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)
