Chapter 7 - Conceptual framework Flashcards
What is the purpose of the conceptual framework for financial reporting
- Assist International accounting standards board to develop IFRS standards
- Assist preparers to develop consistent accounting policies
- Assist all parties in understanding/applying IFRS
How many chapters are there in the framework?
8
What is in chapter 1?
Objective of financial reporting is to provide financial info to users
What is in chapter 2?
For info to be useful it must contain the fundamental qualitative characteristics
What are the fundamental qualitative characteristics?
- Relevance
- Materiality
- Faithful representation
- Completeness
- Neutrality
- Error free
What are enhancing qualitative characteristics?
-Comparability
- Verifiability
- Timeliness
- Understandability
What is in chapter 3?
Objective of financial statements is to provide info about assets, liabilities, equity, income and expenses
What is the going concern assumption?
Reporting entity will continue in operation for the foreseeable future
What is in chapter 4?
The elements of financial statements
What are the different elements of financial statements?
- Assets
- Liabilities
- Equity
- Income
- Expenses
How is an asset defined?
A present economic resource controlled by the entity as a result of past events
How is a liability defined?
A present obligation of the entity to transfer an economic resource as a result of past events
How is an equity defined?
The residual interest in the assets of the entity after deducting all its liabilities
How is income defined?
Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims
How are expenses defined?
Decreases in assets or increases in liabilities that result in decreases in equity other than those relating to distributions to holders of equity claims
What is an economic resource?
A right that has potential to produce economic benefits
What is in chapter 5?
Recognition criteria
What is the criteria for items to be recognised in statements?
- Meet definitions of one of the elements of statements
- Provide relevant info
- Provide faithful representation
What is deregognition?
Removal of all/part of a recognised asset/liability from SOFP
What is in chapter 6?
Recognised items need to be quantified in monetary terms
How can items be measured for monetary value?
- Historical cost
- Current value
What is historical cost?
Provide monetary info derived from the price of the transaction at the date it occurred
Doesn’t reflect changes in value
What is current value?
Uses up to date info at the measurement date to provide monetary info
What bases are used in current value measurements?
- Fair value
- Value in use
- Current cost
What is fair value?
Price that would be received to sell an asset in an orderly transaction between market participants at the measurement date
What is value in use?
Value in use is the present value of the cash flows or other economic benefits which an entity expects to derive from use of asset and from its ultimate disposal
What is fulfilment value?
Present value of the cash that an entity expects to be obliged to transfer to fulfil a liability
What is current cost of an asset?
Cost to acquire an equivalent asset at the measurement date plus transaction costs incurred
What is the current cost of a liability?
The consideration that would be received for an equivalent liability at the measurement date minus transaction costs incurred
What are the advantages of historical cost accounting?
- Easy to understand
- Straightforward to produce
- Objective and bias free
- Reliable
- Gains not recorded until realised
What are the disadvantages of historical cost accounting?
- Carrying amounts of non-current assets often substantially below current value
- Inventory values outdated
- P/L doesn’t reflect current value
- Price changes unaccounted for
- Profits overstated and assets understated
What is in chapter 7?
Presentation and disclosure within financial statements
What is the objective of presentation and disclosure?
To add to the fundamental and enhance qualitative characteristics of info
Understandability and, relevance and comparability improved
What is classification?
Sorting of assets, liabilities, equity, income, and expenses on the basis of shared characteristics for presentation and disclosure purposes
What is aggregation?
Makes info more useful by summarising a large volume of detail
What is in chapter 8?
Concepts of capital and capital maintenance
What are the 2 concepts of capital?
Financial and physical
What is the financial concept of capital?
Capital=net assets or equity of an entity
Used by most entities
What is the physical concept of capital?
Capital=productive capacity of entity (measured using units of output per day)
What is capital maintenance?
Preserving the value of the capital of the entity and reporting profit only if the capital of the entity has increased
What are the 2 types of capital maintenance?
PCM and FCM?
What is PCM?
Physical capital maintenance
Sets aside profits in favour of operational activity
What is FCM?
Financial capital maintenance
Sets aside profit to preserve the value of shareholder’s funds in real terms
