1: Regulation and the Conceptual Framework Flashcards
What does AASB stand for and what do they do?
The Australian Accounting Standards Board is responsible for creating accounting standards in Australia.
What is the role of the Australian Securities and Investments Commission (ASIC)?
To administer company law throughout Australia.
What is the purpose of The Conceptual Framework?
It was hoped that a conceptual framework would enable regulators to:
~ Develop standards that were consistent and logical
~ Provide guidance to accountants in areas with no standards
~ Enable users of financial reports to understand better the standards developed
Define a ‘reporting entity’.
A reporting entity is an entity in which it is reasonable to expect the existence of users who depend on general purpose financial reports for information to enable them to make and evaluate economic decisions.
What are the three features of a reporting entity?
According to ED (Exposure Draft) 193 a reporting entity is seen as having three features:
- The conduct of economic activities
- The economic activities can be objectively distinguished from those of other entities and from the economic environment in which the entity exists
- Financial information about those economic activities is potentially useful in making economic decisions and in assessing whether the management have made efficient and effective use of the resources provided
What are the two fundamental characteristics of financial information?
Relevance (information that helps users make decisions by forming predictions about outcomes of past, present and future events)
Faithful Representation (information that is complete, neutral and free from material error)
What are the four enhancing qualitative characteristics of financial information?
Timeliness (having information available to decision makers in time to be capable of influencing their decisions)
Verifiability (helps to assure users that information is faithfully represented)
Comparability (enables users to identify and understand similarities and differences among items)
Understandability (assumes that users have a suitable level of business knowledge to understand financial reports)
What is an asset?
Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
What is a liability?
Present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
What is equity?
The residual interest in the assets of the entity after deducting all its liabilities.
Describe income vs expenses
Income is the increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants; includes revenues and gains.
Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
How is equity related to assets and liabilities?
Equity is a residual after liabilities have been deducted from assets.
There are recognition criteria to be followed in the preparation and presentation of general purpose financial reports. Define recognition.
The process of incorporating in the statement of financial position/balance sheet or income statement an item that meets the definition of an element.
Recognition means to include an element in the accounting records.
Presentation means to include an element in the financial statement.
Alternative methods for measuring an entity’s assets and liabilities include historical cost, current cost, realisable value, fair value, and discounted cash flows or present value. Define these methods.
Historical Cost: An asset is recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire it at its acquisition date.
Current Cost: For an asset, the amount of cash or cash equivalents that would be paid if the same or equivalent asset was acquired currently.
Realisable Value: The amount of cash or cash equivalents that could be obtained currently by selling the asset in an orderly disposal or in the normal course of business.
Fair Value: the price that would be received to sell an asset or paid to transfer a liability in a orderly transaction between market participants at the measurement date
Present Value: the single value at the present time of cash flows expected to be received or paid in the future that have been discounted at an appropriate rate.
What are the two main concepts of capital discussed in the Conceptual Framework?
Financial Capital: Capital is synonymous with the net assets or equity of the entity, measured either in terms of the actual number of calculated dollars by subtracting the total of liabilities from assets, or in terms of the purchasing power of the dollar amount recorded as equity. Profit exists only after the entity has maintained its capital, measured as either the dollar value of equity at the beginning of the period or the purchasing power of those dollars in the equity at the beginning of the period.
Physical Capital: Capital is seen as the operating capability of the entity’s assets. Profit exists only after the entity has set aside enough capital to maintain the operating capability of its assets.
