Conceptual Framework and IFRS

Question 1

Objectives of Financial Reporting

Answer 1

Objectives of Financial Reporting

1. ) To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the interesting.
2. ) Information about a reporting entity’s economic resources and claims against the entity (Financial Position – B/S).
3. ) Changes in economic resources and claims – current year
4. ) Answer performance perspective by accrual accounting (provides a better basis for assessing entities past and future performance than does cash basis – (Income Statement)
5. ) Unanswered performance reflected by past cash flow (cash flow)
6. ) Changes in economic resource and claims, Not resulting from financial performance (ex: issuing additional stock)

Question 2

Primary Qualitative Characteristics (USEFUL)

Answer 2

Primary Qualitative Characteristics (USEFUL)

in order to be useful, information must have both RELEVANCE and FAITHFUL REPRESENTATION.

Question 3

Relevance (Roger is PC)

Answer 3

Relevance (Roger is PC)
capable of making a difference in a users decision making process.
–PREDICTED VALUE– helps the decision-maker predict or forecast future results
–CONFIRMATORY VALUE (Feedback Value) – confirm or correct prior predictions.
– MATERIALITY– capable of MAKING a DIFFERENCE in the user’s decision-making process if omitted or misstated (auditors judgment). Considered and entity specific aspect of Relevance that applies at the individual entity level.

Question 4

Faithful Representation – (Roger is never on the FENCe)

Answer 4

Faithful Representation – (Roger is never on the FENCe).
The information depicts what it reports to represent.
– Free from error – no errors or omissions in the info
– Neutrality (W/O bias) – the uncle is free from bias
– Completeness – info is presented in a way that users can understand.

Question 5

Enhancing Characteristics – (Roger is Cut like a V)

Answer 5

Enhancing Characteristics – (Roger is Cut like a V)
– Comparability (consistency) – same principles in use with business enterprise and similar industry/consistency – same accounting methods in different periods
– Understandability – classifying, characterizing and presenting them clearly and concisely.
– Timeliness – info is available to decision-makers when it is useful to make a decision.
– Verifiability – different sources agree on an amount through either direct or indirect verification.
One pervasive constraint that overwrites the usefulness of information – cost/benefit.
Cost of obtaining and presenting the information shouldn’t exceed the benefit.

Question 6

Three Basic Elements (accounting equation)

Answer 6

Three Basic Elements (A – Lia = Equity)
ASSETS– an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred
LIABILITIES– an economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred.
EQUITY or NET ASSET– assets left over after deducting liabilities.

Question 7

Equity (DENT)

Answer 7

Equity – consists of three elements
– contributions/investments by owners
– distributions to owners – (dividends)
– comprehensive income – all changes in equity other than “owner” sources.
These items affect Comp Income, but not net income (DENT)
D – Derivative cash flow hedge (changes go to comp income)
E – Excess adjustments of pension PBO and FV of plan assets at year end.
N – Unrealized gains or losses on “available – for – sale” securities.
T – Translation adjustment for foreign currency

Question 8

Physical Capital Maintenance Concept

Answer 8

Physical Capital Maintenance Concept
Only recognize anything when an asset is sold or a liability is settled (measures the effect of price changes in normal or consistent dollars).

Question 9

Financial Capital Maintenance Concept

Answer 9

Financial Capital Maintenance Concept
Recognize an event as a change in the value of an asset or liability occurs. (Recognize holding gains and losses – current GAAP)

Question 10

Comprehensive Income

Answer 10

Comprehensive Income – consists of four elements
Revenues – inflows from an entity’s primary operations
Expenses – outflows do to an entity’s primary operations
Gains – increases in equity firm incidental transactions
Losses – decreases in equity from incidental transactions

Question 11

Measure In Monetary Terms

Answer 11

To Measure In Monetary Terms
Historical Costs – amount you paid for it (PP & E)
replacement cost – what it would cost to replace an item (inventory) – LCM
Fair Market Value – (FMV)– Per ASC 820, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”
Net Realizable Value (NRV) – amount expected to be converted into (A/R)
Present Value (PV) – discounted cash flows due to the time value of money (notes/receivables, bonds/payables, leases recorded at PV

Question 12

Derivatives(the D in DENT)

Answer 12

All in derivatives are reported at fair value.
Unrealized gains and losses are generally reported in income.
Unrealized gains and losses on derivatives that are designated as cash flow hedges accumulate in other comprehensive income (0CI) until recognized at the same time as the gain or loss on the hedged item.

Question 13

Fair Value

Answer 13

“the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date”

Question 14

Measuring Fair Value (three valuation techniques)

Answer 14

– THE MARKET APPROACH– involves using information generated by market transactions that involve identical or comparable assets or liabilities
– THE INCOME APPROACH – involves analyzing future amounts in the form up revenues,, cost savings, earnings, and some other item.
– THE COST APPROACH – involves measuring the cost that would be incurred to replace the benefit derived from the asset

Question 15

There Are Three Levels Of Inputs (fair value)

Answer 15

LEVEL I – the most reliable, involves the use of observable data from actual market transactions, occurring in an activity market, for identical assets or liabilities (quoted prices).
Level II – also involves the use of observable data from actual market transactions but either:
– the transaction did not occur in an active market,
– the transactions relate to similar, but not identical, assets or liabilities
– LEVEL III – involves the use of unobserved data and are largely based on management’s judgment (financial forecasts)

Question 16

SFAC 7 the Expected Cash Flow Approach

Answer 16

SFAC 7 the Expected Cash Flow Approach
Factors to be considered:
Risk – the probability that cash flow actually be paid or received
Timing – the period in which the payments are expected to be received
Interest – the interest rate that would be appropriate taking into consideration market rent and the credit standing of the parties involved.
– TRADITIONAL approach – use most likely cash flow amount
– EXPECTED approach – use weighted average of different possibilities

Question 17

Revenue Recognition

Answer 17

Revenue Recognition
Revenue is recognized when:
– the binding ARRANGEMENT EXISTS (signed contract)
– SERVICES RENDERED or delivery has occurred
– FIXED or DETERMINABLE price exists
– collection is REASONABLY ASSURED

Question 18

Recognized Expenses or Losses As Incurred

Answer 18

Recognized Expenses or Losses As Incurred
Economic benefit is used up (consumed) or assets lose future benefit (as incurred)
– Cause and Effect – expenses that produce revenue act identifiable points in time can be matched directly with revenues (e.g. cost of goods sold)
– Systematic and Rational Allocation – expenses that produce revenues over long periods of time are matched to those using a reasonable means of allocation (e.g. depreciation)
– Immediate Recognition – some expenses cannot be directly related to specific benefits and are expensed as incurred (e.g. monthly salaries of selling, general and administrative employees)

Question 19

Risk and Uncertainties

Answer 19

Risk and Uncertainties requires disclosure and financial statements of risks and uncertainties existing as of the date of those statements. Four areas of the disclosure:
– Nature of operations
– Use of Estimates
– Certain significant estimates
– Current vulnerability associated with certain concentrations