Lecture 3 -The Regulation Of Financial Reporting: Conceptual Frameworks

Question 1

What is a ‘Conceptual Framework’ in accounting?

Answer 1

‘A coherent frame of reference used by standard setters - FRC/ASB/FASB’

Question 2

What is the point in a ‘Conceptual Framework’?

Answer 2

• To Clarify underpinning of standards
• To aid in the development and review of standards
• Ensure standards are consistent
• Act as a reference source for accounting theory
• Reduce the need for debate on every new standard

Question 3

So is a ‘Conceptual Framework’ a good thing or not? What are the justifications and criticisms?

Answer 3

Justification:
Defends against political interference
Gives more authority to accounting standards setters
Acts as a common language for raising issues or concerns

Criticisms:
Not theoretically sound because its built on compromise
Too general and vague

Question 4

Does the IASB Conceptual framework override IAS/IFRS? And when was the IASB Conceptual Framework released?

Answer 4

No,

It is not an international standard

Released: 1989, revision in 2010 and revision in 2018

Question 5

What does the term ‘General-Purpose Financial Reporting’ mean? And What is its purpose?

Answer 5

Pertains to the information a firm has on itself

What is its purpose?
To provide useful information about the firm to existing and future investors, lenders and other creditors

Question 6

What are the two main forms of characteristics in the IASB Conceptual Framework? And What elements make up each of these characteristics?

Answer 6

Fundamental and Enhancing

Fundamental:
Relevance
Faithful representation

Enchancing:
Comparability
Verifiability
Timeliness
Understandability

Question 7

What are the ‘elements’ in financial reporting? What elements go on the Financial position (balance sheet) and What elements go on the Performance statement (P&L, Income statement)?

Answer 7

Elements are the groups in which transactions are placed in financial statements.

Financial position (Balance sheet):
Assets
Liabilities
Equity

Performance statement (Income statement, P&L):
Income
Expenses

Question 8

What is an asset?

Answer 8

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

Economic resource = Something capable of creating money

Question 9

What is a liability?

Answer 9

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

Question 10

What is Equity?

Answer 10

‘The residual interest in the assets of a company after deducting all of its liabilities’

Equity = Assets - Liabilities

Question 11

What is income? And What is not included as income?

Answer 11

‘Increases in assets or decreases in liabilities that result in increased equity’

DOES NOT include contributions from holders of equity and distributions to holders of a claim.

Question 12

What is the concept of ‘Conceptual Primacy’?

Answer 12

There is only 1 economic reality but this may be reflected in the accounts in 2 different ways

Question 13

What is the traditionalist standpoint in Conceptual Primacy?

Answer 13

Traditionalists believe:

1) Define incomes and expenses first and match them.
2) Define leftovers as assets and liabilities.

Question 14

What is the standards setters standpoint in Conceptual Primacy?

Answer 14

Standard setters believe:

1) Define assets and liabilities
2) Let income and expenses be the changes in these

Question 15

What is ‘Historical cost accounting’ (HCA) and what are the issues surrounding it?

Answer 15

In Historical Cost Accounting (HCA) the items historic cost is taken as the nominal monetary value for that item.

Issues:

1) £/$ etc aren’t the same today as they were a year ago
2) Comparisons over time become difficult
3) Income statements
4) Out of date information leads to poor decisions

Question 16

What four other methods (not Historical) can be used in valuation?

Answer 16

Net realisable value (NRV)
Replacement cost (RC)
Present Value (PV)
Fair Value (FV)