Chapter 5- Conceptual Framework, accounting concepts + conventions Flashcards
What board is responsible for issuing International Accounting Standards?
IASB (in the form of IAS standards + IFRS standards)
Two areas that can help users identify the reporting entity’s financial strengths and weaknesses… (IASB’s Conceptual Framework)
- Economic resources it controls
- The claims on an entity’s resource (the entity’s liabilities)
(not management structure, past financial performance or demographic structure of local economy)
IASB’s Conceptual Framework says financial info is capable of making a difference in decisions if it has…
Predictive and confirmatory value
not comparative and historic value
According to the Conceptual Framework (from IASB) the objective of financial statements is to…
- Provide financial info about reporting entity that’s useful to existing + potential investors, lenders + creditors in making decisions
- To show the results of management’s stewardship of the resources entrusted to it
(not to provide a basis for valuing the entity, comparison of financial performance between entities operating in different industries OR assisting management and those charged with governance in making timely economic decisions about deployment of the entity’s resources)
Characteristics for info to be useful (IASB’s Conceptual Framework)
Fundamental characteristics:
- Relevance (materiality is an aspect of this)
- Faithful Representation
Enhancing characteristics:
- Comparability
- Verifiability
- Timeliness
- Understandability
Financial statements are required to give a true and fair view but…
these are not defined in statue (IAS 1, instead they tend to be determined in courts of law/ on the facts)
IAS 1 Presentation of Financial Statements states that a set of financial statements comprises:
- Statement of FP
- Statement of P+L
- Statement of cash flow
- Statement of changes in equity (or changes in equity except those arising with owners)
- Accounting policies + explanatory notes
For financial info to be useful it must be… (IASB’s Conceptual Framework)
relevant and faithfully represented
Objectives of IAS 1 Presentation of Financial statements
- Purpose is to ensure comparability through prescribing the basis for presentation of general-purpose FS
- Objective of FS is to provide a summary of accounting transactions for a period
IAS 1 requires FS to fairly present…
Financial position, financial performance and cash flow of entity
departure from IAS 1 requires…
disclosure in accounts with an explanation + estimate of financial impact
Accruals (matching) concept
- Transactions + events are recognised when they occur not when cash is received/ paid for
- Costs incurred in generating income are matched against revenue generated
Going concern concept requires that…
- Entity is viewed as continuing its operations for the foreseeable future (at least 12 months)
- assume there’s no intention/ necessity to liquidate or curtail materially its operations
Going concern concept means that assets…
do not need to be valued on a break-up basis (the value they could be sold separately at by the business if the business were to be liquidated)
If management do not believe going concern concept should apply, they need to disclose…
- that they don’t believe it should apply
- the basis on which accounts have been prepared
- reasons why entity is not a going concern
Info is material if…
Its omission/ misstatement could influence economic decisions of users taken on the basis of financial statements. (according to IAS 1)
If info is immaterial a specific disclosure requirement…
of an IFRS Standard need not be satisfied
Materiality depends on…
size or effect of item judged in the particular circumstances of its omission/ misstatement
Determining whether an item is material is…
subjective (a % is used as a rule of thumb). Decisions must be made in context
Sundry expenses are…
small immaterial expenses all added together
The offsetting rule by IAS 1 Presentation of financial statements
does not allow assets + liabilities OR income + expenses to be offset (deducted) from one another unless another IAS allows it
Generally assets + liabilities are recording in SFP at their…
historic cost.
(Assets are recorded at amount of cash/ cash equivalents paid or the fair value of the considerations given to them) (Liabilities are recorded at the amount of proceeds received in exchange for the obligation)
The accounting principle which, in times of rising prices, tends to understate asset values and overstate profits is…
Historic value
advantage of historical cost accounting…
it removes subjectivity of estimating the value of an asset or liability (usually objective evidence of cost)
