5: The Conceptual Framework

Question 1

What are the two international accounting standards and who sets them?

Answer 1

IAS and IFRS

Set by the International Accounting Standards Board.

They are in turn part of the IFRS Foundation

Question 2

What is the Conceptual Framework

Answer 2

A framework that sets out the concepts that underlie the preparation and presentation of financial statements

Issues by the IFRS Foundation

Question 3

What is the objective of financial statements, according to the framework?

Answer 3

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity’

Question 4

What are the two fundamental qualitative characteristics of financial information?

Answer 4

Relevance
- can assist users’ decision making by helping them evaluate past, present or future events, by confirming or correcting existing evaluations
- information may be: predicative (future) or confirmatory (past)
- may be relevant in nature or materiality

Faithful representation
In order to faithfully represent events, the information must be:
- complete (all info necessary)
- neutral (unbiased)
- free from error
- showing substance over form (presented according to their economic substance)
Supported through the exercise of prudence

Question 5

What are the four enhancing qualitative characteristics of financial information?

Answer 5

Comparability
- info is produced on a consistent basis
- can compare statements with past periods or other entities

Verifiability
- info can be checked
- a consensus could be reached that the info faithfully represents transactions or events

Timeliness
- info should be supplied in time to be used in decision-making
- recent info is more useful
- some info remains timely for ages!

Understandability
- info must be understandable to those who have a reasonable knowledge of business and accounting

Question 6

What is IAS1 and what’s in it?

Answer 6

IAS1 Presentation of Financial Statements deals with the structure and content of financial statements

Prescribed formats are recommended

Should compromise of 5 things (see chap 1)

Question 7

What is the purpose of IAS1?

Answer 7

Purpose: to ensure comparability by prescribing the basis for the presentation of general-purpose financial statements

Objective of financial statements is to provide a summary of the accounting transactions for a period

Question 8

What does IAS1 require that is presented fairly?

Answer 8

• financial position
• financial performance
• cash flows of the entity

Must all be presented fairly. Fair presentation requires the faithful representation of the effects of transactions

Question 9

How should departures from IAS1 be handled by a business?

Answer 9

If the statements do not company with the standards, disclose that fact.

Management may conclude that compliance with IAS would be misleading, therefore a departure from a requirement is necessary for fair representation.

This also requires an explanation of the circumstances along with an estimation of the financial impact.

Question 10

What are the requirements of IAS1 in terms if comparability?

Answer 10

Comparative information (previous period figures) must be included for all amounts - including narrative and descriptive info where relevant.

Where presentation or classification is amended, comparative amount should be reclassified where practical.

Question 11

What is the accruals concept?

Answer 11

The accruals (or matching) concept requires that transactions and events are recognised when they occur, not when cash is received or paid for them.

This means costs incurred are matched against revenues they have generated

Question 12

If a company is viewed as a going concern, what does that mean?

Answer 12

• the entity is viewed as continuing its operation for the foreseeable future (at least 12 months)
• an assumption is made that there is no intention or necessity to liquidate or curtail materially its operation
• assets do not need to be valued on a break-up basis

Question 13

What is valuing assets on a ‘break up basis’?

Answer 13

The value at which they could be sold separately by the business if the business were to be liquidated

Question 14

What should be disclosed in the event that a company is NOT a going concern?

Answer 14

• the fact itself
• the basis on which the accounts have been prepared
• the reasons why the entity is no longer a going concern

Question 15

What is materiality?

Answer 15

Information is material if its omission, misstatement or obscuring could influence the economic decisions of users on the basis of financial statements

• depends on the size or effect or the item
• determining materiality is normally subjective; normally a percentage
• decisions must be made in context

Question 16

Is offsetting allowed in IAS1?

Answer 16

No! This does now allow assets, liabilities, income, or expenses to be offset (deducted) from one another unless under special treatment.

Question 17

Why are historical costs used?

Answer 17

Assets are recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration given to them

Liabilities are recorded at the amount of proceeds received in exchange for the obligation

Advantage: removes the subjectivity of estimating the value of an asset or liability

Question 18

5 reasons regulation is important?

Answer 18

• endures that accounts are sufficiently reliable and useful, and prepared without delay
• taxable profits are accurate
• statements are used to report to shareholders on the condition and performance of the company
• stock markets rely on statements
• international investors prefer information to be presented in a similar and comparable way

Question 19

What’s the definition of sustainability and where is it from?

Answer 19

Comes from the 1987 Brundtland report.

Development that ‘meets the needs of the present without compromising the ability of of future generations to meet their own needs’

Question 20

The bodies and boards to do with sustainability?

Answer 20

Financial Stability Board (FSB) - international body that monitors the global financial system. Created the:

Task force on Climate-related Financial Disclosures (TCFD) - develops recommendations on the disclosures companies should make to help users properly assess risks related to climate change

IFRS created the International Sustainability Standards Board (ISSB) in 2021. Mainly climate-based.

They set sustainability disclosure standards (IFRS Sustainability Disclosure Standards), first ones in 2023.

Question 21

What are the two aspects of sustainability reporting?

Answer 21

Impacts - effects OF the organisation.
- how the decisions and actions of an org positively and negatively affect ESG issues

Dependencies - effects ON the organisation
- how ESG issue can affect the org’s ability to create and maintain value

Examples:
- human rights
- health and safety
- carbon emissions
- depletion and scarcity of natural resources
- endangered species
- employee welfare
- enviro pollution and change
- employee know-how
- supplier and customer relationships