Frameworks Flashcards
What are the main criticisms of the conceptual Framework?
- Historic information - would stakeholders not be better served by more prospective information?
- Unrecognised Assets & Liabilities - i.e. Goodwill and some internally generated assets.
- Estimates - is the basis sound?
- Judgements - will vary depending on experience and bias.
- Policy Choices - for example depreciation policies or revaluation choices.
- Clutter - multiple disclosures included.
What is the stated purpose of Financial reporting?
To provide information to users to enable them to make decisions about providing economic resources to an entity.
Key user groups
- Investors
- Lenders
- Other creditors
Information required to make assessment
- An entities future cash flows.
- Managements stewardship of the entities assets.
Under the Conceptual framework how is an asset to be recognised defined?
Broken down in to three parts:
- A present economic resource - the entity must have current access to the resource
- Controlled by the entity - the entity must have a right over or the control of the item.
- The resource must have the potential to generate economic benefits for the entity.
An economic benefit can be an increase in cash flows in or a decrease in cash flows out.
How is a Liability recognised and defined by the conceptual framework
Broken down in to three parts:
- A present obligation of the entity - something the entity must do either for legal reasons, because its been done in the past (Constructive) or for other reasons
- To transfer economic resources - basically increase of cash outflows.
- As a result of a past event - the cause of the obligation must have occurred prior to the financial reporting date.
How is equity defined and recognised by the conceptual framework?
If all liabilities are settled the remaining asset value is the “residual interest”, so what would be left for the shareholders of the business.
What are the two fundamental qualitative characteristics of useful information and how are they defined?
Relevance - The information is capable of influencing the decisions of the statements users.
Faithful Representation - The information is Complete, neutral and free from error.
Within this the information will either have:
Predictive Value - enabling users to evaluate or assess past, present or future events.
Confirmatory - Helps users confirm or correct past evaluations and assessments.
What are the four enhancing qualitative characteristics of useful information and how are they defined?
Comparability - it should be possible to compare an entity over time and with similar information about other entities.
Understandability - The information should be understandable to those who may want to review and use it. This can be facilitated through classification, characterisation and presentation.
Verifiability - That the information can be verified, provides assurance to users that it is both credible and reliable.
Timeliness - The information should be provided to users within a timescale suitable for their decision making purposes.
What does the conceptual framework say about where income and expense should be presented in the financial statements?
Income or expense should b presented in Other comprehensive income if:
- By doing so the P&L provides more relevant information
- A more faithful representation is provided of an entities performance.
What is IFRS 13 Fair Value Measurement and how is it applied?
Definition - the price received when selling an asset, or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Allowable Approaches
- Market Approach - based on recent selling prices
- Cost approaches - based on replacement cost
- Income approaches - based on financial forecasts.
The Price - this is market based (Not entity) with input prices classified in to three levels.
Note Observable data from active markets should be used wherever possible.
Level 1 - Quoted prices for identical assets in active markets.
Level 2 - observable inputs that are not level 1, i.e similar assets in active markets, or identical assets in less active markets.
Level 3 - unobservable inputs, i.e. the companies own data.
Where an asset is sold in two (or more) active markets how is fair market value determined?
In this situation the fair value would be based on the most advantageous price.
The price, less transaction costs but not transport costs, is considered for both markets and the higher price will be the one used.
What are the 5 fundamental ethical principles?
Integrity - Behave in an honest and straight forward way.
Objectivity - No bias or conflict of interest.
Professional Competence & Due care - Attain and maintain professional knowledge,
Confidentiality - No disclosure of business info or use of information to your advantage.
Professional Behaviour - Comply with eleven laws and regulations, do not bring the profession in to disrepute.
What are the different types of threats to ethical behaviour?
Self Interest - Putting your own interest in front of what is right.
Self review - not showing objectivity when reviewing own work.
Advocacy - Acting for or against a position rather than being impartial.
Familiarity - allowing personal or business relationships to influence your judgement.
Intimidation - Allowing physical or other pressure to influence your actions.
