A conceptual and regulatory framework Flashcards
International Financial Reporting Standards Foundation (theFoundation):
responsible for governance of the IFRS Standard setting process
International Financial Reporting Standards Board (the Board):
responsible for setting IFRS Standards
IFRS® Interpretations Committee (IFRIC®):
issues guidance where divergent interpretations have arisen
IFRS Advisory Council:
forum for experts to offer advice to the Board
International Sustainability Standards Board(ISSB):
established with the
objective of delivering global guidance on sustainability-related disclosure
Qualitative characteristics are attributes that make information useful. The Framework splits the characteristics between:
Fundamental
– Relevance
Predictive value – evaluates past, present or future events
Confirmatory value – confirms or corrects past evaluations.
– Faithful representation (including substance, neutral and free from error)
Complete
Neutral
Free from error
Enhancing
– Comparability
– Verifiability
– Timeliness
– Understandability
Asset
– ‘present economic resource controlled by the entity as a result of
past events’ (Framework, para 4.3)
– ‘economic resource is a right that has the potential to produce
economic benefits’
Liability
‘present obligation of the entity to transfer an economic resource as a result of past events
Equity
residual interest in assets after deducting all liabilities.
Income
– ‘increases in assets or decreases in liabilities, that
– result in increases in equity
– other than those relating to contributions from holders of equity claims.’
Expenses
– ‘decreases in assets or increases in liabilities, that
– result in decreases in equity
– other than those relating to distributions to holders of equity claims.’
Recognition
An item that meets the definition of an element will be recognised if its recognition provides:
relevantinformation
faithfulrepresentationoftheelement.
These may not be provided where there are high levels of uncertainty or low probabilities of inflow or outflow of economic resources.
Measurement bases
Historical, current, value in use, fair value
Historical cost items are recorded at
the amount of consideration given at the time of acquisition.
Current cost items are carried at the value
to be paid to acquire the equivalent item currently
Value in use items are carried at
the discounted present value of future cash flows relating to the item.
Fair value items are carried at
the amount that could be obtained from an orderly disposal.
There are two main forms of current value accounting which seek to tackle the disadvantages of historical cost accounting.
Current cost accounting
ConstantPurchasingPower
Constant Purchasing Power
All costs in the statement of profit or loss are adjusted to show the value of assets
consumed during the period, based on current rather than historical values.
The statement of financial position shows the current value of inventory and non- current assets.
Current Cost Accounting
Figures in the financial statements are adjusted to reflect amounts with the same
purchasing power, using a general price index.
In this way the financial statements reflect the impact of inflation, although it is only a general inflationary impact.
Why a regulatory framework is necessary
Regulation of accounting information is aimed at ensuring that users of financial statements receive a minimum amount of information that will enable them to make meaningful decisions regarding their interest in a reporting entity. A regulatory framework is required to ensure that relevant and reliable financial reporting is achieved to meet the needs of shareholders and other users.
Qualitative characteristics
(i) Fundamental qualitative characteristics
– Relevance
– Faithfulrepresentation
(ii) Enhancing qualitative characteristics
– Comparability
– Verifiability
– Timeliness
– Understandability
Relevance
Information is relevant if:
it has the ability to influence the economic decisions of users, and
is provided in time to influence those decisions.
Completeness
To be understandable, information must contain all the necessary descriptions and explanations.
Neutrality
Information must be neutral, i.e. free from bias. Financial statements are not neutral if, by the selection or presentation of information, they deliberately influence the making of a decision or judgement in order to achieve a predetermined result or outcome.
Free from error
Information must be free from error within the bounds of materiality. A material error or omission can cause the financial statements to be false or misleading, and thus unreliable and deficient in terms of their relevance.
Comparability, verifiability, timeliness and understandability are qualitative characteristics that
enhance the usefulness of information that both is relevant and provides a faithful representation
Equity is
the residual interest in the assets of the entity after deducting all
its liabilities
Income is
increases in assets or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
CPP factor =
(Index at the reporting date/Index at date of initial recognition)CPP factor = (Index at the reporting date/Index at date of initial recognition)
IAS 8 requires accounting policies to be changed ‘only if the change:
is required by an IFRS Accounting Standard or
results in the financial statements providing reliable and more relevant information’
The requirements of IAS 8 are:
effects of a change in accounting estimate should be included in the statement of profit or loss in the period of the change and, if subsequent periods are affected, in those subsequent periods
effects of the change should be included in the same income or expense classification as was used for the original estimate
if material, the nature and amount of effect of the change must be disclosed.
Examples of changes in accounting estimates are changes in:
useful lives of non-current assets
method of depreciating non-current assets
warranty provisions, based upon more up-to-date information about claims frequency and value.
Prior period errors are omissions from, and misstatements in, the financial statements for
one or more prior periods arising from a failure to use information that
was available when the financial statements for those periods were authorised for issue and
could reasonably be expected to have been taken into account in preparing those financial statements.
Prior period errors are dealt with by:
restating the opening balance of assets, liabilities and equity as if the error had never occurred, and presenting the necessary adjustment to the opening balance of retained earnings in the statement of changes in equity
restating the comparative figures presented, as if the error had never occurred
disclosing within the accounts a statement of financial position at the beginning of the earliest comparative period. In effect this means that three statements of financial position will be presented within a set of financial statements:
– at the end of the current year
– at the end of the previous year
– at the beginning of the previous year.
IAS 41 Agriculture relates to Biological assets, government grants and agricultural produce at the point of harvest. Products which are the result of processing after harvest will be dealt with under
IAS 2 Inventories, or other applicable standards.
A biological asset is a living animal or plant. A biological asset should be recognised if:
it is probable that economic benefits will flow to the entity
the cost or fair value of the asset can be reliably measured, and
the entity controls the asset.
Recognition and measurement
Initial measurement is at:
fair value less any estimated ‘point of sale’ costs
if there is no fair value, then the cost model should be used.
Subsequent measurement:
revalue to fair value less point of sale costs at year-end, taking any gain or loss to the statement of profit or loss.
Bearer plants are accounted for under
IAS 16 Property, Plant and Equipment,
A bearer plant is a living plant that:
is used in the production or supply of agricultural produce;
is expected to bear fruit for more than one period; and
has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales
At the date of harvest the produce should be recognised and measured at X.
Gains and losses on initial recognition are included in
fair value less estimated costs to sell.
profit or loss (profit from operations) for the period.
