Conceptual Framework Upload7 Flashcards
The Conceptual Framework Definition, Purpose, Advantages Disadvantages, Intended Role, and Status
Definition
A conceptual framework is a statement of generally accepted theoretical principles, which form the frame of reference for a particular field of enquiry. “a constitution, a coherent system of interrelated objectives and fundamentals which can lead to consistent standards and which prescribe the nature, function and limits of financial accounting and financial statements.” (FASB 1976)
Purpose
Provides the basis for 1) The development of new reporting practices, and 2) The evaluation of existing ones.
Advantages
1) A consistent conceptual base should lead to standardised consistent accounting practices. 2) Development of standard is less subject to political pressures. 3) A consistent Statement of Financial Position driven approach is used. 4) Avoids ‘fire-fighting’ approach to standard setting.
Disadvantages
1) Different users have difference needs, the needs of all users cannot be considered. 2) Different purposes or uses may require different conceptual bases. 3) A conceptual framework does not necessarily make preparing standards any easier, and may hamper their development.
Intended Role
The IFRSs are based on the Conceptual Framework for Financial Reporting. The objective of the conceptual framework is to facilitate the consistent and logical formulation of IFRSs. The Conceptual Framework also provides a basis for the use of judgement in resolving accounting issues.
Status
The Conceptual Framework does not override and IFRS, but instead forms the conceptual bases for the development of IFRSs. IAS 1 states that in order to achieve Fair Presentation, an entity must comply with both 1) The International Financial Reporting Standards, and 2) The Conceptual Framework for Financial Reporting.
What is GAAP
National Accounting Standards
FASB (USA) / ASB (UK)
National Company Law
UK is a Hybrid System, in some countries accounting is regulated by statute
Stock Exchange Requirements
Must report according to IFRSs
Regional Bodies
European Union or Mercosur in South America
Contents of The Conceptual Framework
Chp.1 The Objective of General Purpose Financial Reporting
Chp.2 The Reporting Entity (To be completed)
Chp.3 Qualitative Characteristics of Financial Information
Chp.4 The Framework (1989): The remaining text
Cpt 1. The Objective of General Purpose Financial Reporting
The Objective of General Purpose Financial Reporting
“The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decision involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.”
Information about a reporting entity’s economic resources, claims against the entity and changes in resources and claims.
Financial performance reflected by Accrual Accounting
Financial performance reflected by Past Cash Flows
Changes in economic resources and claims not resulting from financial performance, EG: a share issue
Cpt 3. Types of Qualitative Characteristics of Financial Information (2)
Fundamental Qualitative Characteristics of Financial Information
Enhancing Qualitative Characteristics of Financial Information
Cpt 3. Fundamental Qualitative Characteristics of Financial Information
Relevance
Predictive Value and/or Confirmatory Value
Materiality
Could influence decisions that users of financial information make.
Faithful Representation
Complete, Neutral, and Free from Error
Cpt 3. Enhancing Qualitative Characteristics of Financial Information
Comparability
To other Entities / other Periods
Verifiability
Assures users that information faithfully represents the economic phenomena it purports to represent.
Timeliness
Available to decision makers in time to capable of influencing their decisions.
Understandability
Classifying, Characterising and Presenting information clearly and concisely.
Cpt 4. The Framework: The remaining text (5)
Underlying Assumption
The Elements of the Financial Statements
Recognition of the Elements of the Financial Statements
Measurement of the Elements of the Financial Statements
Concepts of Capital and Capital Maintenance
Cpt 4. Underlying Assumption
That the entity is a Going Concern
Management must state that the Financial Reports have been complied on the basis that the entity is a Going Concern.
Cpt 4. The Elements of the Financial Statements
Asset
Liability
Income
Expense
Equity
