QUESTION 1 The accountant of Fauntleroy Ltd is preparing financial statements for the current year end but is struggling to establish which information is more important. He has a shortlist of questions which need to be solved: (a) In preparing the description of a very complex transaction he has two options: (i) To use information from a close friend who holds shares in the company: the information prepared by his friend is somewhat biased but is very clear and concise; or (ii) To use the information prepared by an independent analyst: this information is complex to the average person Which piece of information is more appropriate for use in the financial statements? (b) A transaction took place during the year which is capable of impacting the economic decisions of the users, both currently and potentially in the future. The exact details of the transactions are still not available but are likely to be finalized halfway through the next financial year. Should the information, in its current state, be included in the current financial statements? (c) Two transactions took place in the year which met the definition and recognition criteria of an expense. The transaction did, however, have a distinct difference which is highlighted below: (i) Transaction one resulted in the decrease of the bank account, an asset; and (ii) Transaction two resulted in a loan liability being created As the accountant was confused with the conceptual treatment of the transactions, he examined another set of financial statements, showing non-compliance with IFRS, which treated transaction one as an expense but transaction two as the issue equity preference shares. The accountant has therefore decided to follow this treatment but is concerned it is not correct. Do you agree with the treatment? REQUIRED: Provide an answer, based on the Conceptual Framework, to each of the accountant’s questions in (a), (b) and (c) above.
QUESTION 1
The accountant of Fauntleroy Ltd is preparing financial statements for the current year end but is struggling to establish which information is more important. He has a shortlist of questions which need to be solved:
(a) In preparing the description of a very complex transaction he has two options:
(i) To use information from a close friend who holds shares in the company: the information prepared by his friend is somewhat biased but is very clear and concise; or
(ii) To use the information prepared by an independent analyst: this information is complex to the average person
Which piece of information is more appropriate for use in the financial statements?
(b) A transaction took place during the year which is capable of impacting the economic decisions of the users, both currently and potentially in the future. The exact details of the transactions are still not available but are likely to be finalized halfway through the next financial year.
Should the information, in its current state, be included in the current financial statements?
(c) Two transactions took place in the year which met the definition and recognition criteria of an expense. The transaction did, however, have a distinct difference which is highlighted below:
(i) Transaction one resulted in the decrease of the bank account, an asset; and
(ii) Transaction two resulted in a loan liability being created
As the accountant was confused with the conceptual treatment of the transactions, he examined another set of financial statements, showing non-compliance with IFRS, which treated transaction one as an expense but transaction two as the issue equity
REQUIRED:
Provide an answer, based on the Conceptual Framework, to each of the accountant’s questions in (a), (b) and (c) above.
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