Conceptual Framework

Question 1

What does IASB stand for?

Answer 1

International Accounting Standards Board

Question 2

Are conceptual frameworks developed by the AcSB and IASB considered to be accounting standards?

Answer 2

No they are not, and therefore they do not override any of the ASPE or IFRS that specifically deal with accounting for certain transactions and events.

Question 3

T or F: there are minimal inconsistencies between the newer conceptual frameworks and the older accounting standards (in both ASPE and IFRS)

Answer 3

False: there may be some inconsistencies since the older standards may have been created using an older conceptual framework (or none at all)

Question 4

What is a conceptual framework?

Answer 4

A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.

Question 5

Why is a conceptual framework like a constitution?

Answer 5

Many observers believe that the real contribution of standard-setting bodies, and even their continued existence, depends on the quality and usefulness of the conceptual framework

Question 6

What are the 2 reasons why a conceptual framework necessary?

Answer 6

1. to be useful, standard setting should build on an established body of concepts and objectives.
2. By referring to an existing framework of basic theory, it should be possible to solve new and emerging practical problems more quickly.

Question 7

After having a soundly developed conceptual framework as their starting point, what are standard setters then able to do?

Answer 7

Are then able to issue additional useful and consistent standards over time.

Question 8

What is the result of standard setters having a conceptual framework and building off of it?

Answer 8

The result is a coherent set of standards and rules because they have all been built upon the same foundation.

Question 9

What is the importance of conceptual framework on users understanding of statements?

Answer 9

It is important that such a framework increase financial statement users’ understanding of and confidence in financial reporting, and that it enhance the comparability of different companies’ financial statements.

Question 10

What is hoped of accountants who use good judgement, with the help of a universally accepted conceptual framework?

Answer 10

It is hoped that accountants will be able to decide against certain alternatives quickly and to focus instead on a logical and acceptable treatment

Question 11

Is there a universally accepted conceptual framework relied on in practice?

Answer 11

No, over the years, many organizations, committees, and interested individuals have developed and published their own conceptual frameworks

Question 12

Realizing there was a need for a generally accepted framework, what did the Financial Accounting Standard Board issue in 1976?

Answer 12

A three-part discussion memorandum entitled “Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement.”

Question 13

What was included in the “Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement”?

Answer 13

It stated the major issues that would need to be addressed in establishing a conceptual framework for setting accounting standards and resolving financial reporting controversies.

Question 14

What was published after the FASB’s conceptual framework discussion was issued?

Answer 14

6 Statements of Financial Accounting Concepts were then published. A seventh statement, on accounting measurement, was added in 2000.

Question 15

How did the AcSB and IASB follow FASB’s lead?

Answer 15

Issued their own respective frameworks

Question 16

What is the first level of a conceptual framework?

Answer 16

The objectives identify accounting’s goals and purposes: these are the conceptual framework’s building blocks

The “why”—goals and purposes of accounting

Question 17

What is the second level of a conceptual framework?

Answer 17

The qualitative characteristics that make accounting information useful and the elements of financial statements (assets, liabilities, equity, revenues, expenses, gains, and losses).

Bridge between levels 1 and 3

Question 18

What are qualitative characteristics?

Answer 18

The characteristics defined by the conceptual framework that distinguish more useful information from less useful information for decision-making purposes.

Question 19

What is the objective of financial reporting?

Answer 19

The goal “to communicate information that is useful to investors, members, contributors, creditors, and other users in making their resource allocation decisions and/or assessing management stewardship,” per the CPA Canada Handbook.

Question 20

What are elements of financial statements?

Answer 20

Basic items that are presented in the financial statements

Question 21

What is the third and final level of a conceptual framework?

Answer 21

The foundational principles used in establishing and applying accounting standards.

The “how” implementation

Question 22

What are foundational/first principles?

Answer 22

Foundational principles from which decisions stem, making decisions theoretically consistent if they stem from the same foundational reasoning.

Question 23

What does the new framework was issued by the IASB in March 2018 deal with?

Answer 23

• Objective of general-purpose financial reporting
• Qualitative characteristics of useful information
• Financial statements and the reporting entity
• The elements of financial statements
• Recognition and derecognition
• Measurement
• Presentation and disclosure
• Concepts of capital and capital maintenance

Question 24

Did the new framework issues by the IASB in March 2018 have lots of changes, how important were they?

Answer 24

There are some significant changes

Question 25

Will the new framework issued by IASB in 2018 be adopted for private entities?

Answer 25

The AcSB has signalled that it will likely adopt the framework for private entities as well.

Question 26

Does a new conceptual framework change how things are presently accounted for?

Answer 26

Not necessarily change how things are presently accounted for, since the conceptual framework does not override specific IFRS

Question 27

When did the new framework issued in 2018 by IASB become effective?

Answer 27

Effective January 1, 2020, for those financial statement preparers developing accounting policies. Having said that, the IASB planned to start using the conceptual framework immediately after it was issued.

Question 28

T or F: information in the capital marketplace is not always evenly accessible or available to investors and creditors.

Answer 28

Stock markets and regulators go to great lengths to ensure information symmetry for all capital market participants so that no one is at a disadvantage. Despite this, various stakeholders often do not have the same information.

Question 29

Why is it an issue that information in the capital marketplace is not always evenly accessible or available to investors?

Answer 29

Because stakeholders may make suboptimal decisions because they are lacking good or complete information

Question 30

Financial statements play a large part in information accessibility?

Answer 30

Play a large part in helping to ensure that investors, creditors, and others have access to information they need to make decisions

Question 31

What is adverse selection?

Answer 31

A result of information asymmetry whereby the capital marketplace may attract the wrong types of companies (such that companies with higher-quality products may choose not to enter the market).

Question 32

What is moral hazard?

Answer 32

The risk that certain parties who have additional information not accessible to others will act in their own self-interest.

Question 33

Although financial statements play a large part in making information more widely accessible to stakeholders, what kinds of issues can arise?

Answer 33

Because of adverse selection and/or moral hazard, issues can arise

Question 34

When is the moral hazard issue worse than adverse selection?

Answer 34

Where certain stakeholders such as accountants and owner-managers have expert knowledge that the rest of the capital marketplace does not. They may use this expertise to act in their own self-interest to the detriment of other capital marketplace participants such as investors.

Question 35

What may a well-written conceptual framework based on sound principles help address?

Answer 35

Information asymmetry concerns

Question 36

What is financial information useful in making decisions about?

Answer 36

How to allocate resources (including assessing management stewardship)

Question 37

Give an example of financial information being useful in decision making on allocating resources.

Answer 37

A bank may need information in order to decide whether to lend a company money or call a loan. Similarly, an investor may need information about a company’s profitability in order to decide whether to invest in it or divest.

Question 38

What is management stewardship?

Answer 38

A concept whereby management is charged with protecting and enhancing the capital of a company.

Aka: how well management is using entity resources to create and sustain value

Question 39

What kind of information should company’s provide in order to have “good management stewardship”?

Answer 39

Financial position, changes in financial position, and performance. Also show how efficiently and effectively management and board of directors have discharged their responsibilities to use the entity’s resources wisely

Question 40

How can companies provided information pertaining their management stewardship?

Answer 40

Through general-purpose financial statements.

Question 41

What are general-purpose financial statements?

Answer 41

Basic GAAP financial statements that provide information that meets the needs of key external users (normally investors and creditors).

Question 42

What are the general-purpose financial statements intended to provide?

Answer 42

The most useful information possible in a manner whereby benefits exceed costs to the different kinds of users.