Financial Reporting Framework (16.2)

Question 1

Describe the International Accounting Standards Board’s conceptual framework (high level)

Answer 1

to provide financial information that is useful in making decisions about providing resources to an entity. The resource providers include investors, lenders, and other creditors.

Users of financial statements need information about the firm’s performance, financial position, and cash flow.

Question 2

Describe the 2 FUNDAMENTAL qualitative characteristics of financial reports in the IASB’s conceptual framework

Answer 2

There are two fundamental characteristics that make financial information useful: relevance and faithful representation.1

RELEVANCE. Financial statements are relevant if the information in them can influence users’ economic decisions or affect users’ evaluations of past events or forecasts of future events. To be relevant, information should have predictive value, confirmatory value (confirm prior expectations), or both. Materiality is an aspect of relevance.

FAITHFUL REPRESENTATION. Information that is faithfully representative is complete, neutral (absence of bias), and free from error.

Question 3

Describe the 4 ENHANCING qualitative characteristics of financial reports in the IASB’s conceptual framework

Answer 3

There are four characteristics that enhance relevance and faithful representation: comparability, verifiability, timeliness, and understandability.

COMPARABILITY. Financial statement presentation should be consistent among firms and across time periods.
VERIFIABILITY. Independent observers, using the same methods, obtain similar results.
TIMELINESS. Information is available to decision makers before the information is stale.
UNDERSTANDABILITY. Users with a basic knowledge of business and accounting and who make a reasonable effort to study the financial statements should be able to readily understand the information the statements present. Useful information should not be omitted just because it is complicated.

Question 4

Describe the required reporting elements of financial reports in the IASB’s conceptual framework

Answer 4

Assets. Resources controlled as a result of past transactions that are expected to provide future economic benefits.

Liabilities. Obligations as a result of past events that are expected to require an outflow of economic resources.

Equity. The owners' residual interest in the assets after deducting the liabilities.

Income. An increase in economic benefits, either increasing assets or decreasing liabilities in a way that increases owners' equity (but not including contributions by owners). Income includes revenues and gains.

Expenses. Decreases in economic benefits, either decreasing assets or increasing liabilities in a way that decreases owners' equity (but not including distributions to owners). Losses are included in expenses.

Question 5

What are the 5 required financial statements according do IFRS

Answer 5

Balance sheet (statement of financial position).
Statement of comprehensive income.
Cash flow statement.
Statement of changes in owners’ equity.
Explanatory notes, including a summary of accounting policies.

Question 6

The general features for preparing financial statements (According to IFRS)

Answer 6

Fair presentation, defined as faithfully representing the effects of the entity’s transactions and events according to the standards for recognizing assets, liabilities, revenues, and expenses.
Going concern basis, meaning the financial statements are based on the assumption that the firm will continue to exist unless its management intends to (or must) liquidate it.
Accrual basis of accounting is used to prepare the financial statements other than the statement of cash flows.
Consistency between periods in how items are presented and classified, with prior-period amounts disclosed for comparison.
Materiality, meaning the financial statements should be free of misstatements or omissions that could influence the decisions of users of financial statements.
Aggregation of similar items and separation of dissimilar items.
No offsetting of assets against liabilities or income against expenses unless a specific standard permits or requires it.
Reporting frequency must be at least annually.
Comparative information for prior periods should be included unless a specific standard states otherwise.

Question 7

structure and content of financial statements:

Answer 7

Most entities should present a classified balance sheet showing current and noncurrent assets and liabilities.

Minimum information is required on the face of each financial statement and in the notes. For example, the face of the balance sheet must show specific items such as cash and cash equivalents, plant, property and equipment, and inventories.

Items listed on the face of the comprehensive income statement must include revenue, profit or loss, tax expense, and finance costs, among others.

Comparative information for prior periods should be included unless a specific standard states otherwise