Ch 7 - Conceptual Framework Flashcards
Identify 2 Fundamental qualitative characteristics of financial information listed in the Board’s Framework?
Relevance
Fair representation
Explain RELEVANCE as 1 of the fundamental qualitative characteristics of financial info listed in the Board’s Framework?
Info is relevant when it influences the economic decisions of users by helping them evaluate past, present or future events. Some items may only become relevant once they are material, hence materiality is a threshold quality of info. INFO IS MATERIAL if its omission or misstatement could influence the decisions of users.
Explain the Concept of Substance over Form meaning?
essentially, looking beyond the paperwork to understand the actual economic impact of a transaction.
Explain FAITHFUL REPRESENTATION as 1 of the fundamental qualitative characteristics of financial info listed in the Board’s Framework?
Transactions and other events must be accounted for and presented in accordance with their substance and economic reality and not merely their legal form.
For financial information to be Faithfully Represented it needs to posses the following characteristics, explain?
COMPLETENESS - info must be complete and contain all necessary descriptions and explanations to enable a user to understand what is being portrayed.
NEUTRALITY - Info must be neutral / free from bias, also underpinned by the application of PRUDENCE. NOT for info to influence the making of a decision or judgement TO achieve a predetermined result or outcome.
FREE FROM ERROR - info must be free from error within bounds of materiality. If there was an error this can cause financial statement to be false or misleading and thus unreliable.
What is prudence?
an accounting mindset which favours caution in situations of uncertain judgement.
Free from error does not mean?
perfectly accurate in all respects! For example, where an estimate has been used the amount must be described clearly and accurately as being an estimate.
Where an estimate has been used, described clearly and accurately as an estimate, what is this PHENOMENA?
Describing clearly and accurately as an estimate is a MEASUREMENT UNCERTAINTY.
What is Aggregation according to the Framework?
Summarising a large volume of detailed info to make it more useful.
What are the number of PURPOSES the Conceptual Framework for financial Reporting has?
- assist the IASB - to develop IFRS Standards - based on consistent concepts;
- assist preparers to develop consistent accounting policies when no IFRS Standard applies
- to assist all parties to understand and interpret the IFRS Standards
What best defines relevant financial info to users of financial statements?
Information that influences the decision of users.
What is the Conceptual Framework?
The Board developed a conceptual framework which lays out / provides guidance on broad principles that should be applied and followed consistently when developing accounting standards and when determinining appropriate accounting treatment.
