its capital real.=.$lso/ historical cost accounts may fail to show the extent to which funds canprudently be distributed in the form of dividends.>.:istorical cost accounts can give misleading impression of growth andprofitability. .#t does not express in current prices all of the resources employed in a business.?.$nother possible wea3ness is the matching of current revenues expresses incurrent prices with historical cost may result in inflated profits being reported. MAY 2011/. ,utline four '>) conditions under which the management of E#5 would be justified in their decision 'with reference to #$8 2@ A5onsolidated and 8eparate Binancial 8tatementsA)  ANS:  $ parent may be exempted from presenting consolidated financial statement s if andonly if the following can e established* 'i) the parent is itself a wholly-owned subsidiary/ or the parent is a partially-ownedsubsidiary of another entity and its other owners/ including those not otherwise entitledto vote/ have been informed about/ and do not object to/ the parent not preparingconsolidated financial statements4 'ii) the parentCs debt or equity instruments are not traded in a public mar3et 'iii) theparent did not file/ nor is it in the process of filing/ its financial statements with asecurities commission or other regulatory organization for the purpose of issuing anyclass of instruments in a public mar3et4 and 'iv) the ultimate or any intermediate parentof the parent produces consolidated financial statements available for public use thatcomply with #nternational Binancial <eporting 8tandards. The 8tandard clarifies therequirements for a parent exempted from preparing consolidated financial statementswhen the parent elects/ or is required by local regulations/ to present separate financialstatements. . Explain the term (Dearing( in relation to the capital structure of a company limited byshares. ANS: Dearing is the relationship between fixed interest bearing long term loans plus fixeddividend bearing shares on one hand and equity share capital or equity fund on theother. $n alternative term for gearing is leverage. Dearing  long Term Foan G reference 8hares Equity BundEquity funds . ,utline the role and structure of #nternational $ccounting 8tandards oard '#$8). ANS: The formal $3!4#i!  of the #$8/ formulated in its mission statement are* 'a)To develop/ in the public interest/ a single set of high quality/ understandable andenforceable global accounting standards that require transparent andcomparable information in general purpose financial statements. 'b)To co-operate with national accounting standard setters to achieve convergencein accounting standards around the world.  'c)to develop a single set of high quality/ understandable/ enforceable and globallyaccepted In#!%n*#i$n* Fin*n4i* R!,$%#in5 S#*n'*%' (IFRS )  through itsstandard-setting body/ the In#!%n*#i$n* A44$n#in5 S#*n'*%' 6$*%' (IAS6) 4'd)to promote the use and rigorous application of those standards4'e)to ta3e account of the financial reporting needs of emerging economies and smalland medium-sized entities '8+Es)4 and 'f)to promote and facilitate adoption of #B<8s/ being the standards andinterpretations issued by the #$8/ through the convergence of nationalaccounting standards and #B<8s.The #%4#%!  of the #$8 has the following main features. 'a)The oard consists of ;2 full-time members and two part-time members. 'b)#t operates under the umbrella of The #$85 foundation 'which is an independentcorporation having two main bodies H the Trustees and the #$8.) 'c)The #$85 Boundation trustees appoint the #$8 members/ exercise oversightand raise the funds needed. 'd)The #$8 has sole responsibility for setting accounting standards. 'e)There are also two further bodies/ the 8tandard $dvisory 5ouncil and the#nternational Binancial <eporting #nterpretations 5ommittee. MAY 20127. #$8 2@  Consolidated and separate financial statements 0 provides circumstances inwhich an entity can be said to have control over another 'subsidiary). ,utline 8i! () conditions that are indicative of the existence of control. C$n'i#i$n : ;.The power to govern the financial and operating policies of an entity. 2.,wnership of more than ! of the ordinary shares in the investee entity4 =.5asting more than half of the voting rights because of an agreement withother investors4 >.Doverning the financial and operating policies of the entity by law or byagreement4 .$ppointment or removal of the majority of the members of the board of directors and control of the entity is by that board4 ?.5asting the majority of votes at a meeting of the board of directors andcontrol is exercised by that board 9. Explain the concept of Ifair presentationC and compare it with Jtrue and fair   i!; F*i% ,%! !n#*#i$n *n' #%! *n' 8*i% i! #$8 ; Presentation of Financial Statements describes the concept of fair presentation.Bair presentation involves representing faithfully the effect of transactions/ other eventsand conditions in accordance with the definitions and recognition criteria in the #$8 Framework  . This is developed by stating that the application of #B<8/ interpretations and additionaldisclosures will result in fair presentation. The traditional 7K approach required financial statements to comply with the 5ompanies $ct 'and therefore 7K standards) and give a true and fair view. True could beapproximated to Jrepresent faithfullyC and fair to Jfair presentationC. #$8 ; lin3s them by  stating that compliance with standards will give a fair presentation. $s a result there isunli3ely to be any difference between the two. &hilst not dealing with the concepts directly/ the #$8 Framework    uses the descriptionsof fair presentation and true and fair view interchangeably in its discussion of theapplication of the principal qualitative characteristics of financial information. <. Explain the concept of I  #*n4! $!%=8$%+; and its relationship to >8*i% ,%! !n#*#i$n; S #*n4! $!% 8$%+ *n' 8*i% ,%! !n#*#i$n +ost transactions are reasonably straightforward and their substance 'their commercialeffect) is the same as their legal form. #n some complex transactions the true substancemay not be readily apparent. Their legal form may not adequately express the truecommercial effect of such transactions. &here this is the case/ it may not be sufficient to account for them by merely recordingtheir form. The financial statements should represent commercial substance/ not justlegal form 'substance over form). #f a transaction gives rise to an asset or liability 'asdefined in the #$8 Framework  )/ it should be accounted for on this basis even if this isdifferent from its legal form. $pplying the definitions of an asset and a liability identifiesthe appropriate accounting treatment. The #$8 Framework identifies that if information is to represent faithfully thetransactions it purports to represent/ then they should be accounted for in accordancewith their substance and economic reality and not merely their legal form. The substancemay not be consistent with the legal form of a transaction. $n example is a sale andrepurchase agreement. 10. Explain the circumstances in which non-compliance with the detailed provisions of anaccounting standard would be justified. N$n=4$+,i*n4! i#- IFRS #$8 ; allows non-compliance with a standard 'or interpretation) only where managementconcludes that compliance would be so misleading as to conflict with objectives of financial statements set out in the #$8 Framework  . :owever this is only where therelevant regulatory framewor3 requires/ or does not prohibit/ such a departure. The standard uses the phrase Jwhere management concludesC which may indicate thatthere a margin for those preparing the financial statements to use this exception wherethey believe it is appropriate. :owever/ #$8 ; tal3s about this coming about Jin extremelyrare circumstancesC. To all intents and purposes/ these circumstances will never occur. 11. 6efine an #nvestment roperty 'in reference to. #$8 >) In! #+!n# ,%$,!%#? : Fand or building/ or part of a building/ or both/ held by the owner or the lessee under a finance lease to earn rentals and%or for capital appreciation/ rather than for use in production or supply of goods and services or for administrative purposesor for sale in the ordinary course of business.
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