1. Accounting Framework Flashcards
What is the scope of the accounting framework?
- Objectives of financial statements
- Define, measure and recognize elements
- Qualitative characteristics
- Concept of capital maintenance and capital
What does the framework do?
Sets out objectives and concepts in order to prepare the financial statements
What is the objective of the financial statements?
Provides information about the financial position, performance and changes in financial position of the entity
What are the underlying principles?
- Accrual basis
2. Going concern
What are the qualitative characteristics of financial statements?
- Understandability
- Relevance
- Reliability
- Comparability
What is relevance affected by?
- Nature
2. Materiality
What is materiality?
Something is material if the omission will influence financial decisions of users
What are the sub-elements of reliability?
- Faithful presentation
- Substance over form
- Neutrality
- Prudence
- Completeness
What is substance over form?
Where something is recorded according to the effect it has on the entity instead of just the legal manner it’s perceived as
What is neutrality?
Statements are prepared without any bias and favors no one
What is prudence?
Where assets and incomes are not overstated but rather conservatively recorded
What does comparability consist of?
- Consistence
- Disclosures of changes of policies and it’s effects
- Comparative figures
What the the constraints of qualitative characteristics?
- Timeliness
- Balance between benefit and cost
- Balance between qualitative characteristics
What are the elements of financial position?
- Assets
- Liabilities
- Equity
What are the elements of financial performance?
- Income
- Expenses
- Profit
What are capital maintenance adjustments?
Revaluations of assets and Liabilites
What is the result of capital maintenance adjustments?
Increase or decrease in equity
How are capital maintenance adjustment recorded?
In SOCI & SOCE as revaluation reserves
What is the mnemonic to remember the sub characteristics of reliability?
Reliable furniture sink no person completely
Example of substance over form?
A lessee leases asset for production, he must record asset as if he owns it because that’s how it represents the entity as opposed to not recording it because he doesn’t technically own it.
What is capital maintenance?
A principle that says that income is only earned if capital has been maintained
How does one reach capital maintenance?
Capital is the same at begin and end of period, excess is profit.
