Definitions for part 1 & 2 Flashcards
Relevance
Relevant financial information is that which is capable of influencing the decisions of users
In determining what is relevant to users preparers of financial statements should consider whether information is material and the extent to which reliable information may be omitted.
Materiality
hint x or y
Information may be material and therefore relevant simply because of its
magnitude
or
because its omission from the financial statements could affect decision making
Faithful representation
Faithful representation means that financial information must meet three criteria: completeness, neutrality and be free from error
Completeness
All information that users need to understand the item is given
Neutrality
There is no bias in the selection or presentation of information
Free from error
There are no omissions, errors or inaccuracies in the process to produce the information
It is recognised that this is not entirely possible due to human error
Inaccuracies will arise particularly when estimating but it is expected that estimates are made on realistic basis
Comparability
Accounting method applied consistently in similar situations, facilitating comparison with information for similar entities
Verifiability
Accounting info must be checked and verified to be true, accurate or justified
Timeliness
Provision of information must be timely in order to provide substantive value to the user
Understandability
Format and layout of FS and terminology used must be clear and concise
Asset
Present economic resource controlled by the entity, with the potential to produce economic benefits
Liability
A present obligation to transfer an economic resource as a result of a past transaction or event. What is left if company were wound up
Equity
The residual interest in the assets after deducting the liabilities
Income
Increases in assets or decreases in liabilities that result in increases in equity
Expense
Decreases in assets or increases in liabilities that result in decreases in equity
Simulation modelling
Calculates NPVS based on key variables each with probabilities, runs simulation many times, allowing for a more informed decision
Scenario analysis
Non-probabilistic approach providing info on possible outcomes by creating various possible scenarios - usually most likely, optimistic, pessimistic
Sensitivity analysis
Non-probabilistic approach in project appraisal that analyses changes to assumptions made in forecast by ascertaining the sensitivity of changes to critical variables on the decision
Accruals
transactions to
be accounted for in the period when income is earned or expenses are incurred, not when they are received and paid in
cash
Going concern
Financial statements are normally prepared on the assumption that the entity is a going concern and will continue in operation for the foreseeable future
Materiality and aggregation
each material class of similar items should be presented separately and items that are dissimilar in terms of nature or function should be presented separately unless they are immaterial
Reporting period
Entities should prepare financial statements at least annually
In unusual cases, where the end of an
entity’s reporting period is changed to less or more than one year, the entity should disclose:
* the reason for the change
* the fact that the comparative figures given are not entirely comparable
Offsetting
Assets and liabilities and income and expenses shall not be offset unless required or permitted by a standard or an interpretation
Social accounting
A commitment by businesses to behave ethically and contribute to economic development while remaining sensitive to the needs of all stakeholders.
Companies should make decisions based not only on financial factors, but also on social and environmental consequences of their actions. Over the last decade has moved from voluntary effort to subject to mandatory schemes.
