L3 The conceptual framework and the conceptual basis of measurement Flashcards
What is a conceptual framework approach to standard setting in accounting?
A conceptual framework approach means defining the key ideas of accounting—such as its purpose, users, and financial terms—before creating standards.
What are the 4 primary roles of the concepual framework?
- Practical tool to help and guide standard setters and keep them on track.
- Improve consistency between different accounting standards
- Increases comparability across accounts
- Assist all parties understand and interpret standards.
Why are there various issues that need to be agreed upon?
- To develop the practice of financial reporting logically and consistently.
- The accounting financial reporting standards will be developed in an ad hoc manner.
- Limited consistency between accounting standards in the absence of a conceptual framework.
What is the objective of General Purpose 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 relating to providing resources to the entity.
What does it mean when information is relevant?
- Information is capable of making a difference to the decision made by users.
- Financial information is capable of making a difference in decisions if it has predictive or confirmatory value.
What does it mean when information is faithfully represented?
- Information must faithfully represent the substance of what it purports to represent.
- The representation is, to the maximum extent possible, complete, neutral and free from error.
- It is affected by the level of measurement uncertainty.
What does it mean when information is comparable?
Allows a user to identify and understand similarities in, and differences among, items (e.g. over time and between firms)
What does it mean when information is verifiable?
Means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation
What does it mean when information is timely?
The information that is provided two months after the end of the financial year is considered quite timely.
What does it mean when information is understandable?
The information is understandable by the financially literate, not by a person in the street
What is a reporting entity?
An entity that has users that depend on general purpose financial reports for information to facilitate resource allocation decisions
What is the definition of an asset?
A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
What does control relate to?
To the capacity to benefit from the asset and to deny or regulate others’ access to the benefit.
What is a liability?
A present obligation of the entity to transfer an economic resource as a result of past events.
An obligation is a duty or responsibility that the entity has no practical ability to avoid.
What is equity?
The residual interest in the assets of the entity after deducting all its liabilities
What is 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 an expense?
Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
What is measurement?
The assignment of numerals to objects or events according to rules.
What is the modified historic cost system?
- Assets are initially brought to account at their ‘cost’
- To the extent that the service potential of assets declines over a reporting period, depreciation is charged
- Periodic Asset Revaluations (including Upward Revaluations) are permitted
