Part 1: The Conceptual framework for financial reporting Flashcards
List four primary users to whom general purpose financial statements are directed in terms of the Conceptual Framework for Financial Reporting (2018
Primary users:
Existing investors
Potential investors
Lenders
Other creditors
What are the two fundamental qualitative characteristics of useful financial information in terms of the Conceptual Framework for Financial Reporting (2018)?
Fundamental qualitative characteristics of financial information:
Relevance
Faithful presentation
What are the four enhancing qualitative characteristics of useful financial information in terms of the Conceptual Framework for Financial Reporting (2018)?
Enhancing qualitative characteristics of financial information:
Comparability
Verifiability
Timeliness
Understandability
What is the purpose of the Conceptual Framework for Financial Reporting (2018)?
Assist the Board (IASB) in the development of future standards based on consistent concepts
Assist preparers of financial reports to develop consistent policies where no Standard applies or where there is a choice
Assist all parties to understand and interpret Standards
Which one of the following statements is correct?
a) The Conceptual Framework is a standard of IFRS and sets standards for specific measurement and disclosure matters.
b) There can be contradictions between the Conceptual Framework and a standard of IFRS. In those cases the principals of the Conceptual Framework should enjoy preference.
c) In cases where there are contradictions, the requirements of the standard of IFRS should dominate those of the Conceptual Framework.
d) The Conceptual Framework serves only as a general guideline in the preparation of financial statements and may be ignored.
e) Both a) and c) are correct
(c)
Choose the correct answer. The following are the four enhancing qualitative characteristics of financial statements:
a) Prudence, understandability, faithful representation and completeness.
b) Comparability, verifiability, timeliness and understandability.
c) Reliability, consistency, relevance and prudence.
d) Assets, liabilities, income and expenses.
e) Completeness, neutrality and free from error.
(b)
What are the criteria that have to be met, in terms of the Conceptual Framework (2018), before an item is recognised in the financial statements?
- The item must meet the definition of one of the elements of the financial statements
- The recognition of the item needs to provide useful information by meting the fundamental qualitative characteristics of relevance and faithful representation
List the elements of financial statements, as identified by the Conceptual Framework for Financial Reporting (2018)
Income
Expenses
Equity
Assets
Liabilities
An asset is an element of the financial statements of an entity. Which one of the following statements, which relate to an asset, is incorrect?
a) Physical form is not necessary for the existence of an asset.
b) Ownership is not a determining factor for the existence of an asset.
c) The potential to produce economic resources must be likely.
d) Legal rights are not a pre-requisite to comply with the definition of an asset.
e) Assets can be obtained by purchasing them, manufacturing them or receiving them by means of a donation.
(c)
What is a Framework for financial reporting?
Provides guidance to preparers of financial reports regarding:
* which business, economic and other events should be accounted for, and
* how these events should be measured and communicated to users
True or false
A framework for financial reporting is a standard and can override other IAS/IFRS
FALSE
A framework for financial reporting is NOT a standard and CANNOT override other IAS/IFRS
State the limitations of general purpose financial reporting
Only provides financial information
Not designed for all users
Not designed for all decisions
Only provides historic information
What are fundamental qualitative characteristics?
- Relevance
- Faithful representation
What does relevance consist of?
-Makes a difference to decision making
-Has predictive and confirmatory value
-Related to materiality
What does faithful representation consist of?
-Neutral
- Complete
-Free from error
State the types of qualitative characteristics?
- Fundamental characteristics
- Enhancing characteristics
Define an asset
- An asset is a resource
- Controlled by the entity
- As a result of passed events
- From which future economic benefits
- Are expected to flow to the entity
What is an right?
Rights that have potential to produce economic benefits take many
forms, such as:
* Rights corresponding to an obligation of another party (par 4.6a):
* to receive cash
* to receive goods or services
* to exchange economic resources with another party on favorable terms
* to benefit from an obligation of another party to transfer an economic
resource if a specified uncertain future event occurs
How is an right established?
Through:
- contract
- legislation; or
- similar means
Which rights does not correspond to an obligation of another party?
- Right over physical objects (PPE/Inventories)
- Rights to use intellectual property
Discuss recognition of assets
Not all rights are assets: to qualify as assets, rights must:
* Have the potential to produce economic benefits beyond those available to
all other parties; and
* Be controlled by the entity (Par 4.9)
True or false
Each right is a separate asset.
For accounting purposes, related rights are usually treated as a single asset.
(Par 4.11)
- Right to use an object.
- The right to sell the rights over an object
True
Define economic resource
Necessitates the potential to produce economic benefits
State the exception to the potential to produce economic benefit
A right will produce economic benefits.
Rather, a right must exist and in at least one circumstance, that right would
produce economic benefits beyond those available to all other parties. (Par
4.14)
Explain an economic resource
- a right
- that has the potential to produce economic benefits
True or False
A right can be an asset even if the probability that it will produce economic
benefits is low. (Par 4.15)
The economic resource is the present right that contains that potential, not
the present economic benefits that the right may produce. (Par 4.17)
False
A right can be an asset even if the probability that it will produce economic
benefits is low. (Par 4.15)
The economic resource is the present right that contains that potential, not
the future economic benefits that the right may produce. (Par 4.17)
True or false
Assessing the existence of control helps to identify the economic
resource for which the entity accounts.
True
What should an entity do for control to exist?
- Have a present ability to direct the use of the economic resource
- Obtain the economic benefits that flow from the resource
- Have the present ability to prevent other parties from directing the use of the
economic resource - Have the present ability to prevent other parties from obtaining the economic
benefits that flow from the resource(Par 4.20)
How is a present ability to direct the use of an economic resource is evidenced?
- A right (of an entity) to use the economic resource in its activities; or
- To allow another party to use the economic resource in its activities
When does control arise?
- From an ability to enforce legal rights.
- If an entity has a means, other than a legal right, to ensure that no other
party has the present ability to direct the use of an economic resource.
True or false
For an entity to control an economic resource, the present economic
benefits arising from that economic resource should flow to the entity
– directly or indirectly.
False
For an entity to control an economic resource, the future economic
benefits arising from that economic resource should flow to the entity
– directly or indirectly.
True or False
Exposure to significant variations in the amount of economic benefits
may indicate control.
True
Define an liability
- a present obligation of the entity
- to transfer an economic resource
- as a result of past events
Explain present obligation
A present obligation is:
- a duty or responsibility that an entity
- has no practical ability to avoid
State the criteria for liabilities to exist
- Entity has a present obligation
- Obligation to transfer an economic resource
- As a result of past events
How is obligation formed?
Through:
- contract
- legislation
- legally enforceable
- from an entity’s customary practices, published policies
or specific statements of the entity; entity should have no practical ability
to act in a manner that is not consistent with the published policies,
practices or statements.
Discuss transfer of an economic resource
- The obligation must have the potential to require the entity to transfer an
economic resource to another party. - For that potential to exist, it does NOT need to be certain, or even likely,
the entity will be required to transfer an economic resource. - It is only necessary that, in at least one circumstance, the entity would be
required to transfer an economic resource to another entity. (Par 4.37) - An obligation may exist even if the probability of a transfer of an economic
resource is low. (Par 4.38)
When does a present obligation exist?
- A present obligation exists as a result of a past event if:
- The entity has already obtained economic benefits or taken an action; and
- As a consequence, the entity will or may have to transfer an economic
resource that it would not otherwise have had to transfer. (Par 4.43) - A present obligation can exist even if a transfer of economic resources
cannot be enforced until some point in the future. (Par 4.46) - If the criteria in Par 4.43 are not satisfied, then the entity does not
have an obligation.
Define unit of account
“the right, the obligation, or the group of rights and/or obligations, to
which recognition criteria and measurement concepts are applied”
What is include in the unit of account?
- An individual right or individual obligation
- All rights, all obligations, or all rights and all obligations, arising from a
single source (e.g. a contract) - A subgroup of those rights and/or obligations (e.g. a subgroup of
rights over an item of PPE for which the useful life and pattern of
consumption differ from those of the other rights over that item of
PPE - A group of rights and/or obligations arising from a portfolio of similar
items.
Define executory contracts
“A contract, or portion thereof, that is equally unperformed – neither
party has fulfilled any of its obligations or both parties have partially
fulfilled their obligations to an equal extent”.
What does executory contracts do?
- Establishes a combined right and obligation to exchange economic
resources; both are interdependent. (Par 4.57) - Combined right constitutes a single asset or liability.
- To the extent that either party fulfils its obligations under the
contract, the contract is no longer executory.
Discuss substance over legal form
- Contracts create rights and obligations for an entity.
- The rights and obligations created by contracts have to be
represented faithfully. To do this, the substance of the rights and
obligations is what is reported on in the financial statements. - Consider all terms – implicit and explicit – in a contract, provided they
have substance. (Par 4.60) - Terms have no substance if they have no discernible effect on the
economics of a contract.
Define an equity
The residual interest in the assets of the entity after deducting all its liabilities
[Assets less (-) liabilities]
Define income
- increases in assets, or
- decreases in liabilities
- other than those relating to contributions from holders of equity claims
Define expenses
- decreases in assets
- increases in liabilities
- other than those relating to distributions to holders of equity claims
What are the elements of financial statements?
- Financial position
- Financial performance
Complete the sentence
Financial positions are…
- Assets
- Liability
- Equity
Complete the sentence
Financial performance are…
- Income
- Expenses
Explain the phrase ‘controlled by entity’
- Abilitytodirectuse(legalrights)&obtainbenefits
- Preventotherpartiestoobtainbenefits
Analysis the phrase “transfer economic resource”
- Preventotherpartiestoobtainbenefit
Measurement is?
Elements recognised in financial statements are quantified in monetary terms
Measurement bases is?
- Historical cost
- Current value (reflects conditions at measurement date)
How is historical cost calculated/
Cost less depreciated cost
Current value consist of?
- Current cost
- Fair value
- value in use
What is qualitative characteristics?
Are the qualities that make information
contained in financial reports useful to users in predicting future cash
flows and assessing stewardship
Explain relevance (fundamental qualitative characteristics)
- Information is relevant if can influence the
decisions made by users of the financial
statements. - Financial information can influence the
decisions made by users if it has a
predictive value or confirmatory value.
Explain faithful representation (fundamental qualitative characteristics)
- Information must faithfully represent the
substance of what it purports to represent. - A faithful representation is, as far as is
possible, complete, neutral, and free from
error. - A faithful representation is affected by a
Explain comparability (enhancing qualitative characteristics)
- Comparability
enables users to
identify and
understand
similarities in, and
differences among,
items. - Comparability ≠
Consistency ≠
Uniformity
Explain verifiability (enhancing qualitative characteristics)
Verifiability
* Verifiability ≈
different
knowledgeable and
independent
observers could
reach consensus that
a particular depiction
is a faithful.
representation
* Can be direct or
indirect.
Explain timeliness (enhancing qualitative characteristics)
- Timeliness ≈ availing
information for
users’ decision making
needs in
time. - Relevance of
information reduces
with time.
Explain understandability (enhancing qualitative characteristics)
- Is achieved by
classifying,
characterizing and
presenting
information clearly
and concisely.
