2.1: Conceptual Framework

Question 1

What is a conceptual framework in financial reporting?

Answer 1

A conceptual framework is a coherent system of interrelated objectives and fundamentals that lead to consistent standards.

It prescribes the nature, function, and limits of financial accounting and financial statements.

Question 2

Why is a conceptual framework necessary in accounting?

Answer 2

A conceptual framework is necessary because it provides a foundation for setting accounting standards.

It helps increase financial statement users’ understanding and confidence and enhances the comparability of financial statements.

Question 3

What are the main benefits of having a universally accepted conceptual framework?

Answer 3

A universally accepted conceptual framework allows for the quick resolution of new and emerging practical accounting problems, enhances comparability, and provides clear guidance for complex situations by using sound judgment.

Question 4

What are the three levels of the conceptual framework?

Answer 4

First level: Objectives of financial reporting – defines the goals and purposes of accounting.

Second level: Qualitative characteristics and elements of financial statements – bridges the gap between the objectives and the principles.

Third level: Foundational principles – provides the “how” for applying accounting standards.

Question 5

What are the qualitative characteristics of accounting information?

Answer 5

The qualitative characteristics of accounting information include relevance, reliability, comparability, and understandability, which make the information useful for decision-making.

Question 6

What is the objective of financial reporting?

Answer 6

The objective of financial reporting is to communicate information useful to investors, creditors, and other users for decision-making, including how to allocate resources and manage stewardship.

Question 7

What issues does information asymmetry create in financial markets?

Answer 7

Information asymmetry occurs when all market participants do not have equal access to information.

This can lead to suboptimal decisions, as stakeholders may lack the information necessary for sound resource allocation.

Question 8

What are general-purpose financial statements?

Answer 8

General-purpose financial statements provide basic financial information that meets the needs of a wide range of users, such as investors and creditors.

They aim to present useful information where the benefits exceed the costs.