Conceptual Framework Flashcards
What is the objective of financial statements according to the Conceptual Framework?
To provide information that is useful to present and potential investors, lenders, and other creditors about providing resources to the entity.
This reflects the need for decision usefulness in financial reporting.
What does ‘decision usefulness’ imply?
It implies that it is the investor who makes the decision and that the role of financial reporting is to supply useful information for this purpose.
This highlights the importance of understanding user needs in financial reporting.
What are the primary users of financial reports?
Existing and potential investors, lenders, and other creditors.
These users rely on general purpose financial reports for much of the financial information they need.
What are the limitations of the Conceptual Framework?
Development has been incomplete and of limited value; it does not resolve current issues; piece meal changes make it difficult to appreciate the extent and direction of change.
There is a need for Emerging Issues Committees to address unresolved issues.
What are the building blocks of a conceptual framework?
- Statement of objectives/purpose including presumption as to users and needs
- Business purpose and nature of the economics
- Qualitative characteristics and limitation of financial information
What is the purpose of general purpose financial reporting?
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions relating to providing resources to the entity.
However, it cannot provide all information needed by users.
Fill in the blank: The objective of financial statements is to provide financial information about the reporting entity’s _______.
[assets, liabilities, equity, income, and expenses]
What is the nature of business purpose as defined in the Conceptual Framework?
To provide information about the financial position of a reporting entity, including its economic resources and claims against those resources.
Financial reports also reflect the effects of transactions and events that change these resources.
What are the fundamental qualitative characteristics of financial information?
- Relevance
- Faithful representation
What enhancing qualitative characteristics improve the usefulness of financial information?
- Comparability
- Verifiability
- Timeliness
- Understandability
True or False: Financial reports are based on exact depictions of transactions.
False
They are based on estimates, judgements, and models.
What are the challenges faced by the accounting profession regarding the conceptual framework?
- Highly complex transactions
- Global marketplace
- Volatile market
- Increase in intangible assets
- Modern financial instruments
- Capital mobility
- Codification of conventions
- AI and digital disruption
What is the role of the IFRS Conceptual Framework?
To describe the objective and concepts for general purpose financial reporting, guiding the Board in developing IFRS Standards.
It ensures conceptual consistency and assists in developing accounting policies.
What is meant by ‘materiality’ in the context of financial reporting?
Materiality is driven by the concept of relevance, determining the significance of information in financial reports.
It influences what information is included in financial statements.
Fill in the blank: The exercise of professional judgment is not a substitute for _______.
[principles]
What was the major change in the IFRS Conceptual Framework announced in 2018?
A revised Conceptual Framework effective January 2020 was announced.
This revision aimed to enhance the quality of performance measures.
What is the significance of the Conceptual Framework for financial reporting?
It provides more useful information, guides standard setters, controls political biases, and supports the claim for professional status.
It serves as a frame of reference for resolving controversies.
