Lecture 3 Conceptual Framework

Question 1

What is CF

Answer 1

A systems of inter related objectives and fundamentals aimed at leading to consistently articulated standards and prescribe, through strong theoretical basis, the nature function and limits of financial statements and accounting information.

Question 2

Goal of the conceptual framework

Answer 2

Standards based on consistent and appropriate principals

Question 3

Objective of general purpose financial reporting

Answer 3

To provide 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.
Others, regulators and members of the general public may find general purpose financial stamens useful but they are not primarily directed to these groups.

Question 4

It should be known that general purpose financial reports

Answer 4

Do not show the value of the reporting entity rather they provide information to help users estimate the value

They are based on estimates, judgements and models rather than exact depictions. The framework establishes the concepts that underlie these estimates, judgements and depictions

Question 5

General Purpose financial reports provide info about the financial position of the reporting entity

Answer 5

Economic resources
Claims
Effects of transactions and events on the reporting entity’s economic resources and claims

Question 6

Exposure drafts proposals

Answer 6

Increase the prominence of stewardship within the overall objective.
Confirm focus on existing and potential investors, lenders and other creditors
Includes long term investors.

Question 7

Measurement

Answer 7

Measurement consideration of objective of financial reporting, the qualitative characteristics of useful information and the cost constraint is likely to result in the selection of different measurements based for different assets and liabilities.
Historical cost
Fair value
Fulfilment value/value in use

Cash flow based measurement techniques

Describe factors to consider in selecting a measurement basis

Question 8

Qualitative characteristics

Answer 8

They identify the types of information that are likely to be more useful to users.
Fundamental - relevance - faithful representation
Enhancing - Comparability, Verifiability, Timeliness, Understandability

Question 9

If financial information is to be useful, it must be

Answer 9

Relevant
Predictive value
Confirmatory value
Materiality 
Complete 
Neutral 
Free from error
Information is material if omitting it or misstating it could influence users decisions

Question 10

Application of qualitative characteristics

Answer 10

1) identify an economic phenomenon that has the potential to be useful to users
2) identify the type of information about the phenomenon that would be most relevant if it is available and faithfully represented
3) Determine whether that information is available and can be faithfully represented
4) If so, the process ends, if not repeat with the next most relevant type of information

Question 11

The usefulness of Financial Information is enhanced if it is:

Answer 11

Comparable 
Verifiable 
Direct
Indirect
Timely
Understandable 
Classifying, characterising, presenting information clearly and concisely 
Complexity and no excuse for exclusion

Question 12

Recognition that…

Answer 12

Cost may be a constraint

Question 13

Qualitative Characteristics ED proposals

Answer 13

Retain faithful representation as a qualitative characteristic however, if an estimation is too uncertain, it might not provide relevant information
Reintroduce reference to prudence
Caution under conditions of uncertainty
No overstatement or understatement of assets, liabilities, income or expenses (neutral)
Reintroduce reference to substance over form within description of faithful representation

Question 14

Chapter 4 the framework 1989
Performance
Profit frequently used ad the measure

Answer 14

Income= increases in economic benefits during the accounting period in the form of inflows of enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions by equity participants 
Expenses = Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Question 15

Assets of an entity - existing definition

Answer 15

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Question 16

Assets - exposure draft

Answer 16

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

Question 17

Liability of an entity - existing definition

Answer 17

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 18

Liability - exposure draft

Answer 18

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

Question 19

Economic resource - exposure daft

Answer 19

A right that is capable of producing economic benefits.

Question 20

Present obligation - exposure draft

Answer 20

An obligation to transfer economic resources that:
The entity has no practical ability to avoid
Has risen from past events (e.g economic benefits already received or activities already conducted

Question 21

Recognition

Those criteria may not always be met when one or more of the following applies

Answer 21

A) it is uncertain whether an asset or liability exists
B) There is only a low probability of future inflows (outflows) of economic benefits from the asset (liability) or
C) The level of measurement uncertainty is so high that the resulting information has little relevance.

Question 22

De recognition

Answer 22

No guidance in current conceptual framework, exposure draft provides guidance aimed at providing a faithful representation of:
The assets and liabilities retained after a transaction or other event that led to de recognition and
The change in the entity’s assets and liabilities as a result of the transaction or other event

Normally decisions about de recognition are straightforward
However, more difficult when the two sims described above conflict with each other.

Question 23

The debates

Answer 23

Prudence
Move from stewardship to decision usefulness
Regulators specifically not identifies as primary users
Reliability replaced with faithful representation