Conceptual and Regulatory Framework Flashcards
What is IFRS1?
Conceptual and Regulatory Framework
What is the first IFRS reporting period?
the period covered by the first IFRS financial statements
What is the date of transition?
the date at the start of the earliest period for which comparatives are provided in the first IFRS financial statements
What are convertible loans?
Loans/liability that can be converted into equity
Are preference shares assets, liabilities or equity?
equity
If a leaser leases a building to someone for 5 years, who’s balance sheet will the building be in?
The balance sheet of the leasee
When was the most recent Conceptual Framework for Financial Reporting published?
March 2018
What are/is the purpose(s) of the Conceptual Framework?
- to assist in the development of IFRS/IAS
- to provide a basis for reducing alternatives
- to assist preparers of financial statements in applying international standards
- to assist auditors in forming an opinion as to whether financial statements have complied with international standards
- to assist users in interpreting financial statements
What does the framework contain?
- objective of general-purpose financial reporting
- qualitative characteristics
- financial statements and the reporting entity
- elements of financial statements
- recognition and derecognition
- measurement
- presentation and disclosure
- concept of capital and capital maintenance
What is the objective of general-purpose financial accounting?
to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
What should general purpose financial reporting provide information about?
the entity’s:
- financial position
- financial performance (accrual basis)
- cash flows
- changes in financial position which are not caused by financial performance (e.g share issues)
- recognise expenses once they incur (when it paid) under accrual basis
Who are the primary users of general-purpose financial reports?
- existing/potential investors
- existing/potential lenders and other creditors
Who are the other users (not listed in conceptual framework) of general-purpose financial reports?
- employees
- customers
- governments and their agencies
- the public
What are the two categories of qualitative characteristics of financial information?
Fundamental & enhancing
What are the fundamental characteristics of financial information?
Relevance (predictive or confirmatory value)
Faithful representation (complete, neutral, error-free)
What are the enhancing characteristics of financial information?
Comparability (consistent accounting treatments)
Verifiability (someone with accounting knowledge can verify)
Timeliness (in time to influence decisions)
Understandability (clear and concise presentation)
When considering comparability as a characteristic of financial information, what the minimum amount of time for comparison?
1 year
What are financial statements usually prepared on?
the going concern basis
What is the going concern basis?
It’s when the entity is viewed as continuing in business for the foreseeable future and has neither the intention nor the need to close down or materially reduce the scale of its operations
What are the elements of financial position?
Assets, liabilities and equity
What are the elements of financial performance?
income & expenses
What is an asset?
- A present economic resource controlled by the entity as a result of past events
- An economic resource is a right that has the potential to produce economic benefits
What is a liability?
- A present obligation of the entity to transfer an economic resource as a result of past events
What is equity?
The residual interest in the assets of the entity after deducting all its liabilities
What is income?
Increases in assets
Decreases in liabilities
Result in increases in equity
Other the those relating to contributions from holders of equity claims
What are expenses?
Decreases in assets
Increases in liabilities
Results in decreases in equity
Other than those relating to distributions to holders of equity claims
What is recognition?
the process of incorporating in the balance sheet or income statements an item that meets the definition of a element and satisfies the criteria for recognition
An item is recognised if…
a) if it’s probable that any future economic benefit associated with the item will flow to or from the entity
AND
b) the item has a cost or value that can be measured with reliability
What are the measurement basis?
- historical cost
- current value
- current cost
- value in use
- fair value
What is value is use?
NPV of an asset’s current cash flow
How do you calculate an asset’s fair value?
Selling price - selling expenses
What is financial capital?
- same as net assets or equity of an entity
Under the financial maintenance concept, when is profit earned?
Only when the amount of net assets at the end of the period is greater than the amount of net assets in the beginning, after excluding contributions from and distributions to equity holders.
What is physical capital?
the productive capacity of the entity based on, for e.g. units of output per day, how much equipment at the start of the year compared to the end, production capacity, labour hours etc.
e.g of something that relies on physical capital is inflation
When is profit earned under the physical capital concept?
If physical productive capacity increases during the period, after excluding the movements with equity holders
Why is regulation important?
As companies are owned by shareholders but managed by directors, most shareholders don’t have much day-to-day involvement with the company - therefore they rely on financial reports for info to help them make important decisions
regulations try to ensure that financial reports provide a faithful representations
What are some sources of regulation?
- Legislation (e.g. Companies Act 2006 act in 2006)
- accounting standards (e.g. national standards, international standards)
- stock exchange regulations (e.g requirement to publish quarterly figures)
What is GAAP?
Generally accepted accounting practice
The complete set of accouting regulations (from all sources) and accounting conventions that apply in a certain jurisdiction (e.g. UK GAAP, US GAAP etc.)
What does the International Accounting Standards Board (IASB) do?
Develop and amend international standards
What does the IFRS Advisory Council do?
Advises the IASB on its agenda and priorities
What does the IFRS Interpretations Committee do?
Interprets international standards and provides guidance on matters not covered by standards
What is the standard setting process?
Identification of the topic area
Application of the Conceptual Framework
Consultation with national standard-setters, the IFRS Foundation and IFRS Advisory Council
Publication of discussion document and consideration of comments
Publication of exposure draft and consideration of comments
Publication of standard
Whats the structure of an international standard?
Introduction
Objectives and scope
Definitions
Body of the standard
Effective date and transitional provisions
Formal approval by IASB and any dissenting opinions
Basis for conclusions
Application/implementation guidance and/or illustrative examples
What are some purposes of accounting standards?
Reduce variation in accounting practice and introduce a degree of uniformity into financial reporting
Make it more likely that financial statements will provide a faithful representation of an entity’s financial performance and financial position
Meaningful comparisons may be drawn over time and between entities
IASB Conceptual Framework stresses the importance of faithful
representation and comparability
Tell me about IFRS use in other countries
Required for listed companies in over 120 countries (including all EU companies)
USA allows foreign listed companies to use IFRS
Permitted for listed companies in other countries
Where should the opening IFRS statement of financial position start from?
the date of transition
What should be the same in all the periods of the first IFRS financial statements?
the accounting policies
and they must comply with all international standards in force at the end of the first IFRS reporting period
