Conceptual Framework Flashcards
What is Conceptual Framework and what is it’s purpose
- Provide guidance and consistent concepts for IFRS from IASB
- Provide guidance for accounting policies where no standard applies
- To assist in understanding and interpreting the standards
What two things must an entity’s financial statements comply with?
- IFRS standards
- Conceptual framework for financial reporting
True or False: Conceptual Framework exactly matches IFRS standards
False- there are slight discrepencies but the conceptual framework cannot override any standard requirements
What is the Objective of financial reporting?
To provide financial information to lendors, investors and creditors - economic resources of entity and how efficiently and effectively
What is meant by Accrual Accounting?
Reporting of Entity’s economic resources and claims are recognised in the period which they occur even if cash is recieved at a later date
What are the fundamental qualitative characteristics of useful financial information?
Relevance and Faithfuol representation
What is meant by materiality?
Information which if ommitted or misstated could influence decisions - can be material due to size, nature so it is entity specific and judgement based
Explain the fundamental value of Relevance as a qualitative charcteristic
Financial informaiton is capable of making a difference in decision making. Due to predictive or confirmatory value - material information
Explain the qualitative characteristic of Faithful representation
Information should faithfully represent the substance - complete, neutral and free from error
What is meant by Prudence in Conceptual Framework
Exercising of caution when making judegmetns under uncertaintiy- income only stated when realised, liabilities stated when foreseen
What are the four enhancing characteristics of useful financial information?
- Comparability
- Verifiability
- Timeliness
- Understandability
What is the difference between comparability and consistency
- Comparable - entities which are similar can be compared
-Consistency - use of same methods for same items
Explain enhancing characteristic of verifiability
independent observers could reach consensus that information is a faithful representation: can be direct(verify ammount) or indirect (checking inputs to formula)
Explain enhancing characteristic of timliness
- When infromation is available for users
- Newest informaiton is most useful
Explain enhancing characteristic of Understandability
- Classifying, presenting information clearly to understand
- Without excluding complex information
What is meant by the cost constraint of useful financial reporting
Conceptual framework asks to consider whether the benefits of reporting particular financial information justify the costs incurred to provide it
What is meant by going concern?
Underlying assumption whereby financial statements are normally prepared assuming entity is going operation in the forseeable future.
What does the three elements of Asset, Liability and Equity relate to on financial statement
An Entity’s financial position
What does the elements of Income and expense relate to on financial statement
An Entity’s performance
Define asset
Present economics resource - right has the potential to produce economic benefits- controlled by entity as a result of of past events
What is the accounting formula on the SOFP
Assets= Liabilities + Equity
What are the three conditions to recognise an asset
- Control: entity must be able to direct use of economic resource
- Potential to produce economic benefit: resource : cash inflow, reduction of liabilities
- Right: entity has rights to recieve rg. cash, good/service or PPE
Define Liability as per Conceptual framework
Present obligation of the entity to transfer an economic resource as a result of past events
What are the three criteria to recognise liability
- Obligation: (legal or contractual), cannot be avoided
- Transfer of economic resource: Cash payment, delivery of good or service
- Present obligation due to past events: entity has already obtained economic benefits in the past,
Define Equity
Residual interest in the assets of an entity after deducting liabilities
Equity = Assets- Liabilities
Define Income
Increase in assets or decrease in liabilities
- result in increase in equity (other than relating to contributions from holders of equity claims)
Define Expenses
Decreases in assets or increase in liability
- that result in decrease in equity (other than those relating to distributions to holders of quity claims)
What is recognition criteria?
An iten is recognised and included in SOFP or SPL when
- it meets the definition of the elements
- AND is Relevant AND Faithful representation
- At a cost which does not outweigh benefits of providing information
What is meant by derecognition
- Removal of all or part of recognised asset or liability
- when control of part or all of an asset is lost
- No longer a present obligation in respect of liability
What is meant by measurement basis?
How element is quantified in monetary terms
- Historical Cost : cost inccured in acquiring asset + transactional costs
- Current Value: not from transactional price but price on the measurement date
What are the three types of current value
- Fair Value: market price of asset or liability or estimated using futture cash flows and discounting to reflect time value
- Value in use or fulfillment value: present value of cash flow
- Current cost: cost of an equibalent asset at measurement date
What are the two concepts relating to capital
Financial concept of capital: Net Assets or Equity of an entity
Physical Concept of Capital: Productive Capacity of entity eg. output per day
What is the concept of financial capital maintenance?
Finacial capital maintenace: Profit earned if financial amout of net asssets at end of period > beginning - excluding ditrubutions to and contributions from holders of Equity
What is the concept of physical capital maintenance?
A profit is made if physical productive capacity or operating cabability of entity at end of period is > begining - exluding any distributions to/contributions from holders of equity
