03 Conceptual Framework for Financial Reporting Flashcards by Leann Ganzon

What are the chapters of the Conceptual Framework?

Chapter 1 Objective of Financial Reporting
Chapter 2 Qualitative Characteristics
Chapter 3 The Financial Statements and The Reporting Entity
Chapter 4 Elements of Financial Statements
Chapter 5 Recognition and Derecognition
Chapter 6 Measurement
Chapter 7 Presentation and Disclosure
Chapter 8 Concepts of Capital and Capital Maintenance

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Summary of general terms and concepts that underlie the preparation and presentation of general purpose FS

Conceptual Framework

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What is the underlying theme of Conceptual Framework

decision-usefulness

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What is the basic purpose of the Conceptual Framework?

guide in developing future PFRSs and guide in resolving accounting issues not directly addressed by existing PFRSs

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What are the specific purposes of PFRS?

Assist:
IASB and FSRSC - in developing and reviewing accounting standards
Preparers of FS - in developing policies for transactions and events
FS users - in interpreting PFRS
Others - to know what IASB and FSRSC do

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In case of conflict between PFRS and Conceptual Framework, which one will prevail?

PFRS

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Assumptions or postulates on which the accounting process is based

Underlying assumptions

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The only underlying assumption recognized by the Conceptual Framework

Going Concern Assumption

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Assumes business operations will continue indefinitely in the absence of contradictory evidence

Going Concern Assumption / Continuity Assumption

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Assumption supporting cost principle

Going Assumption

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Examples of application of going concern assumption

Classification of current and non-current
Accruals and deferrals
Depreciation, amortization and depletion

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Different kinds of periods in years in accounting

Calendar - year end December 31
Fiscal - year end is not December 31

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Income is recognized when earned, not when collected
Expense is recognized when incurred, not when paid

Accrual Principle

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Income is recognized when payment is collected

Cash basis of Accounting

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Life of the entity is divided into series of reporting periods usually in years

Time Period Principle / Periodicity Concept

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Assumes entity and its owners are two separate beings

Accounting Entity Concept

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Who are the users of FS and their classification?

Primary - existing and potential investors, lenders & other creditors
Other - employees, customers, government, public

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The Monetary Unit Principle assumes purchasing power of the peso is ________

constant

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Assumes there is a common measurement basis for accounting information

Monetary Unit Principle

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What is the purpose of Chapter 1?

foundation of Conceptual Framework

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What are the concerns of the users of FS?

Investors - risk and return of investment
Lenders and other creditors - liquidity and solvency
Employee - stability and profitability
Customers - continuity
Government - regulatory
Public - various

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What is the objective of general-purpose financial reporting?

Provide financial information about the reporting entity that is useful to primary users in making decisions relating to providing resources to the entity

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What are the information needed by the primary users for their decision making?

> economic resources of the entity, claims against the entity and changes in those resources
how efficiently and effectively management uses resources

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What are the limitations of financial reporting?

> do not and cannot provide all information needs of its users
not designed to show the value of an entity
based on estimate and judgment

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Qualitative characteristics that represent the qualities of useful information in users' decision making

Fundamental Qualitative Characteristics

What chapter focuses on qualities or attributes that make financial accounting information useful to the users?

Chapter 2 Qualitative Characteristics of Useful Information

What are the fundamental qualitative characteristics?

Relevant and faithful representation

Qualitative characteristics that address content or substance of information

Fundamental Qualitative Characteristics

How is relevance of information determined?

Predictive value - help increase likelihood of correctly predicting or forecasting outcome of events Confirmatory value - enables confirmation or correction of earlier expectations

Ability of information to influence a decision made by users

Relevance

What is the relation of materiality and relevance?

All material items are relevant but not all relevant items are material.

Quality of information where omission, misstatement or obsurity could influence economic decisions made by users.

Materiality

What factors do you consider when determining materiality?

Relative size of the item in relation to total of the group it belongs Nature of item

Means information provides a true, correct and complete depiction of the econoomic phenomena it purports to present

Faithful representation

What supports neutrality?

Prudence or conservatism

How is faithful representation determined?

Completeness Neutrality (free from bias) Free from error

Characteristics that enhance the usefulness of information

Enhancing Qualitative Characteristics

Address the form or presentation of information

Enhancing Qualitative Characteristics

What are the enhancing qualitative characteristics

Verifiability Comparability Understandability Timeliness

Means different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

Verifiability

Enable users to identify and understand similarities in and differences among items

Comparability

What is the relation between comparability and consistency?

Comparability is the goal while consistency is the means to achieve the goal

Information must be comprehensible or intelligible if it is to be useful (though complex matters cannot be eliminated)

Understability

Having information available to decision-makers in time

Timeliness

What is the objective of general purpose FS?

Provide financial information about the reporting entity's assets, liabilities, equity, income and expenses that is useful in assessing: 1. prospects for future net cash inflows 2. management's stewardship over economic resources

Financial statements are prepared for a specified period of time called _________________.

Reporting period

Financial statements should provide comparative information for _________________.

at least one preceding reporting period

What are the elements of the FS?

Assets Liabilities Equity Income Expenses

Types of FS

1. Consolidated - parent and subsidiary 2. Unconsolidated or individual - single entity 3. Combined - two or more entites but not parent-subsidiary relationship

Present economic resource controlled by an entity as a result of a past event

Asset

Entity who must or chooses to prepare the FS and is not necessarily a legal entity.

Reporting Entity

Refer to the quantitative information show in the SFP and SCI

Elements of Financial Statements

Essential characteristics of an asset

Control Result of a past transaction or event Potential to produce economic benefits Economic resource is a right

Present obligation of an entity to transfer an economic resource as a result of past events

Liability

Essential characteristics of a liability

Present obligation of a particular entity Obligation is to transfer an economic resource (except settlement of liability through distribution of shares of stocks) Result of past event

Event leading to a legal obligation or constructive obligation

Obligating event

What are the two classification of comprehensive income?

Profit or loss Other comprehensive income

Increases in assets or decreases in liabilities resulting to increases in equity other than those relating to contributions from holders of equity claims

Income

Residual interest in assets of the entity after deducting all its liabilities

Equity

Differentiate the two types of income

Revenue - ordinary course of business, at gross amount Gains - incidental or peripheral operations, at net amount

What are items of OCI?

UGL - FVOCI Gain/loss from translation of foreign operation FS Revaluation surplus UGL from derivatives designated as CF hedge Defined benefit plan remeasurements

Decreases in assets or increases in liabilities resulting to decreases in equity other than those relating to distributions to holders of equity claims

Expenses

Differentiate the two types of expense

Expense - ordinary course of business, at gross amount Losses - incidental or peripheral operations, at net amount

Process of reporting an asset, liability, income or expense on the face of the FS

Recognition

What are the recognition criteria?

> meets definition of asset, liability, equity or expense > recognition would provide useful information

Expenses are incurred in conformity with the 3 applications of the matching principle, namely:

1. cause and effect association or strict matching - expenses are strictly recognized only when there is recognition of income 2. systematic and rational allocation 3. immediate recognition

When does recognition of an item not provide useful information?

> uncertain whether asset or liability exists > probability of inflow or outflow is low

Simultaneous recognition of both income and related expenses

Matching principle

Removal of previously recognized asset or liability from SFP

Derecognition

When does derecognition occur?

Item no longer meets definition of an asset or liability

Process of determining monetary amounts at which elements of FS are to be recognized and carried in the SFP and income statement

Measurement

What are the various measurement bases?

historical cost - transaction price at time of recognition current value - updated to reflect conditions at measurement date

What is the historical cost of an asset and liability?

Asset - consideration paid plus transaction costs Liability - consideration received less transaction costs

What are the types of updated value?

FV - price to be received to sell an asset or paid to transfer a liability between market participants today Value in use - PV of cash flows an entity expects to derive from use of an asset and from its ultimate disposal Fulfilment value - PV of cash flows expecrs to be obliged to transfer as it fulfills a liability Current cost - consideration that would be paid/received at measurement date plus/minus transaction costs of an asset/liability

Information about assets, liabilities, equity, income and expenses is communicated through _______________________.

Presentation and disclosure in FS

Differentiate FV and current cost

FV - exit price Current cost - entry price

Effective communication requires:

> focus on presentation and disclosure objectives and principles, not rules > classifying info by similarity > no obscurities due to excessive detail/summarization

Differentiate classification and aggregation.

Classification - sorting elements with similar nature, function, and measurement basis Aggregation - adding elements with same characteristics under the same classification

Capital Maintenance Approach

Net income occurs only after capital used from beginning of the period is maintained.

Differentiate the two types of capital

Financial capital - invested money, based on historical cost and is adopted by most entities Physical capital - productive capacity, based on current cost and is not adopted by most entities

How do you compute net income using Capital Maintenance Approach?

Net changes in equity Less: Additional investment by owners Add: Withdrawals and distributions to owners Less: OCI Add: OCL = Net Income