22 - The Conceptual Framework Flashcards
what is the conceptual framework and what are its main objectives
was produced by the International Accounting Standards Board (IASB)
main objectives:
- to promote harmonisation of accounting standards and procedures relating to presentation of financial statements
- to assist preparers of financial statements in applying IFRS
they are used as a guide when producing new accounting standards and minimise inconsistencies
what can the conceptual framework be used for
- to resolve accounting issues that arent addressed directly in other standards
- should be used by management in exercising judgement
- isn’t a reporting standard and will be overridden if conflict occurs between it and financial reporting standard
what is the objective of general purpose financial reporting
to provide financial info about reporting entity that is useful to existing and potential investors, lenders and other creditors
what does the conceptual framework provide
- details of entity’s economic resources
- claims against the entity
- changes in resources and claims
= allows users to assess how effectively management is running the business, enabling them to assess entity’s ability to fund future cash flows
who are qualitative characteristics useful to
qualitative characteristics of useful financial information identifies types of info that are likely to be most useful to existing and potential investors, lenders and other creditors
how are qualitative characteristics categorised
- fundamental qualitative characteristics
- enhancing qualitative characteristics
what are the fundamental qualitative characteristics
- RELEVANCE
relevant financial info makes a difference if it has predictive value or confirmatory value - FAITHFUL REPRESENTATION
to be useful, must represent values faithfully, be: complete, neutral, free from error - MATERIALITY
info is material if excluding it or misstating it could influence decisions users make - PRUDENCE
exercising caution with areas where judgement is required. supports concept of neutrality
what are the enhancing qualitative characteristics
- COMPARABILITY
more useful if compared to other entities or periods, consistency helps - VERIFIABILITY
ensures faithfulness, can be direct or indirect - TIMELINESS
info available on time for decisions to influence. balance must be achieved between info and timeliness - UNDERSTANDABILITY
clear and concise
what is another consideration in the conceptual framework
consideration of whether the benefits of reporting particular info justifies costs incurred to provide and use that info
what is the reporting entity and how does it relate to the conceptual framework
conceptual framework explains that reporting entity must be identified as separate entity to owners and personal transactions shouldn’t be mixed with business transactions
what is the underlying assumption in financial statements
assumes the entity is a going concern and will continue in operation for foreseeable future
assumes the entity has neither the intention nor need to liquidate or materially curtail scale of operations
if such intentions or needs exist, financial statements may need to be prepared differently
define ‘asset’
as per the conceptual framework
a present economic resource controlled by the entity as a result of past events
define ‘liability’
as per the conceptual framework
a present obligation of the entity to transfer an economic resource as a result of past events
define ‘equity’
as per the conceptual framework
the residual interest in the assets of an entity after deducting all its liabilities so
EQUITY = NET ASSETS = SHARE CAPITAL + RESERVES
define ‘income’
as per the conceptual framework
increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from equity participants
(contributions from equity participants = transfers of capital that owners make to the business)
define ‘expenses’
as per the conceptual framework
decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions of equity participants
(distributions of equity participants = withdrawals of capital by owners from business)
what is recognition of the elements of financial statements
recognition = process of capturing for inclusion in financial statements an item that meets the definition of one of the elements in the financial statements
when is an item recognised in statement of fp or profit/loss
when it meets the definition of one of the five elements of the financial statements
what is derecognition
occurs when the item no longer meets the definition of an element
can happen when an entity loses control or there is no obligation for the liability
when is the economic impact taken into account
the probability of whether there is an economic impact is only taken into consideration based on two fundamental qualitative characteristics
if low chance of relevant info provided = may be more relevant to show asset or liability
what is measurement of elements of financial statement
process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried
what are the choices available for measurement
HISTORICAL COST
- most commonly used
- transaction measured at amount paid at transaction date
CURRENT VALUE MEASURES
- current cost = calculated by taking costs to buy equivalent asset + acquisition cost, at date of measurement
- value in use = calculated by taking present value of cash flows or other benefits entity is expected to receive during lifetime of asset/liability
- fair value = most commonly calculated by taking open market value
what are accounting policies defined as and examples
accounting policies are the specific principles, conventions and practices applied by an entity in preparing and presenting financial statements
eg, whether property, plant and equipment is held at cost or revaluation, and how inventory is valued
how are accounting policies determined
companies select those aligning with performance/position
determined by applying relevant accounting standard
if no relevant standard, management develop policies which result in financial info that is relevant and faithful
how is estimation defined and examples
as a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. estimation involves judgements based on latest available, reliable info
eg, allowances for doubtful debts, expected useful lives of depreciable assets
