Conceptual Framework

Question 1

What is the purpose of conceptual framework?

Answer 1

• To assist the International accounting board to develop IFRS standards that are based on consistent steps
• To assist consistent accounting policies when no IFRS standard applies (may be a choice of accounting policies)
• To assist all parties to understand and interpret IFRS standards

Question 2

Is conceptual frame work an IFRS standard?

Answer 2

No, in a rare case that there is conflict between IFRS standards and the Conceptual framework, IFRS will prevail.

Question 3

What is the purpose of financial reporting?

Answer 3

To provide 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.

Question 4

What information do the users need about the entity?

Answer 4

• The economic resources of the entity, claims against the entity, and changes in resources and claims
• How efficiently and effectively the entity’s management have discharged their responsibilities to use the entity’s resources

Question 5

Why do they need to know these?

Answer 5

• Info about entity’s economic resources and claims helps users to asses the entity’s liquidity and solvency and likely need for additional financing.
• Infor about entity’s financial performance helps users to understand the return they have produced on their economic resources. Shows how efficient and effective management have been.

Question 6

What are the two fundamental characteristics that make the financial statements useful?

Answer 6

Relevance - can be of predictive value and confirmatory value (derive correct evaluation ) relevance is (effected by nature and materiality)
Faithful - complete, neutral (without bias) and free from error (prudence is the exercise of judgement under uncertainty, never overinflate). (substance over form)

Question 7

What are the other 4 enhancing qualitive characteristics?

Answer 7

Comparability
Verifiability
Timeliness
Understandability

Question 8

Comparability?

Answer 8

This enables users to identify and understand similarities in and differences among items.

Question 9

Verifiability?

Answer 9

Different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation. (e.g., observing inventory count

Question 10

Timeliness?

Answer 10

Having information available to decision-makers in time to be capable of influencing their decisions. Generally the older the info is the less useful

Question 11

Understandability?

Answer 11

Classifying, characterising and presenting information clearly and concisely makes it understandable. Matters of difficulty should not be left out the statements but may need the aid of an advisor to make easier to understand.

Question 12

Definition of Asset

Answer 12

A present economic resource controlled by the entity, as a result of past events.

Assets must have the potential to produce economic benefits either alone or in conjunction with other items

Question 13

How is an item an asset?

Answer 13

• It is cash or has the right to receive cash in the future (trade receivables, rights to services)

Question 14

How does an asset exists, in terms of control?

Answer 14

• Doesn’t have to have a physical form (e.g. copyrights)
• Don’t have to leally own (leased assets)

Question 15

Definition of Liability?

Answer 15

When the entity has a present obligation to transfer an economic resources, that exists from past events.

Question 16

What is an obligation?

Answer 16

Duty/responsibility that entity has no practical ability to avoid.

They may be legally enforceable - binding contract .
Business practice - may have a policy to rectify faults in products even after standard warranty expired.

Question 17

Definition of equity?

Answer 17

The residual interest in the asset of an entity after deducting it liabilities.

Question 18

What is the difference between revenue and gains?

Answer 18

Revenue arises from ordinary activities and gains include those arising on the disposal of non-current assets.

Question 19

Definition of expenses?

Answer 19

Both expenses and losses are includes in the definition of expense.

Losses will include those arising on the disposal and impairment of PPE and intangible non-current assets.

Question 20

What are the different measurement bases?

Answer 20

Historical cost - original cost
Current cost - value in use, fair value etc
Realisable value - amount asset could be sold for.
Present value - Discounted value of cash flows from asset.

Question 21

What is the value in use?

Answer 21

Present value of the cash flows, or other economic benefits that an entity expects to derive from use of asset and from its ultimate disposal.

Considers revenue generation/cost savings.

Question 22

What is fulfilment value?

Answer 22

Present value of the cash, or economic resources, that an entity expects to be obliged to transfer as it fulfils its liabilities.

Can be used when the liability is known, as opposed to being a subject to negotiation.

Question 23

Ethics principles?

Answer 23

Integrity - be straight forward and honest

Objectivity - No bias, interest/influence should override professional judgement

Professional competence and due care - Act diligently in accordance with standards ensure competent professional service.

Confidentiality - don’t disclose to any 3rd party without consent.

professional behaviour - comply with laws and regulations to avoid any action that discredits the profession.

Question 24

What us the accrual concept?

Answer 24

When items are recorded when they are incurred not when invoiced or cash moves.