Conceptual Framework & IFRS

Question 1

Recognition Criteria

Answer 1

Determines what will appear on the financial statements and when it will appear

Question 2

Measurement Criteria

Answer 2

Determines the amount at which it will be reported

Question 3

Presentation Criteria

Answer 3

Determines where it will appear on the financial statements

Question 4

Disclosure Criteria

Answer 4

Determines what information and how much information must be provided to financial statement users

Question 5

Financial Reporting Framework (FRF) includes…

Answer 5

Recognition Criteria
Measurement Criteria
Presentation Criteria
Disclosure Criteria

Question 6

Special Purpose Framework

Answer 6

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.

Question 7

Special Purpose Framework: Cash Basis

Answer 7

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.

Question 8

Special Purpose Framework: Modified Cash Basis

Answer 8

Hybrid approach between cash and accrual, where assets could be capitalized and taxes and inventory could be accrued.

Question 9

Special Purpose Framework: Tax Basis

Answer 9

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.

Question 10

Special Purpose Framework: Contractual basis

Answer 10

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.

Question 11

Special Purpose Framework: Regulatory Basis

Answer 11

One that is imposed by a government regulatory agency to which the entity is required to report.

Question 12

Primary Qualitative Characteristics that makes information USEFUL; Relevance (Roger is PC)

Answer 12

Capable of making a difference in a User’s decision-making process.

Question 13

Primary Qualitative Characteristics that makes information USEFUL; Relevance (Roger is PC); The 2 ingredients are:

Answer 13

-> Predictive value - Helps decision makers predict or forecast future results.
-> Confirmatory value - (Feedback value) - Confirm or correct prior predictions
Or Both

Question 14

Materiality

Answer 14

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.

Question 15

Primary Qualitative Characteristics that makes information USEFUL: Faithful Representation (Roger is never on the FENCe)

Answer 15

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

Question 16

Enhancing Qualitative Characteristics that relate both Relevance and Faithful Representation (Roger is CUT like a V)

Answer 16

• 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

Question 17

Assets

Answer 17

An economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred.

Question 18

Liabilities

Answer 18

An economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred.

Question 19

Equity or Net Assets

Answer 19

assets left over after deducting liabilities

Question 20

Equity consist of 3 elements

Answer 20

• Contributions/ investments by owners
• Distributions to owners - (dividends)
• Comprehensive Income

Question 21

Comprehensive Income (DENT)

Answer 21

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

Question 22

Consistency

Answer 22

Same principle each year

Question 23

Conservatism

Answer 23

considering all risk inherent in the business (accruing a contingent loss)

Question 24

Cost/ Benefit

Answer 24

costs don’t exceed benefits to be derived

Question 25

Matching

Answer 25

recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized.

Question 26

Allocation

Answer 26

spreading a cost over more than one period

Question 27

Full Disclosure

Answer 27

providing all useful info in the financial statements

Question 28

Recognition

Answer 28

Booking an item in the financial statements

Question 29

Realization

Answer 29

converting non-cash resources into cash or claim to cash

Question 30

Historical Cost

Answer 30

Amount you paid for it (PP&E)

Question 31

Replacement Cost

Answer 31

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.

Question 32

Net Realizable Value (NRV)

Answer 32

amount expected to be converted into A/R

Question 33

Present Value (PV)

Answer 33

discounted cash flows due to the time value of money (Notes/ Receivable, Bonds/Payable, Leases)

Question 34

Specific Items that do no qualify for the fair value election:

Answer 34

• Pension plan, post-retirement, and other post-employment benefits.
• Leases
• Financial instruments that are components of equity
• Share based payments and stock options

Question 35

Level of inputs used to measure fair value: Level 1

Answer 35

(most reliable) involves the use of observable data from actual market transactions, occurring in an active market, for identical assets or liabilities.

Question 36

Fair Value Valuation Technique: Market Approach

Answer 36

Involves using information generated by market transactions that involve identical or comparable assets or liabilities

Question 37

Fair Value Valuation Technique: Income Approach

Answer 37

Involves analyzing future amounts in the form of revenue, cost savings, earnings, or some other item.

Question 38

Fair Value Valuation Technique: Cost Approach

Answer 38

Involves measuring the cost that would be incurred to replace the benefit derived from an asset.

Question 39

Level of inputs used to measure fair value: Level 2

Answer 39

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.

Question 40

Level of inputs used to measure fair value: Level 3

Answer 40

Involves the use of unobservable data and are largely based on management’s judgement. (least reliable)

Question 41

Market participants

Answer 41

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