03. Conceptual Framework Flashcards
What are the three main purposes of the conceptual framework?
- To assist the IASB to develop IFRS based on consistent concepts.
- To assist preparers of FS to develop consistent accounting policies when no standard applies or a standard allows a choice.
- To assist all parties to understand and interpret the standards.
What is the objective of general purpose financial reporting? What information do primary users need?
To provide financial info that is useful to current and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.
Primary users need info that will help them assess an entity’s potential future cash flows (amount, timing and uncertainty) and management’s stewardship of economic resources.
What is the going concern assumption?
It underlies preparation of FS. Going concern assumes entity will be in operation for the foreseeable future.
What is an asset as per the framework?
An asset is a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
Rights may correspond to an obligation of another party (eg right to receive cash, goods or services) or to correspond to another party’s obligation (eg right to use or sell PPE or inventories).
Economic benefits may either be future cash inflows or avoidance of future cash outflows or even a future exchange of resources in favourable terms.
An entity controls an economic resource if it can presently direct the use of it and obtain benefits flowing from it or preventing another entity from doing so.
What is a liability as per the framework?
A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
Obligation refers to a duty or responsibility that an entity has no practical ability to avoid. It identifies always owed to another party.
Doesn’t have to be a probable transfer, there must just be potential of transfer.
A present obligation only exists as a result of a past event if entity has already obtained the economic benefits or taken an action and as a consequence, the entity has to transfer resources it wouldn’t have had to t transfer otherwise.
What is equity as per the framework?
The residual interest in the assets of the entity after deducting all its liabilities.
What is income as per the framework?
Increases in assets or decreases in liabilities that result in increases in equity other than those relating to contributions from holders of equity claims.
What is an expense as per the framework?
Expenses are decreases in assets or increases in liabilities that result in decreases in equity other than those relating to distributions to holders of equity claims.
What kind of items may be recognised in the FS?
Only items meeting the definition of an element may be recognised. Elements are only recognised if recognition provides useful info to users ie it is relevant and is a faithful representation.
Recognition may not provide a faithful representation if there is a very high degree of measurement uncertainty.
When does derecognition of an asset or liability usually occur?
- When the entity loses control of the asset.
- When the entity no longer has a present obligation for a liability.
Outline the two main measurement bases under the conceptual framework.
- Historical cost - acquisition cost of asset or trans price when liability was incurred.
- Current value - reflects changes in value. Three bases:
- fair value - price received to sell an asset or paid to transfer a liability.
- value in use/fulfilment value - value in use is the PV of cash flows expected to be derived from the use of an asset and its ultimate disposal. Fulfilment value is the PV of resources transferred to fulfil a liability.
- current cost - cost of an equivalent asset/consideration that would be received for an equivalent liability at the measurement date.
Outline the fundamental characteristics of useful information.
Relevance - info is relevant if it helps users to evaluate past, present and future events (predictive value) and allows users to confirm or correct their past evaluations (confirmatory value).
Relevance is affected by materiality.
Faithful representation of info meets the following criteria:
- neutral (free from bias). Supported by prudence.
- complete within the bounds of materiality and cost.
- free from errors: no errors or omission. Does not mean perfectly accurate eg due to estimates.
- (commercial) substance over (legal) form
Provide an overview of materiality.
Info is material if its omission or misstatement could influence the decisions of primary users taken on the basis of the FS.
Materiality is entity specific and based on nature and/magnitude.
