Conceptual Framework Flashcards
Theoretical principles in financial reporting?
Development of accounting standards
Udnerstanding and interpretation of accounting standards
Conceptual framework forms basis on?
Determining how events accounted for
How they should be measured
How they should be communicated
Advantages of conceptual framework?
Developed on same theoretical principles
Less political pressure
Principles, not large volume of rules
Disadvantages of a conceptual framework?
No framework can fit all users
Diversity of user requirements
Accrual accounting?
Transactions and events are reported in periods which effects occur. Also known as matching concept
Purpose of conceptual framework?
Help IASB develop IFRS accounting standards
Assist preparers of accounts develop accounting policies in case there is no IFRS standard
Objective of financial reporting?
Provide financial information about reporting entity that is useful to stakeholders
Primary users?
Decisions about buying, selling or holding shares or debt instruments or providing or settling loans
What is going concern?
An entity will continue in operation for the foreseeable future
Fundamental qualitative characteristics?
Relevance
Faithful representation
Enhancing qualitative characteristics?
Comparability
Verifiability
Timeliness
Understandability
What is relevance?
Information capable of making a difference in decisions made by users
What does consideration relate to?
Materiality
What is materiality?
If a mistake is reasonably expected to influence decisions of primary users
What is prudence?
Exercising caution
What is faithful representation?
Complete
Neutral
Free from error
What is comparability?
Qualitative characteristics that enable users to identify and understand similarities/differences in items
Why is a change in accounting policy changed retrospectively?
Results from one period to the next can be usually compared
Does comparability = uniformity?
No
What is verifiability?
Different knowledgeable and independent observers could reach consensus
What is timeliness?
Having information available to decision-makers in time to be capable of influencing their decisions
What is understandability?
Classifying, characterising and presenting information clearly and concisely
When should an accounting policy be changed?
If change will result in information that is reliable and more relevant
What is an asset?
A present economic resource controlled by the entity as a result of past events
What is an economic resource?
A right that has the potential to produce economic benefits
When does an entity control an economic resource?
Has the present ability to direct use of economic resource and obtain economic benefits that may flow from it
What is a liability?
A present obligation of entity to transfer an economic resource as a result of past events
What is meant by an obligation?
A duity of responsibility entity has no practical ability to avoid
What is an equity?
Residual interest in assets after deducting all liabilities
What is income?
Increase in assets
Decrease in liabilities that result in increase in equity
What is expense?
Decrease in assets
Increase in liabilities that result in decreases in equity
What happens when debit expense
Credit asset OR credit liability
When to recognise an item?
Is an element (asset, liability, income, expense or equity)
Element has relevant info and has faithful representation
When is derecognition for asset and liability?
Asset: When control is lost
Liability: No longer a present obligation
