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MN20018 | Financial Accounting and Reporting > L1 | Financial Reporting Framework > Flashcards

L1 | Financial Reporting Framework Flashcards

1
Q

What is the objective of financial reporting?

A

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

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2
Q

What are the purposes of a conceptual framework?

A
  • 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
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3
Q

2018 IASB Conceptual Framework for Financial Reporting: Status and Purpose

A
  • 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
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4
Q

2018 IASB Conceptual Framework for Financial 1, Chapter 1 is about…

A

The objective of general purpose financial accounting

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5
Q

The objective of general purpose financial accounting

A

to provide information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity

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6
Q

2018 IASB Conceptual Framework for Financial 1, Chapter 2 is about…

A

the qualitative characteristics of useful information

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7
Q

The 2 Fundamental Qualitative characteristics of Useful Information are…

A

Relevance
Faithful Representation

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8
Q

What is meant by “relevance”?

A

information is relevant if it is capable of making a difference to the decisions made by users

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9
Q

What is meant by “faithful representation”?

A

a faithful representation is, to the maximum extent possible, complete, neutral and free from error

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10
Q

The 4 ‘Enhancing’ Qualitative characteristics of useful information are…

A

comparability
verifiability
timeliness
understandability

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11
Q

What is meant by ‘comparability’?

A

the extent to which the information provided in the financial statements is comparable across different firms and time periods.

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12
Q

What is meant by “verifiability”?

A

Different knowledgeable and independent observers should be able to reach the same consensus.

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13
Q

What is meant by “timeliness”?

A

available to decision makers in time to be capable to influence their decisions

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14
Q

What is meant by “understandability”?

A

Clearly and concisely classified, characterised and presented (assuming a reasonable knowledge on the part of the user)

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15
Q

What is the purpose of enhancing qualitative characteristics?

A

enhance usefulness of information
can’t make non-useful information useful

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16
Q

What is the principle of the cost constraint?

A

the cost of producing and reporting information must be justified by the benefit of disclosing it

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17
Q

2018 IASB Conceptual Framework for Financial 1, Chapter 3 is about…

A

Financial Statements and the Reporting Entity

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18
Q

What is a reporting entity?

A

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

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19
Q

What is meant by the “going concern” concept?

A

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.

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20
Q

What is the underlying consumption about the entity in Chapter 3?

A

The entity is a going concern

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21
Q

2018 IASB Conceptual Framework for Financial 1, Chapter 4 is about…

A

The Elements of Financial Statements

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22
Q

What are the 5 elements of financial statements?

A

Assets
Liabilities
Equity
Income
Expenses

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23
Q

what is the definition of an asset?

A

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

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24
Q

what is an economic resource?

A

a right that has the potential to produce economic benefits

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25
Q

what is the definition of a liability?

A

a present obligation of the entity arising out of past events

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26
Q

what is an obligation?

A

a duty or responsibility that the entity has no practical ability to avoid.

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27
Q

What is the definition and formula for equity?

A

defined as residual interest
assets - liabilities

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28
Q

What is the definition for income?

A

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

29
Q

What is the definition for expenses?

A

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

30
Q

2018 IASB Conceptual Framework for Financial 1, Chapter 5 is about…

A

Recognition and Derecognition

31
Q

What is the meaning of recognition?

A

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

32
Q

How are relevance and recognition linked?

A

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

33
Q

How are faithful representation and recognition linked?

A

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

34
Q

What is the criteria for an element to be recognised?

A

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

35
Q

When is an item derecognised?

A

When the item no longer meets the definitions to be recognised

36
Q

2018 IASB Conceptual Framework for Financial, Chapter 6 is about…

A

Measurement

37
Q

What is the concept of historical cost measurement bases?

A

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

38
Q

When are the historical cost of assets reduced?

A

If they become impaired

39
Q

What is meant by impaired in accounting?

A

a permanent reduction in the value of a company asset

40
Q

When are historical costs of liabilities increased?

A

If they become onerous (burdensome)

41
Q

What is a method to apply a historical cost measurement basis to financial assets and financial liabilities?

A

Measure them at amortised cost

42
Q

What is the definition of amortised cost?

A

The amortised cost is the value of an asset that has been written off; It represents the accumulated depeciation amount to date.

43
Q

What is meant by current value?

A

Provides information updated to reflect conditions at the measurement date

44
Q

What do current value measurement bases include?

A

Fair value
Value in use (for assets)/Fulfilment value (for liabilities)
Current cost

45
Q

What is meant by fair value?

A

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

46
Q

What is meant by value in use (for assets)/fulfilment value (for liabilities)?

A

Reflects entity-specific current expectations about the amount, timing and uncertainty of future cash flows

47
Q

What is meant by current cost?

A

Reflects the current amount that would be:
Paid to acquire an equivalent asset
Received to take on an equivalent liability

48
Q

What is the concept of fair value measurement bases?

A

Carry at what a similar asset is currently being sold for in the market

49
Q

How do we carry an asset at fair value?

A

Carried at market price that would be received when selling the asset

50
Q

How do we carry a liability at fair value?

A

Carried at market price that would be paid when transferring the unfulfilled part of the liability.

51
Q

What is the concept of ‘value in use’ measurement base?

A

The discounted cash flows expected to accrue from a particular asset

52
Q

How do you carry an asset at ‘Value in Use’?

A

Carried at the present value of future cash flows from the use of the asset and its disposal at the end

53
Q

How do you carry a liability at ‘Value in Use’?

A

Carried at the present value of the future cash flows that will arise when paying off the unfulfilled part of the liability

54
Q

How do you carry an asset at ‘Current Cost’?

A

Carried at current cost to the extent unconsumed or uncollected and recoverable

55
Q

How do you carry a liability at ‘Current Cost’?

A

Carried at the consideration received for taking on the unfulfilled part of the liability plus the cash outflows over that consideration

56
Q

2018 IASB Conceptual Framework for Financial, Chapter 7 is about…

A

Presentation and Disclosure

57
Q

What is the statement of profit or loss?

A

The primary source of information about an entity’s financial performance for the reporting period

58
Q

How can the statement of profit or loss be presented?

A

Profit or loss could be a section of a single statement of financial performance or a separate statement.

59
Q

What is included in the statement of profit or loss?

A

A total (subtotal) for profit or loss

60
Q

What, in principle, is classified and included in the statement of profit or loss?

A

All income and expenses

61
Q

What do the IFRS standards seek a balance between?

A

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

62
Q

2018 IASB Conceptual Framework for Financial, Chapter 8 is about…

A

Concepts of Capital and Capital Maintenance

63
Q

What is the definition of capital (financial concept)?

A

Invested money or purchasing power

64
Q

What is the definition of capital (physical concept)?

A

Operating capability

65
Q

The Regulatory Framework

A
66
Q

Global IFRS adoption - Benefits

A

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

67
Q

Global IFRS adoption - Criticisms

A

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

68
Q

Impact of Brexit on UK companies

A

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

69
Q

Impact of Brexit on IFRS/EU

A

May affect IASB’s standard-setting processes
Dynamics of future EU discussions may change

MN20018 | Financial Accounting and Reporting (9 decks)

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