B. Financial statements Flashcards
What is the ‘Framework’?
The Conceptual Framework of Financial Reporting
- transactions are becoming more complex
- IASB developed Framework to law out broad principles that should be applied when developing accounting standards and treatment
Purpose of IFRS Framework?
- assist IASB to develop IFRS Standards that are based on consistent concepts
- assist preparers to develop consistent accounting policies that are new
- assist all parties to understand and interpret IFRS standards
What is prioritised between Framework and IFRS Standards?
Standards prioritised as Framework is not an accounting standards
What does the Framework cover?
- objs of the general purpose of financial reporting
- qualitative characteristics of useful financial reporting
- financial statements and the reporting entity
- elements of the financial statements
- recognition and derecognition
- measurement
- presentation and disclosure
- concepts of capital and capital maintenance
What is the objective of financial reporting?
provide information about the reporting entity that is useful to users in making decisions relating to providing resources to the entity
Who uses financial statements?
- existing and potential investors
- lenders
- other creditors
What decisions are made in relation to resources and financial statements?
- buy, sell of hold equity and debt instruments
- provide or settle loans and other forms of credit
- exercise the rights to vote on management actions
- assessment of stewardship of directors
What are the two qualitative categories of the Framework?
fundamental-‘must have’
- relevance
- faithful representation
enhancing- ‘would be nice to have’
- comparability
- verifiability
- timeliness
- understandability
What is the fundamental quality characteristic ‘relevance’?
- when it influences an economic decision by helping them evaluate past, present or future events
- affected by nature or materiality
- according to Framework, info is material if its omission or misstatement could influence the decision of its users
What is ‘materiality’?
- entity specific aspect of relevance
- depends on size of item/entity in context of specific financial statements
- takes different forms and values so Framework does not attempt to quantify it
What is the fundamental quality characteristic ‘faithful representation’?
- info must be accounted for and presented in accordance with substance and economic reality
- not merely legal form
- concept of applying substance over form
What are the 3 characteristics of ‘faithful representation’?
- completeness:full picture, understandable
- neutrality:no bias, prudence
- free from error:within bounds of materiality
What is prudence?
- accounting mindset
- favours caution in situations of uncertainty and judgement
- tied to neutrality of faithful representation
What is measurement uncertainty?
- estimate used and described clearly and accurately as an estimate
- free from error does not mean perfectly accurate in all respects
- tied to free from error of faithful representation
What is the enhancing quality characteristic ‘comparability’?
- compare fin stmts over time to identify trends
- compare to different entities
- must treat similar items in a relevant, reliable and consistent matter
- disclose accounting policies
What is the enhancing quality characteristic ‘verifiability’?
- if info can be independently confirmed or verified i.e audited
- verification can be direct or indirect e.g counting cash or checking inputs
What is the enhancing quality characteristic ‘timeliness’?
- providing info to decision makers in timely manner
- older info is less useful
What is the enhancing quality characteristic ‘understandability’?
- info needs to be readily understandable by users
- include all useful info
- need to consider format and audience
What does the Framework state that financial statements provide?
provide information about economic resources of the reporting entity
- claims against the entity
- changes in those resources and claims that meet the definitions of the elements of financial statements
What is the going concern assumption?
- foreseeable future is considered to be >12 months
- fin statements are prepared under the assumption that entity neither has an intention to liquidate or significantly reduce scale of operations
- if business was not deemed to be a going concern, the financial statements would be prepared on the break-up basis
- -e.g all assets values using realisable values and no -non-current-classifications can be used
What is the accruals concept?
states that events should be dealt with in the accounting period they occur, rather than the period in which cash flows occur
- no longer considered to be an underlying concept of financial statements
- still considered by Framework as important concept
What is the reporting entity?
entity that chooses to or is required to prepare financial statements
-can be single or be composed of multiple
What is a consolidated financial statement?
-statements including both parent and subsidiaries
What is a unconsolidated financial statement?
-reporting parent alone’s financial statements