ACCT 860 Financial Accounting

Week 1
Q1. What are the arguments for and against the regulation of financial accounting?

Answer:

• Free-market perspective versus pro-regulation perspective

Free Market Perspective beliefs:

1. Demand & supply forces generate an optimal supply of information

2. Even in the absence of regulation there are private economics-based incentives to provide
information (what does this mean?)

3. Information is produced to reduce conflict between parties with an interest in the organisation
(agency theory?)

4. Managers are best placed to determine what information should be produced

5. Financial statement audits can also be expected in the absence of regulation

6. Without regulation, entities would still be motivated to disclose both good & bad news

Pro-regulation Perspective beliefs:

1. Accounting information is a public good:

• Free-rider problem!

• What is this? How does this affect accounting?

2. Regulation is required to alleviate the effects of market failure:

• Arguments that on average the market is efficient ignore the rights of individual
investors who might lose as a result of relying upon unregulated disclosures

• Ability to obtain information might depend on the individuals control of scarce resources
required by the entity

• Basically protection is need for the smaller weaker parties

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Q2. What are the advantages and disadvantages of a conceptual framework?

Answer:

Advantages

1. Provides a coherent theory to underpin standard setting – avoids developing overlapping &
conflicting standards

2. Requires for better accountability from standard setters

3. Protects standard setters from political pressure

4. Improves communication between standard setters and constituents

5. Makes the development of accounting standards more economical

6. Standards can be developed that focus on different areas e.g. profit or loss versus valuation of
net assets

7. Increases compatibility and comparability of financial reports

Disadvantages

1. FS are designed for a range of different users – a single conceptual framework may not suit
the requirements of all

2. Given the diversity of users it may be more appropriate to develop a variety of different
standards each with its own conceptual base

3. It is not clear whether the role of standard setters, prepares, auditors etc. is actually made
easier as a result of having a conceptual framework

MCQs

NZ external reporting environment

2.  The financial statements and supporting notes included in an annual report presented to
shareholders at a company's annual general meeting is an example of general purpose financial
statements.  
TRUE

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3.  Directors could elect not to comply with an accounting standard on the grounds that applying the
particular accounting standard would cause the accounts not to present a ‘true and fair view'.  
FALSE
 
4.  The role of the New Zealand External Reporting Board (XRB) is to provide broad oversight of the
process for setting standards in New Zealand , including the authority to direct the FRSB to develop,
amend or revoke a particular standard.  
FALSE

5.  In New Zealand, accounting standards are issued by the External Reporting Board (XRB).  
TRUE

6.  In terms of the Companies Act 1993, the directors of a company are responsible for maintaining
the accounting records in such a way that.  
A.  all transactions entered into by the company are accurately recorded, and can be adequately
explained.
B.  at any time during the reporting period, the financial position of the company is determinable with
reasonable accuracy.
C.  when financial statements are prepared, they comply with the Financial Reporting Act 1993 and
can be readily and properly audited.
D.  All of the answers provided are correct.
 
7.  XRB are initials that stand for:  
A.  External Reporting Board
B.  Internal Reporting Board
C.  Xpress Reporting Board
D.  Xclusive Reporting Board

8.  What option(s) does a company have when directors are of the view that compliance with
accounting standards does not generate a ‘true and fair view’ financial statements?  
A.  Directors may elect not to comply with the standard.
B.  Directors may exercise the ‘true and fair view override’.
C.  Directors may disclose the standard in question, the nature of conflict and adjustments made.
D.  All of the answers provided are correct.
 
9.  The role of the audit report is to:  
A.  provide assurance as to the future viability of the entity.
B.  confirm that all transactions have been correctly recorded.
C.  monitor the efficiency and effectiveness of management.
D.  help establish the credibility of financial information.

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10.  Which of the following statements about a ‘true and fair' view is false?  
A.  There is no legal definition of a ‘true and fair' view.
B.  The Companies Act 1993 defines a ‘true and fair' view.
C.  The Financial Reporting Act 1993 requires that directors ensure that financial statements provide
a ‘true and fair' view.
D.  Disclosures are regarded as giving a ‘true and fair' view if they provide all relevant information and
comply with all applicable accounting standards.

11.  Some of the perceived barriers to the harmonisation process (for the harmonisation of accounting
standards globally) include:  
A.  different business environments.
B.  different legal systems.
C.  different cultures.
D.  all of the answers provided.
 
12.  Responsibility for the preparation of the financial information of a company rests with:  
A.  the auditors.
B.  management.
C.  the auditors and management jointly.
D.  the auditors and the board of directors jointly.

NZ Framework
 
1. The NZ Framework has the force of law. 
FALSE
 
2. The New Zealand Framework serves as a guide to the New Zealand National Standard Setter in
developing accounting standards in New Zealand. 
TRUE

3.  General purpose financial statements signify that such financial statements comply with
accounting standards and other generally accepted accounting principles.  
TRUE

 
4.  One of the benefits of the Conceptual Framework is that the development of accounting standards
and other authoritative pronouncements should be more economical.  
TRUE

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5.  The Financial Reporting Act 1993 (FRA) definition of a reporting entity is the same as that
contained in the NZ Framework.  
FALSE
 
6.  The objective of financial statements is to provide future oriented information to help investors
make business decisions.  
FALSE

7.  A separate recognition criteria for equity is not set forth in the Framework because it represents a
residual interest in the assets of an entity.  
TRUE

8.  The NZ framework is an accounting standard.  

9.  Which of the following factors should be considered in order to determine whether an entity is a
reporting entity when it is not obvious that users exist who would be dependent on the financial
reports of the entity?  
A.  separation of management from those with economic interest in the entity
B.  economic or political importance/influence
C.  financial characteristics
D.  separation of management from those with economic interest in the entity and economic or
political importance/influence

10.  When preparing financial reports ‘users are assumed to have a reasonable knowledge of the
business and economic activities and accounting and a willingness to study the information with
reasonable diligence'. This statement is consistent with the qualitative characteristic of:  
A.  materiality.
B.  faithful representation.
C.  understandability.
D.  comparability.
 
11.  In the absence of an NZ IFRS that specifically applies to a transaction, other event or condition,
management shall use:  
A.  judgment in developing and applying an accounting policy.
B.  previous financial reporting standards.
C.  statement of concepts.
D.  All of the answers provided are correct