Framework Definitions

Question 1

What is a conceptual framework?

Answer 1

• a coherent system of interrelated objectives and fundamental principles
• a framework which prescribles the nature, function and limits of financial accounting and financial statements

Question 2

What are the contents of the Framework?

Answer 2

• objective of FS’s
• underlying assumptions
• qualitative characteristics of FS’s
• elements of FS’s
• recognition of the elements of FS’s

Question 3

What is the objective of FS’s?

Answer 3

• to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
• in practice, gives users information about the entity’s ability to generate cash HOWEVER cash is not the same as profit (which is an indication of capacity to generate cash from resources available to pay dividends to shareholders)

Question 4

Explain the underlying assumption; going concern

Answer 4

-business will continue for the forseeable future (> 12 months)

Question 5

What are the 2 fundamental qualitative characteristics of FS’s?

Answer 5

• relevance

- faithful representation

Question 6

What are the 4 enhancing qualitative characteristics of FS’s?

Answer 6

• comparability
• verifiability
• timeliness
• understandability

Question 7

Define an asset

Answer 7

-present economic resource controlled by the entity as a result of past events

Question 8

Define a liability

Answer 8

-present obligation of the entity to transfer an economic resource as a result of past events

Question 9

Definte equity

Answer 9

-residual interest in the assets of the entity after deducting all its liabilities
(Equity = Assets - Liabilities)

Question 10

Define income

Answer 10

-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 11

Define expenses

Answer 11

-decreases in assets or increases in liabilities, that result in decreases in equity, other than those relating to contributions from holders of equity claims

Question 12

Tell me about principles vs rules based accounting

Answer 12

Principle based - IFRS approach, based on conceptual framework, apply underlying principles (ignore rules if makes FS misleading - must show TRUE & FAIR VIEW)
Rules based - US approach, allows for loopholes (e.g. Enron), strict adherance

Question 13

Discuss the advantages of harmonisation

Answer 13

• multinational entities
• investors
• tax authorities
• large accounting firms

Question 14

Discuss the disadvantages of harmonisation

Answer 14

• resistance
• costly
• legal issues

Question 15

Discuss substance over form

Answer 15

• must REPRESENT FAITHFULLY the transactions that have been carried out
• must reflect the economic substance of events and transactions and not merely their legal form

Question 16

Discuss scenarios where substance over form is applicable

Answer 16

• consolidated financial statements (treat as one as control assets)
• convertible options (don’t know whether they will convert or not, thus show both equity & liability)
• sale and repurchase (secured loan with bank, legal title however risk/rewards haven’t transfered)
• sale and leaseback (not a real sale, defer profit, bring asset back in under finance lease - operating leaseback would be general sale, thus profit on disposal)
• consignment inventory (risk/rewards not transfered)
• sale and return (not really a sale)
• factoring (have you sold receivables or not, risk/rewards transferred)

Question 17

Discuss relevance

Answer 17

• able to influence economic decision of users
• provided in time to influence the decisions
• link to materiality (threshold)
• predictive value
• confirmatory value

Question 18

Discuss faithful representation

Answer 18

• recognise economic substance, not merely legal form
• completeness
• neutral (free from bias)
• free from error