The 'FR' paper is an improvement over FA's double-entry bookkeeping and serves as a bridge to Strategic Business Reporting.
F3 is the most fundamental level, and F7 expands on what students learned at that level. Then there's P2, which is the highest level. Management Accounting, by the way, is the other major strand. That is concerned with what you do within the organization, whereas financial reporting is concerned with how you represent the organization to outsiders.
Financial reporting refers to how you present information about your company to interested third parties. Shareholders, for example, banks or investors.
So, in order to pass the ACCA F7 (FR) Financial Reporting exam, students must learn how to prepare a financial statement for those third parties?
Yes, but that gives the impression that it is very simple. In reality, there is a lot more to it. That, to me, is what makes it interesting.
To be honest, I used to despise financial reporting. I never considered a career here while studying for my exams. I was relieved to be free of financial reporting because I didn't understand it.
It turned out that I had been under-trained! After revisiting it in an investment context, I discovered that it is vastly different in practice.
Accounting is fascinating because you are attempting to depict real-life events using numbers and financial statements. You're attempting to tell a story or paint a picture, depending on the case.
You're attempting to depict real-life events with numbers and financial statements. You're attempting to tell a story while also constructing an image.
Can you share an example?
Of course, yes. Assume that your company owns a freehold building. What do you include in your financial statements to demonstrate this? How do you figure out how much that asset is worth to you? You could base your decision on the price you paid or the current market rate, but different surveyors will give you different results.
Consider the following scenario: you've just sent an invoice to a client. That is a receivable, which you record as an asset because it will become an asset once they pay. You believe it will be advantageous to you in the future. But what happens if they don't pay? When did you decide to take that amount off your income statement? You're putting a monetary value on intangibles like promises and assumptions.
ACCA F7 (FR) Financial Reporting introduces students to a world where financial reporting is no longer black and white. There are no correct or incorrect answers; only differing points of view. Accounting has many different shades of grey.
F7 encourages students to recognize that they have many options available to them, each of which necessitates the use of different tools or methods depending on the situation. These rules change on a regular basis because accountants still don't know how to accurately show certain things.
So ACCA F7 (FR) Financial Reporting includes all of these methods?
That's exactly what I mean. The ACCA F7 (FR) Financial Reporting syllabus covers all aspects of decision-making.
Making decisions about the value of certain assets within the company?
Accountants "measure" as opposed to "value." It does, however, show students the variety of methods that can be used to measure various assets in order to prepare financial reports.
Accountants "measure," not "value."
We concentrate on assets and liabilities on the balance sheet, and revenue and profit on the income statement. In both of those locations, ACCA F7 (FR) Financial Reporting walks students through all of the possible scenarios. Branding, property, plant, and equipment, stock/inventory, investments, and biological assets are examples of intangible assets.
Everything can and must be measured in order to produce a financial report. This is where ambiguity comes into play. What is a logo's worth? What is a brand's worth?
So there are no rules, only opinions?
There are rules, but you must make educated decisions about which rules apply at times. Students must be aware of all of the strict guidelines dictating how to measure a specific asset, but they must also be aware of when they must make a judgment call.
You must make an educated decision about which rules apply.
Students enrolled in ACCA F7 (FR) Financial Reporting are increasingly confronted with situations requiring judgment. Assume I sent you an invoice but you have yet to accept delivery. Is this yours or mine? Have I persuaded you to purchase it? Is it possible to recognize the profit from the sale and remove the inventory from my balance sheet?
In practice, the rules can be difficult to apply at times. Purchasing yogurt at a supermarket is one thing: I take your product to the cash register, pay for it, and it becomes mine. Other situations are rarely as straightforward.
It's one thing to buy yogurt at the grocery store. Other situations are rarely as straightforward.
As an accountant, you are constantly confronted with ambiguity in the real world. To deal with them, you must first understand the range of rules that may apply.
In practice, how does that ambiguity work?
Do you remember the Greek crisis a few years ago? That's a great example. Greece was nearly bankrupt before it was bailed out, but Greek bonds were only trading at around 50% of their face value at the time. The bond's value fell because the market expected Greece to default on its debt.
If you're a bank holding Greek bonds, how do you value that asset? You now own only half of what you did previously in terms of market value. How do you depict this situation in your financial reports?
That is where the gray areas of financial reporting come into play, because the answer is dependent on how you value the loss. Some banks, for example, valued their bonds at 80% because they believed the market was incorrect, whereas others trusted the market and set the value at 50%.
Although the same asset can be measured differently depending on the viewpoint, one cannot be said to be "more correct" than the other.
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