Framework Flashcards
Why have a framework
Regulation of financial statements to ensure meaningful decisions.
Ensures reliable reporting and meets the needs of shareholders, investors, lenders, creditors.
Increases harmonisation
Two ways of frameworks
Principles based: Such the IASB Framework. Standards are created using a conceptual framework
Rules based: Cookbook approach. Standards are a set of rules
Advantages of harmonisation
Consolidation is easier, easier if businesses operate in several countries, greater efficiency
Better for investors
Tax liabilities are easier to calculate
Disadvantages of harmonisation
Difficult to introduce, apply and maintain across multiple countries
Countries have different social, political, economic and business factors, and different legal systems
Different purposes of financial reporting in different countries e.g. Tax liabilities
Costly
The IFRS Foundation
Supervisory body for the board, ensures funding and governance of issues
Develop a set of global standards, convergence of standards
The IASB Board
Responsible for the development of accounting standards
Works with major national standard setting bodies
The Interpretations Comittee
Issues guidance on divergence from IFRS standards e.g. Newly identified issues, or conflicting interpretations
The IFRS Advisory Council
A forum for the board to consult parties, advising on agenda, and views of organisations on the council
Why use a conceptual framework?
Avoids firefighting where standards are only created to tackle specific problems
Generally accepted accounting practice GAAP is developed
Avoids critical issues not being addressed
Transactions are becoming more complicated
Principle based are harder to circumvent
Strengthens credibility of organisations using it
Why use a rules based system?
Increased accuracy of requirements
Increased comparability, verifiability
Less scope for judgemental manipulation
Fundamental Qualitative characteristics
Relevance - can influence economic decisions and provided in time to influence those decisions
Materiality
Faithful Representation - Completeness, Neutral (free from bias), Free from error
Enhancing Qualitative characteristics
Comparability - over time and against competitors. Must be consistent and disclosure
Verifiability
Timeliness
Understandibility - users have sufficient knowledge of economic and business activities, review and analyse the information diligently
