Part 2: The conceptual framework for financial reporting

Question 1

Define recognition

Answer 1

“the process of capturing for inclusion in the statement of financial
position or the statement of financial performance an item that meets
the definition of the elements of financial statements”.

Question 2

What else is included in recognition?

Answer 2

Includes depicting the item in words and by a monetary amount

Question 4

When are assets and liabilities recognized?

Answer 4

• Assets and liabilities are recognized only when recognition provides users
  with information that is useful (i.e. relevant information that faithfully
  represents the asset and liabilities and changes thereto).

Question 5

True or false

Low probability of an inflow or outflow of economic benefits and a
wide range of possible outcomes may mean recognition (measured at a
single amount) will provide relevant information.

Answer 5

False

Low probability of an inflow or outflow of economic benefits and a
wide range of possible outcomes may mean recognition (measured at a
single amount) will not provide relevant information.

Question 7

True or False

The level/amount of measurement uncertainty associated with an
asset or liability and other factors may affect the faithful
representation of an asset or liability.

Answer 7

True

Question 8

True or False

The use of reasonable estimates is an essential part of the
preparation of financial information and does undermine the
usefulness of information.

Answer 8

True

Question 9

When are assets and liabilities not recognized?

Answer 9

• In cases where measurement uncertainty is high and an
  accompanying explanation won’t provide useful information, the
  asset or liability will not be recognised. (Par 5.22)

Question 10

Define derecognition

Answer 10

“the removal of all or part of a recognized asset or liability from the
SOFP”.

Question 12

Define contract modifications

Answer 12

Contract modifications that reduce or eliminate existing rights or
obligations require considerations of the unit of account that will
provide users with the most useful information:

Question 13

Elaborate on contract modifications

Answer 13

a) Modifications that only eliminate existing rights and obligation – apply
derecognition principles in Par 5.26 – 5.32
b) Modifications that only add new rights or obligations – treat added rights or
obligations as separate assets of liabilities, or as part of the same unit of
account
c) Modifications that BOTH eliminate existing rights or obligations and add
new rights or obligations – consider both separate and combined effect of
those modifications.

Question 14

Disclose the different types of measurement

Answer 14

• Fair value
• Value in use
• Current costs

Question 15

Explain fair value

Answer 15

• Price received to sell an asset
  or paid to transfer a liability in
  an orderly transaction
  between market participants
  at the measurement date.
• Reflects perspective of market
  participants .
• Determined directly:
  observable prices .
• Determined indirectly: using
  measurement techniques .
• Not increased/decreased by
  transaction costs (for assets
  and liabilities, respectively).

Question 16

Explain value in use

Answer 16

• The present value of the cash
  flows, or other economic
  benefits, that an entity expects
  to derive from the use of an
  asset and from its ultimate
  disposal.
• It reflects entity-specific
  assumptions rather than
  assumptions by market
  participants.
• It cannot be observed directly
  and are determined using
  cash-flow-based measurement
  techniques.

Question 17

Explain current costs

Answer 17

• The cost of an equivalent asset
  at the measurement date,
  comprising the consideration
  that would be paid at the
  measurement date plus the
  transaction costs that would
  be incurred at that date.
• It reflects prices in the market
  in which the entity would
  acquire the asset or would
  incur the liability.
• Current cost reflects conditions
  at the measurement date.

Question 18

State factors specific to initial measurements

Answer 18

• Description of measurement basis used at initial recognition (Par 6.78)
• Acquisition of assets or incurrences of liabilities in exchange for other
  assets or liabilities (Par 6.79)
• Events that are not transactions on market terms (Par 6.80 – 6.82)

Question 19

Disclose cash-floe bases measurement techniques

Answer 19

Are not measurement bases; techniques used in applying a measurement
basis (Par 6.91)
* Can be used in applying modified measurement bases (Par 6.92)

Question 20

What does an effective communication of financial information requires?

Answer 20

• Focusing on presentation and disclosure objectives;
• Classifying information in a manner that groups similar items and separates
  dissimilar items; and
• Aggregating information such that it is not obscured by unnecessary detail
  and excessive aggregation.