Conceptual Framework And Financial Reporting Flashcards
What is a conceptual framework?
It provided the foundation for the detailed accounting standards. It is used to balance the supply and demand of accounting information
Purpose of the IFRS conceptual framework
-Assist the international accounting standards board to develop IFRS standards that are based on consistent concepts
- assist preparers to develop consistent accounting policies when no standard applies to a particular transaction or other event, or when a standard allows a choice of accounting policy
-it assist all parties to understand and interpret the standards
The IFRS conceptual framework identifies users as?
Existing and potential investors, lenders and other creditors
What are the objectives of financial reporting
-to provide information about the entity that is useful to existing/potential users in making decisions primarily decisions about investment and lending
-to reduce information asymmetry
-to provide information about the amount, timing and uncertainty of cash flows
-to provide information about the entity’s resources, claims and performance
What are the 2 types of qualitative characteristics a financial reporting must have?
-there are fundamental qualitative characteristics (must have)which includes relevance and representational faithfulness
-enhancing characteristics (increase the usefulness) which includes understandability, comparability, verifiability and timeless
What are the attributes of representational faithfulness associated with fundamental qualitative characteristics
-completeness: financial statements include all material items
-neutrality: information should be free of bias, this is achieved by exercising prudence (using caution when making judgements)
-freedom from material error: financial statements should not include any errors or omissions
What are the four enhancing qualitative characteristics?
-understandability: financial statements should be understandable to users for them to be useful in their decision making.
-comparability: ability to compare one set of financial statements to another:
-between different companies
-year to year for the same comp
-verifiability: degree to which different people would agree with the chosen representation
-timeless: how soon the information is available to decision makers. Older information will be less timely and therefore less useful
What are the 2 types of elements in a financial statements?
-balance sheet which measure the financial position:
-elements in the balance sheet are assets liabilities and liquidity
The income statement which measure the performance:
-elements in the income statement are income, expenses and losses
An asset is defined as…
-resource controlled by the entity
-results from past events
-future economic benefits are expected to flow to the entity
*all of those characteristics must be met for the item to be consider classified as an asset
A liability is defined as…
-present obligation of the entity
-arises from past events
-settlement of which is expected to result in an outflow of economic resources
*all three must be met to be consider a liability
What is the difference between revenues and gains?
-revenues relate to income earned in the course of ordinary business activities
-gains relate to other income that is not earned in the ordinary course of business
Difference between expenses and losses
-expenses arise from the ordinary course of business
- losses are outflows outside the ordinary course of business
An item can be recognized in the financial statements when..
-future inflows of resources are probable
-amounts are highly measurable
When can we recognize revenues?
When:
-risks and rewards have transferred to purchaser or performance is substantially complete
-amount of revenue can be reliably measured
-collectability is reasonably assured
What is the definition of measurement in accounting
Measurement is the basis for how the items in the financial statements will be quantified. There are several alternatives
