FINAL EXAM Flashcards
From the current Conceptual Framework, outline the qualitative characteristics of financial information to be included in general purpose financial reports.
The Conceptual Framework, issued by the IASB and the FASB, has divided qualitative characteristics into two categories, namely, fundamental characteristics (relevance and faithful representation) and enhancing characteristics (comparability, understandability, verifiability and timeliness)
Relevance:
Predictive value: Information is relevant if it helps users to form predictions about the outcomes of past, present, and future events.
Confirmatory value: Information is relevant if it confirms or corrects users’ expectations.
Faithful representation:
Completeness: Information is faithful if it is complete within the bounds of materiality and relevance.
Neutrality: Information is faithful if it is free from bias.
Free from error: Information is faithful if it is accurate.
Enhancing qualitative characteristics:
Comparability: Information is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or date.
Verifiability: Information is more useful if it can be confirmed by multiple independent observers.
Timeliness: Information is more useful if it is available to users in time to be capable of influencing their decisions.
Understandability: Information is more useful if it is classified, characterized, and presented clearly and concisely.
These qualitative characteristics help ensure that financial information is relevant, reliable, comparable, and understandable, thereby enhancing its usefulness to users of financial reports.
Accounting Principles
The accounting principles or reporting characteristics that guide the preparation of general purpose financial reports include:
Accrual basis of accounting:
Transactions and events are recognized when they occur (and not when cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Going concern assumption:
Financial statements are prepared on the assumption that the entity will continue to operate in the foreseeable future. If this assumption is not appropriate, financial statements are prepared on a liquidation basis.
Materiality:
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances.
Consistency:
Consistency refers to the consistent application of accounting policies across periods, which enhances comparability between financial statements of different periods.
Prudence (or conservatism):
Prudence is the exercise of caution in the judgment needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.
Entity-specific principles:
These are principles that arise from specific aspects of an entity’s operations, such as industry-specific practices or regulations.
Reporting Characteristics
Relevance:
Financial information is relevant if it is capable of influencing the economic decisions of users by helping them evaluate past, present, or future events, or by confirming or correcting their expectations.
Faithful Representation:
Financial information is faithfully represented if it is complete, neutral (free from bias), and free from material error. It provides a true and fair view of the economic phenomena it purports to represent.
Comparability:
Financial information is comparable when users can identify similarities and differences between items. It enables users to make comparisons across different entities and over different periods.
Verifiability:
Verifiability means that different knowledgeable and independent observers could reach a consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
Timeliness:
Timeliness means that financial information is available to users in time to be capable of influencing their decisions.
Understandability:
Financial information is presented clearly and concisely so that users can comprehend its meaning and significance.
