Definitions - Framework

Question 1

ASSET

Answer 1

An asset is a present economic resource controlled by the entity as a result of past events.
(An economic resource is a right that has the POTENTIAL to produce economic benefits)

1. Control
2. Past event
3. Right
4. POTENTIAL to produce EBs (ie doesn’t have to be probable)

Question 2

LIABILITY (Framework version! not Provs version)

Answer 2

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
(an obligation is a duty or responsibility that the entity has no practical ability to avoid)

1. Present obligation
2. Past event
3. Transfer an ER

Question 3

EQUITY

Answer 3

This is the ‘residual interest’ in the assets of the entity after deducting all its liabilities

Question 4

INCOME

Answer 4

Increases in assets, or decreases in liabilities,

that result in increases in equity,

other than those relating to contributions from holders of equity claims.

Question 5

EXPENSES

Answer 5

Decreases in assets, or increases in liabilities,

that result in decreases in equity,

other than those relating to distributions to holders of equity claims.

Question 6

PROFITS or LOSSES

Answer 6

Profits are increases in equity not resulting from contributions from holders of equity claims (shareholders)

Losses are decreases in equity not resulting from distributions to holders of equity claims (shareholders)

Question 7

Objective of general purpose financial reporting

Answer 7

1. To provide FI about the Reporting Entity
2. that is useful to existing and potential investors, lenders and other creditors
3. in making decisions relating to providing resources to the entity
4. This is defined as Information about the entity’s economic resources and the claims against the reporting entity
5. as well as information about the effects of transactions and other events that change a reporting entity’s economic resources and claims.
6. The chapter newly stresses that information can also help users to assess management’s stewardship of the entity’s economic resources.

Question 8

How does Profit affect the accounting equation

Answer 8

Profit for the year increases the Equity in the Accounting equation.

This is matched by an increase in the assets

Question 9

Relevance

Answer 9

For info to be relevant it must:

1. Be capable of making a difference in the decisions made by users
   (Nature and materiality)
2. Have predictive value, which helps users predict future outcomes
3. Have confirmatory value, which helps users confirm previous evaluations

Question 10

Faithful representation

Answer 10

For the faithful representation of information it must:

1. Correspond to the effect of transactions or events. Substance
2. As far as possible be complete (include all info necessary for a user); neutral (without bias … supported by exercise of prudence) and free from error (measurement uncertainty will impact the level of FR)

Question 11

Objectivity

Answer 11

An accountant must not allow bias, conflict of interest or the undue influence of others to override professional or business judgement

Question 12

Confidentiality

Answer 12

An accountant must maintain the confidentiality of information, unless the information is in the public domain.

Unless has permission or a professional or legal duty to disclose

The requirement includes when in a social situation

Question 13

Professional behaviour

Answer 13

An accountant must be honest and truthful in all dealings so as not to bring the profession into disrepute.

In particular accountants must not make exaggerated claims for the services they offer, qualifications they have, or experience they have gained.

Question 14

entity

Answer 14

an organisation, such as a ltd company whose activities and resources are kept separate from those of the owner(s)

Question 15

Materiality (conceptual framework)

Answer 15

Information is material is omitting, misstating or obscuring it could reasonably be expected to influence decisions made by primary users

Materiality is

• an ENTITY-SPECIFIC aspect of relevance
• based on the NATURE or MAGNITUDE or both
• of the items to which the information relates
• in the CONTEXT of an individual entity’s financial report

Question 16

Recognition

Answer 16

Is the process of including an ELEMENT in the statement of Financial position or statements of financial performance.

An element of the FSs should be recognised when

1. It meets the definition of an element and
2. It is probable that any future economic benefit associated with the item will flow to or from the entity. (Relevant - affects decision - nature - size)
3. The item’s cost or value can be measured with reliability. (If it cant be then Can it be faithfully represented?)

Question 17

Measurement of Elements

2

Answer 17

The process of determining Money amounts at which the elements are to be Recognised and Carried in the FSs

HISTORICAL COST
This is most usual as it is the original price paid or received.

Assets are recorded at the amount paid at the time of acquisition, then subject to amortisation or depreciation;
Liabilities recorded at the amount expected to be paid

Once recorded the value is not regularly updated each year (except for Impairments)

CURRENT VALUE
Under this method of measurement
values are updated to reflect conditions at reporting date.

• Fair Value
  This is the price that would be received to sell an asset or paid to transfer an obligation, in an orderly transaction, between market participants, at the date of measurement
• Value in Use and Fulfillment value
  Being the valuation of assets and liabilities at the present value of their future cash inflows and outflows
• Current cost
  Being what it would cost to replace assets and liabilities at today’s prices

Question 18

Examples Info required by users

Answer 18

Economic RESOURCES of the entity (SFP)

CLAIMS against the entity (SFP)

CHANGES in the entity’s economic resources & claims (SCE / SCF)

EFFICIENCY and EFFECTIVENESS (Sploci)

Question 19

Derecognition

Answer 19

The removal of all or part
of an asset (loss of “control”)
Of a liability (“obligation” has gone)