Chapter 2 (The IASB conceptual framework)

Question 1

Which areas should a conceptual framework consider?

Answer 1

1. The objectives of financial statements
2. The elements from which these statements are built
3. The circumstances in which elements may be shown (recognised) in the financial statements
4. And the ways in which elements are measured and presented

Question 2

Main purposes/objectives for the IASB Conceptual Framework?

Answer 2

“To provide financial information about the reporting entity that is useful to existing and potential primary users in making decisions about providing resources to the entity”

1. To assist the IASB in the development of international standards that are based on consistent concepts
2. To assist the preparers of financial reports to develop consistent accounting policies (see Chapter 4) when no international standard applies to a particular transaction or event, or when an international standard permits a choice of accounting policy
3. To assist all parties to understand and interpret the international standards.

Question 3

Primary users

Answer 3

LIC

1. Lenders
2. Investors
3. Creditors

Question 4

Users that may take interest in financial information, other than primary users

Answer 4

CEGG

1. Customers
2. Employees
3. Governments
4. General public

Question 5

Explain “relevance”

Answer 5

PC eller PRECON

1. Predictive value
2. Confirmatory value

Information is relevant if it has predictive value or confirmatory value [the information should thus be relevant for the primary users’ decision-making]

Question 6

What is a perfectly faithful representation?

Answer 6

CONE FREE

1. Complete
2. Neutral
3. Free from error

A perfectly faithful representation would be complete, neutral and free from error. The objective of the IASB is to maximise these qualities to as great an extent as possible

Question 7

What is the opposite to “neutral representation”?

Answer 7

Neutral representation = Unbiased = Prudence

So the opposite of neutral representation is biased (or the opposite of prudence)

Question 8

Prudence

Answer 8

= Försiktighet

“Prudence” is the exercise of caution when making judgements under conditions of uncertainty

Question 9

Qualitative characteristics

Answer 9

The enhancing qualitative characteristics are:

“COVE UNTI”

1. comparability
2. Verifiability
3. Understandability
4. Timeliness

These characteristics enhance the usefulness of financial information which is already both relevant and faithfully represented.

Question 10

Asset (definition according to the conceptual framework)

Answer 10

An asset is “a present economic resource controlled by the entity as a result of past events”

Question 11

Liability (definition according to the conceptual framework)

Answer 11

A liability is “a present obligation of the entity to transfer an economic resource as a result of past events”

Question 12

Equity (definition according to the conceptual framework)

Answer 12

Equity is “the residual interest in the assets of the entity after deducting all its liabilities”

Question 13

How to measure current value?

Answer 13

Three ways:

1. Fair value
2. Value in use
3. Current cost

Question 14

Fair value (definition)

Answer 14

Fair value is defined as “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”

Question 15

Value in use (definition)

Answer 15

The “value in use” of an asset is the present value of the net cash flows (or other economic benefits) that the entity expects to derive from use of the asset and from its eventual disposal

Question 16

Current cost (definition)

Answer 16

The current cost of an asset is the amount that would have to be paid to acquire an equivalent asset at the measurement date