7.3 The conceptual framework (3) Flashcards
Chapter 6 - Measurement of the elements of FS
- The Framework requires that the elements recognised in the FS are quantified in monetary terms
- This requires the selection of a measurement basis:
- Historical cost
- Current value
Historical cost measures
- provides monetary info derived from the price of the transaction at the date it occurs
- it does not reflect changes in values, except to the extent that those changes relate to impairment of an asset (which would reduce the asset) or a liability becoming onerous (which would increase the liability)
Historical cost of asset / liability
Asset - is the value of the costs incurred in acquiring or creating the asset, including the consideration paid plus transaction costs
Liability - is the value of the consideration received to incur or take on the liability minus transaction costs
Current value measures
- provides monetary info about asset, liabilities and related income and expenses, using info updated to reflect conditions at the measurement date
- Current value measures include:
- Fair value
- Value in use / Fulfilment value
- Current cost
Current value measure - Fair value
is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date
Current value measure - Value in use & Fulfilment value
Value in use can be applied when measuring assets - it is the present value of the cash flows, or other economic benefits, which an entity expects to derive from the use of an asset and from it’s ultimate disposal
Fulfilment value can be used when measuring liabilities - is the present value of the cash, or other economic resources, that an entity expects to be obligated to transfer as it fulfills a liability
Current value measure - Current cost
Current cost of an asset - is the cost to acquire an equivalent asset at the measurement date, plus the transaction costs that would be incurred at that date
Current cost of a liability - is the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred at that date
Factors to consider when selecting a measurement base
- An entity should select the measure that would provide the most relevant and faithful representation of the element being measured
- The characteristics of the asset and liability being measured should be considered
- eg: if asset is volatile in price and highly sensitive to market factors - current value / if asset is to be held long term and stable in price - historical cost
Chapter 7 - Presentation and disclosure - includes sections on
- the objective of presentation and disclosure
- the classification of
- assets and liabilities
- equity
- income and expenses
- aggregation
Objective of presentation and disclosure
- how the presentation and disclosure of info in FS adds to the fundamental and enhancing qualitative characteristics
- by considering consistent presentation and the inclusion of extra disclosures, the relevance, understandability and comparability of the FS are improved
Classification of elements
- is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for presentation and disclosure purposes
- the Framework states that income and expenses are classified and included either:
- in the statement of profit or loss (primary source and should be included here)
- outside the statemen of profit or loss in other comprehensive income (exceptional circumstances and only if gives a more relevant view or faithful representation)
Aggregation
- makes information more useful by summarising a large volume of detail, however it conceals some of the detail
- therefore a balance needs to be found where relevant info is not obscured either by a large amount of insignificant detail or by excessive aggregation
Chapter 8 - Concepts of capital
- A financial concept of capital
- A physical concept of capital
Financial concept of capital
- capital = net assets or equity of the entity
- used if main concern of user of FS is the maintenance of nominal value of invested
capital (used by most entities)
Physical concept of capital
- Capital = productive capacity of the entity (measured as units of output per day)
- used if main concern of user of FS is the operating capacity of the entity
Chapter 8 - Capital maintenance
means preserving the value of the capital in the entity, and reporting profit only if the capital of the entity has been increased by activities and events in the accounting period
The Framework and the standard setting process
- the Framework provides a point of reference to the Board when developing individual standards
- since the standards will then be developed with reference to a common set of concepts, the standards themselves will become more consistent
- the IFRS Interpretations Committee issues guidance where issues have arisen which are not specifically covered by a standard
- they can therefore ensure its guidance is consistent with agreed underlying principles by referring to the Framework
How the Framework can help the Board achieve objectives
- Framework provides guidance on broad principles (how items should be recorded, measured and presented) this could assist in developing consistent accounting standards
- Framework can provide guidance on how similar items are treated ( by providing definitions and criteria to be used)
- Framework can remove the need to address underlying issues over and over again (this will save standard setters time and ensure consistency)
- Where a technical issue is raised but not specifically addressed in Standard, the Framework can help provide guidance on how it should be treated
