Conceptual Framework & IFRS Flashcards
Recognition Criteria
Determines what will appear on the financial statements and when it will appear
Measurement Criteria
Determines the amount at which it will be reported
Presentation Criteria
Determines where it will appear on the financial statements
Disclosure Criteria
Determines what information and how much information must be provided to financial statement users
Financial Reporting Framework (FRF) includes…
Recognition Criteria
Measurement Criteria
Presentation Criteria
Disclosure Criteria
Special Purpose Framework
A definite set of criteria other than accounting principles generally accepted (GAAP) in the United States of America or International Financial Reporting Standards (IFRSs), having substantial support underlying the preparation of financial statements prepared pursuant to that basis.
Special Purpose Framework: Cash Basis
The cash basis of accounting under which revenues are recognized when they are received, regardless of when they are earned; and expenses are recognized when they are paid, regardless of when they are incurred. Fixed assets are expensed and not capitalized.
Special Purpose Framework: Modified Cash Basis
Hybrid approach between cash and accrual, where assets could be capitalized and taxes and inventory could be accrued.
Special Purpose Framework: Tax Basis
Revenues and expenses are recognized for financial reporting purposes in the same periods and in the same amount as they are recognized when the entity is preparing its income tax return. Could be cash or accrual basis.
Special Purpose Framework: Contractual basis
One that is required to be used by a party to a contract and is generally designed to assist users in determining whether or not terms of the contract, and other requirements related to it are being adhered to.
Special Purpose Framework: Regulatory Basis
One that is imposed by a government regulatory agency to which the entity is required to report.
Primary Qualitative Characteristics that makes information USEFUL; Relevance (Roger is PC)
Capable of making a difference in a User’s decision-making process.
Primary Qualitative Characteristics that makes information USEFUL; Relevance (Roger is PC); The 2 ingredients are:
-> Predictive value - Helps decision makers predict or forecast future results.
-> Confirmatory value - (Feedback value) - Confirm or correct prior predictions
Or Both
Materiality
Capable of making a difference in the User’s decision-making process if omitted or misstated (auditor’s judgement). Considered an entity-specific aspect of Relevance that applies at the individual entity level.
Primary Qualitative Characteristics that makes information USEFUL: Faithful Representation (Roger is never on the FENCe)
The information depicts what it purports to represent. The 3 ingredients are:
- Free from Error - no errors or omissions in the info
- Neutrality (w/o bias) - the info is free from bias
- Completeness - info is presented in a way that users can understand
Enhancing Qualitative Characteristics that relate both Relevance and Faithful Representation (Roger is CUT like a V)
- Comparability (Consistency) - Same principles being used with business enterprises in similar industry/ (Consistency - Same accounting methods in different periods).
- Understandability - Classifying, characterizing and presenting info clearly and consistently.
- Timeliness - info is available to a decision maker when it is useful to make the decision.
- Verifiability - Different sources agree on an amount through either director or indirect verification
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 Assets
assets left over after deducting liabilities
Equity consist of 3 elements
- Contributions/ investments by owners
- Distributions to owners - (dividends)
- Comprehensive Income
Comprehensive Income (DENT)
All changes in equity other than “owner” sources. These items affect comp. income, but not net income (DENT):
- Derivative cash flow hedges
- Excess adjustment of Pension PBO and FV of plan assets at year end
- Net unrealized gains or losses on “available-for-sale” securities
- Translation adjustments for foreign currency
Consistency
Same principle each year
Conservatism
considering all risk inherent in the business (accruing a contingent loss)
Cost/ Benefit
costs don’t exceed benefits to be derived
Matching
recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized.
Allocation
spreading a cost over more than one period
Full Disclosure
providing all useful info in the financial statements
Recognition
Booking an item in the financial statements
Realization
converting non-cash resources into cash or claim to cash
Historical Cost
Amount you paid for it (PP&E)
Replacement Cost
What it would cost to replace an item (inventory). The amount an entity would be required to give up in order to obtain an asset that is the same or the equivalent to an existing asset.
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/ Receivable, Bonds/Payable, Leases)
Specific Items that do no qualify for the fair value election:
- Pension plan, post-retirement, and other post-employment benefits.
- Leases
- Financial instruments that are components of equity
- Share based payments and stock options
Level of inputs used to measure fair value: Level 1
(most reliable) involves the use of observable data from actual market transactions, occurring in an active market, for identical assets or liabilities.
Fair Value Valuation Technique: Market Approach
Involves using information generated by market transactions that involve identical or comparable assets or liabilities
Fair Value Valuation Technique: Income Approach
Involves analyzing future amounts in the form of revenue, cost savings, earnings, or some other item.
Fair Value Valuation Technique: Cost Approach
Involves measuring the cost that would be incurred to replace the benefit derived from an asset.
Level of inputs used to measure fair value: Level 2
Involves the use of observable data from actual market transactions but either….
1) did not occur in an an active market
2) The transactions relate to similar but not identical assets or liabilities.
Level of inputs used to measure fair value: Level 3
Involves the use of unobservable data and are largely based on management’s judgement. (least reliable)
Market participants
Parties that are:
- Independent of the entity
- Reasonably knowledgeable about the asset or liability
- In a position to acquire the asset or assume the liability
- Voluntarily willing to acquire the asset or assume the liability
