2 - The Conceptual Framework Flashcards
What is faithful representation?
Depicting a situation accurately, objectively, neutrally.
How is relevance not completely compatible with reliability?
Because the most relevant information for decision making is good estimates of the future but these are unreliable because all statements about the future are opinion, not fact.
Why do American regulators consider prudence is trumped by neutrality?
Because they consider prudence as an unduly negative bias when considering making provisions against future write-offs and liabilities.
What are the advantages of rule-based standards over principles-based standards?
They are certain, unambiguous and do not depend on any personal or subjective judgment – unless the standard explicitly permits it.
What are the accounting rules of recognition?
If an item meets the definition of assets, liabilities, equity, income or expense and its recognition will bring relevance and faithful representation of financial information and will meet the cost-benefit test, an entity needs to recognize it.
What is the significance of the going concern basis for accounting?
It means assets must not be valued at their break up or forced sale value, and it means that fair value assumes continuing use of an asset measured at NPV or a ready market for one valued by reference to sales value in a market.
What is affected by the principle of substance over form in accounting?
A contract will be recognized as an asset if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Such an asset was called a lease but IFRS 16 names it as a ‘right-of-use’ asset.
What is the traditional concept of capital?
It is the owners’ stake in the business, initially by cash injection to buy shares, then by owning the retained earnings by way of reserves that build up the value of equity over time.
Traditional capital is represented by traditional net assets that must meet the traditional rules of recognition.
