Conceptual Framework Flashcards
Objective of financial reporting
To provide financial information that is useful to users in making decisions relating to providing resources to the Entity
When is information considered useful
When it’s about the entity’s economic resources, claim against the entity and changes in those resources and claims
What do decisions made by users involve
Buying selling hold equity and debt instruments
providing or settling loans
exercising right to vote on or otherwise influence management actions
What does the user assess
Future cash flows
Future cash flows
The amount, timing, and uncertainty of (the prospects for) future net cash flow inflows in the entity
Stewardship
The management’s ability to effectively and efficiently perform its responsibility in using the entities resources
predicts the future
protect against unfavorable effects of economic factors
comply with laws, regulations, and contractual provisions
Users of financial reports
Existing and potential investors, lenders, and other creditors who rely on general purpose financial reports for financial information
Fundamental characteristics
Relevance
Faithful representation
Relevance
Relevant information must have either predictive value or confirmatory value or both
Faithful representation
If financial statements of free from error, neutral and complete
Enhancing qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability
Comparability
Its ability to stand useful overtime against the financial information from other sources
Verifiability
provides assurance that the information faithfully represents what it purports to be representing
Timeliness
Having information available to decision-makers on times to be capable of influencing their decisions
Understandability
Information that should be clearly and concisely classified characterized and presented
Cost constraints
The benefit received from useful information needs to justify the cost involved in supplying the information
Objective of financial statements
To provide information about the reporting entities assets liabilities Equity Income and expenses to meet objectives of Financial Reporting
Information about POSITION
Assets and liabilities
Information about PERFORMANCE
Income and Expenses
Types of financial statements
Consolidated Financial Statements
Unconsolidated Financial Statements
Combined Financial Statements
Consolidated Financial Statements
Provide information about assets, liabilities, equity, income, and expenses of both the parent and its subsidiary as a single reporting entity
Unconsolidated financial statements
Provide information about assets, liabilities, equity, income, and expenses of the parent only
Combined financial statements
Provide information about assets liabilities Equity Income and expenses of two or more entities that are not linked by a parent subsidiary relationship
Asset
A present economic resource controlled by an entity as a result of past events
Economic resource
An economic resource is a right that has the potential to produce economic benefits
Liability
A present obligation of the entity to transfer an economic resource as a result of past events
Obligation
A duty or responsibility that The Entity has no practical ability to avoid
Established by contract, legislation or similar means and are legally
enforceable by the party to whom they are owed
TRANSFER of an economic resource
only necessary that the obligation exists and only in one circumstance that obligation will result in the transfer
Present obligation as a result of past events
the entity has already obtained economic benefits
Taken action that creates the obligation
Consequential test
An entity will or may have to transfer an economic resource that it would not otherwise had to transfer
Equity
The residual interest in the asset of The Entity after deducting all its liabilities
Income
Increases in assets or decreases in liability that result in increases in equity, other than those relating to contribution from holders of equity claims
Expenses
Decreases and assets or increases in liabilities that results in decreases in equity other than those relating to distributions to holders of equity claims
Recognition
The process of capturing for inclusion in the statement of financial position or the statement of financial performance
An item that meets the definition of an element
Recognition criteria
Relevant information about elements
faithful representation because the aim is to provide information that is useful to investors, lenders and other creditors
De-recognition
The removal of all or part of a recognised asset or liability from an entity statement of financial position
Measurement basis for assets
Historical cost = transaction-based
fair value = market-based
value in use = Entity specific
current cost = replacement entity
Measurement basis for liabilities
Historical cost = transaction-based
fair value = market-based
fulfillment value = entity specific current cost = received to take on equivalent liability
Fulfillment value
Reflect entity specific current expectations about the amount, timing, and uncertainty of future cash flows to fulfill a liability
Consideration of relevance
Characteristics of the asset or liability
contribution to future cash flows
Consideration of faithful representation
Measurement inconsistency
measurement uncertainty
Statement of profit or loss
Primary source of information about an entity’s financial performance
