7.1 The conceptual framework (2)

Question 1

Chapter 3 - Financial statements and the reporting entity

Answer 1

The Framework states that ‘financial statements provide information about economic resources of the reporting entity, claims against the entity, and changes in those resources and claims, that meet the definitions of the elements of financial statements’

Question 2

Objectives of financial statements

Answer 2

is to provide info about the entity’s assets, liabilities, equity, income and expenses that is useful to users in assessing the prospects for future net cash inflows and assessing managements stewardship of the entity’s economic resources

Question 3

The financial statements that provide information to users are

Answer 3

• in the statement of financial position, by recognizing assets, liabilities and equity
• in the statement of financial performance, by recognising income and expenses
• in other statements (such as statement of cash flows, statement of changes in equity) and in the notes

Question 4

Going concern assumption

Answer 4

• FS are normally prepared on the assumption that the entity is a going concern will continue to operate for the foreseeable future
• this period is not strictly defined but can be generally considered as greater than 12 months
• FS are prepared on assumption that entity does not have an intention or need to liquidate or significantly reduce scale of operations
• If not a going concern, the FS would be prepared on the break-up basis (assets valued using realisable values and no non-current classifications)

Question 5

The accruals concept

Answer 5

states that events should be dealt with in the accounting period they occur, rather than in the period in which cash flows occur
(no longer underlying assumption, but still considered an important concept)

Question 6

The reporting entity

Answer 6

• the entity who chooses to or is required to prepare FS
• can be a single entity or comprise of more than one entity
• if an entity (parent) has control over another entity (subsidiary), there are two options:
  
  • Consolidated financial statements - reporting entity comprises both the parent and subsidiary
  • Unconsolidated FS - if the reporting entity is the parent alone

Question 7

Chapter 4 - The elements of financial statements

Answer 7

• Assets
• Liabilities
• Equity
• Income
• Expenses

Question 8

Assets

Answer 8

• a present economic resource controlled by the entity as a result of past events
• an economic resource is a right that has the potential to produce economic benefits

Question 9

Liabilities

Answer 9

a present obligation of the entity to transfer an economic resource as a result of past events

Question 10

Equity

Answer 10

the residual interest in the assets of the entity after deducting all its liabilities

Question 11

Income

Answer 11

• increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims
• eg: sales, gains on disposal of non current assets and unrealised gains

Question 12

Expenses

Answer 12

• decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims
• eg: expenses that arise in ordinary course of bus (wages, purchases, depreciation) and losses (losses on disposal of non current assets and unrealised losses - losses on reevaluation)

Question 13

Chapter 5 - Recognition

Answer 13

Recognition is the process of capturing for inclusion in the statement of financial position or the statement of financial performance an item that meets the definition of one of the elements of the FS - asset, liability, equity, income or expenses

Question 14

Recognition criteria

Answer 14

• meet the definitions of one of the elements of the FS
• provide relevant information regarding the particular element
• provide a faithful representation of the particular element

Question 15

Recognition criteria - Relevance - Indications that the information regarding an element is not relevant include

Answer 15

• it is uncertain whether an asset or liability exists
• an asset or liability exists, but the probability of an inflow or outflow of economic benefits is low

Question 16

Recognition criteria - Faithful representation

Answer 16

• Whether the info regarding an element would provide a faithful representation is linked to the ability to measure the element
• If there is a high measurement uncertainty (wide range of possible outcomes with probabilities that are difficult to estimate) then it could be argued that the inclusion of the element would not provide a faithful representation

Question 17

Chapter 5 - Derecognition

Answer 17

• Derecognition is the removal of all or part of a recognised asset or liability from an entitys statement of financial position
• it normally occurs when an item no longer meets the definition of an asset or liability

Question 18

Asset derecognition

Answer 18

normally occurs when the entity loses control of all or part of the recognised asset

Question 19

Liability derecognition

Answer 19

normally occurs when the entity no longer has a present obligation for all or part of the recognised liability