Conceptual Framework Flashcards
What is the objective of the conceptual framework?
To enable standard setters to achieve a consistent and coherent set of fundamental principles which helps users of the financial statements to form an assessment of company performance
The conceptual frame work helps all parties to understand the financial statements by ensuring that?
The information provided is consistent and comparable
What fundamental qualitative characteristics makes the financial information useful?
Relevant information and faithful representation
What makes information relevant?
Helps make the difference to a decision of the user.
Two types of relevant information?
Predictive - used to predict future outcome / confirmatory value - feedback about prior evaluations
What else is linked to information being relevant?
Materiality
What is materiality?
Information is material if it’s omission or misstatement could influence the decisions of the users seeking to rely in the financial statements
What is faith representation ?
Transactions that rare complete, neutral and unbiased and free from material error
Conceptual framework also includes another qualitative characteristic?
Prudence
What does prudence mean under conceptual framework?
Cation when making judgement under uncertainty, to ensure that assets are not overstated and liabilities not understated
What’s another characteristic of faithful representation?
Substance over form
What is the enhancing qualitative characteristics to make information relevant and faithful representation?
Comparability, Verifiability, timeliness, understandability
What makes information comparable?
to be able to identify similarities and differences between same and different entities
What makes information verifiability ?
helps users to support the faithful representation within the financial statements, such as direct and indirect verficiation of figures
What makes the information timeliness?
must be provided within a reasonable time
What makes the information understandable?
users with reasonable business knowledge should be able to understanad
What are the three elements of the financial statements that show the reporting entity under conceptual framework?
Assets - economic resources / Liability’s and equity - the claims against it/ income an expenditure and dividends - changes in economic resources
Definition of asset under conceptual framework?
a present economic recourse controlled by the entity as a result of past events. The economic resource has a right to produce potential economic benefits
Definition of liability under conceptual framework?
a present obligation of the entity to transfer an economic resource as a result of past events
Definition of Equity under conceptual framework?
the residual interest in the entity after deducting all its liability
Definition of income under conceptual framework?
the increase in assets or decrease in lability that results in an increase in equity
Definition of Expenses under conceptual framework?
the decrease in assets or increase in liability that result in decreases in equity
What IFRS standard does not align with the conceptual framework and why?
Deferred tax as its classed as only an accounting estimate and doesn’t meet the conceptual frameworks definition of liabilities
When does an item get recognised in the financial statements?
When it has met one of the 5 elements and provides useful information that is relevant and faithful representation
What is the aim of the derecognition process under conceptual framework?
to ensure that the information is relevant and faithful represented, such as making sure that t he derecognition is presented separate to the SFP.
How to determine whether derecognition is required?
Has the entity lost control?
What is the measurement that is used in the SOFP under conceptual framework?
Current value - made up of FV and VIU and historical cost
What is the purpose of capital maintenance?
to ensure that dividends are not being paid in excess in times of rising prices
What are the concept of financial capital and operating capital?
Financial capital looks at the general inflation where as operating capital looks at specific inflation
What causes problems when using the conceptual framework?
There is no definition of profit and loss which results in the information not being consistence
What is the issue with OCI under conceptual framework?
It is not understood by users and is often used to recycle gains and losses in periods - but under conceptual framework this is deemed to be faithfully represented
