L1 | Financial Reporting Framework Flashcards
What is the objective of financial reporting?
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
What are the purposes of a conceptual framework?
- to assist the accounting standards setters to develop standards that are based on consistent concepts
- to assist preparers to develop consistent accounting policies when no standard applies to a particular transaction or event, or when a standard allows a choice of accounting policy
- to assist all parties to understand and interpret standards
2018 IASB Conceptual Framework for Financial Reporting: Status and Purpose
- to assist the Board in the development of IFRS Standards while making sure the Standards are a coherent body of standards based on consistent logic and principles
- to assist preparers of financial statements in applying IFRS Standards when no individual standard applies or IFRS Standards allow a choice of accounting policy.
- to assist all parties in understanding and interpreting IFRS Standards
2018 IASB Conceptual Framework for Financial 1, Chapter 1 is about…
The objective of general purpose financial accounting
The objective of general purpose financial accounting
to provide information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
2018 IASB Conceptual Framework for Financial 1, Chapter 2 is about…
the qualitative characteristics of useful information
The 2 Fundamental Qualitative characteristics of Useful Information are…
Relevance
Faithful Representation
What is meant by “relevance”?
information is relevant if it is capable of making a difference to the decisions made by users
What is meant by “faithful representation”?
a faithful representation is, to the maximum extent possible, complete, neutral and free from error
The 4 ‘Enhancing’ Qualitative characteristics of useful information are…
comparability
verifiability
timeliness
understandability
What is meant by ‘comparability’?
the extent to which the information provided in the financial statements is comparable across different firms and time periods.
What is meant by “verifiability”?
Different knowledgeable and independent observers should be able to reach the same consensus.
What is meant by “timeliness”?
available to decision makers in time to be capable to influence their decisions
What is meant by “understandability”?
Clearly and concisely classified, characterised and presented (assuming a reasonable knowledge on the part of the user)
What is the purpose of enhancing qualitative characteristics?
enhance usefulness of information
can’t make non-useful information useful
What is the principle of the cost constraint?
the cost of producing and reporting information must be justified by the benefit of disclosing it
2018 IASB Conceptual Framework for Financial 1, Chapter 3 is about…
Financial Statements and the Reporting Entity
What is a reporting entity?
an entity that is required, or chooses, to prepare financial statements
not necessarily a legal entity—could be a portion of an entity or comprise more than one entity
What is meant by the “going concern” concept?
Assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations.
What is the underlying consumption about the entity in Chapter 3?
The entity is a going concern
2018 IASB Conceptual Framework for Financial 1, Chapter 4 is about…
The Elements of Financial Statements
What are the 5 elements of financial statements?
Assets
Liabilities
Equity
Income
Expenses
what is the definition of an asset?
a present economic resource controlled by the entity as a result of past events
what is an economic resource?
a right that has the potential to produce economic benefits
what is the definition of a liability?
a present obligation of the entity arising out of past events
what is an obligation?
a duty or responsibility that the entity has no practical ability to avoid.
What is the definition and formula for equity?
defined as residual interest
assets - liabilities
What is the definition for income?
Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
What is the definition for expenses?
Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims
2018 IASB Conceptual Framework for Financial 1, Chapter 5 is about…
Recognition and Derecognition
What is the meaning of recognition?
The process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of an asset, a liability, equity, income or expenses
How are relevance and recognition linked?
whether recognition of an item results in relevant information may be affected by, for example:
low probability of a flow of economic benefits
existence uncertainty
How are faithful representation and recognition linked?
whether recognition of an item results in a faithful representation may be affected by, for example:
measurement uncertainty
recognition inconsistency (accounting mismatch)
presentation and disclosure
What is the criteria for an element to be recognised?
it provides users with relevant information about the items concerned
it provides a faithful representation of the items concerned
the benefits of providing this information exceed its cost
When is an item derecognised?
When the item no longer meets the definitions to be recognised
2018 IASB Conceptual Framework for Financial, Chapter 6 is about…
Measurement
What is the concept of historical cost measurement bases?
Historical information provides information derived, at least in part, from the price of the transaction or other event that gave rise to the item being measured
When are the historical cost of assets reduced?
If they become impaired
What is meant by impaired in accounting?
a permanent reduction in the value of a company asset
When are historical costs of liabilities increased?
If they become onerous (burdensome)
What is a method to apply a historical cost measurement basis to financial assets and financial liabilities?
Measure them at amortised cost
What is the definition of amortised cost?
The amortised cost is the value of an asset that has been written off; It represents the accumulated depeciation amount to date.
What is meant by current value?
Provides information updated to reflect conditions at the measurement date
What do current value measurement bases include?
Fair value
Value in use (for assets)/Fulfilment value (for liabilities)
Current cost
What is meant by fair value?
The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date
Reflects market participants’ current expectations about the amount, timing and uncertainty of future cash flows
What is meant by value in use (for assets)/fulfilment value (for liabilities)?
Reflects entity-specific current expectations about the amount, timing and uncertainty of future cash flows
What is meant by current cost?
Reflects the current amount that would be:
Paid to acquire an equivalent asset
Received to take on an equivalent liability
What is the concept of fair value measurement bases?
Carry at what a similar asset is currently being sold for in the market
How do we carry an asset at fair value?
Carried at market price that would be received when selling the asset
How do we carry a liability at fair value?
Carried at market price that would be paid when transferring the unfulfilled part of the liability.
What is the concept of ‘value in use’ measurement base?
The discounted cash flows expected to accrue from a particular asset
How do you carry an asset at ‘Value in Use’?
Carried at the present value of future cash flows from the use of the asset and its disposal at the end
How do you carry a liability at ‘Value in Use’?
Carried at the present value of the future cash flows that will arise when paying off the unfulfilled part of the liability
How do you carry an asset at ‘Current Cost’?
Carried at current cost to the extent unconsumed or uncollected and recoverable
How do you carry a liability at ‘Current Cost’?
Carried at the consideration received for taking on the unfulfilled part of the liability plus the cash outflows over that consideration
2018 IASB Conceptual Framework for Financial, Chapter 7 is about…
Presentation and Disclosure
What is the statement of profit or loss?
The primary source of information about an entity’s financial performance for the reporting period
How can the statement of profit or loss be presented?
Profit or loss could be a section of a single statement of financial performance or a separate statement.
What is included in the statement of profit or loss?
A total (subtotal) for profit or loss
What, in principle, is classified and included in the statement of profit or loss?
All income and expenses
What do the IFRS standards seek a balance between?
The standardisation of presentation and disclosure of information
The flexibility for entities to decide what is relevant entry-specific information.
Offsetting occurs when an asset and a liability are recognised as separate units of account but presented as a single net amount in the financial statements
2018 IASB Conceptual Framework for Financial, Chapter 8 is about…
Concepts of Capital and Capital Maintenance
What is the definition of capital (financial concept)?
Invested money or purchasing power
What is the definition of capital (physical concept)?
Operating capability
The Regulatory Framework
Global IFRS adoption - Benefits
Common financial accounting and reporting methods
Increased transparency in reporting
Principles rather than rules based
Wider pool of investors -> lower cost of capital
Increase in cross-border M&A activity
Global IFRS adoption - Criticisms
Increased use of fair values has led to increased volatility in earnings
Length and complexity of many IFRSs
Alternative accounting treatments permitted by some IFRSs
Impact of Brexit on UK companies
The use of IFRS for UK listed companies is required as a result of an EU directive
Unlikely that IFRS would be abandoned by the UK
Impact of Brexit on IFRS/EU
May affect IASB’s standard-setting processes
Dynamics of future EU discussions may change
