Reading 17 - Financial Reporting Framework Flashcards
According to IASB conceptual framework for financial reporting, what is the objective of financial reporting?
Provide company information to current and potential investors and creditors that helps them make decisions about BOTH investing and lending to the company itself.
What are standard-setting bodies?
Professional organizations of accountants and auditors that establish financial reporting standards.
What are regulatory authorities?
Government agencies who have the LEGAL ability to enforce compliance on financial reporting standards
Who are the two primary standard setting bodies?
Financial Accounting Standards Boards (FASB) and International Accounting Standards Boards (IASB).
FASB sets GAAP, while IASB sets IFRS.
Some older IASB standards are referred to as IAS.
Who are the two primary regulatory authorities responsible for enforcing compliance with financial reporting standards?
Securities and Exchange Commission (SEC) for US
Financial Conduct Authority for UK
What are the two key fundamental characteristics which make financial information useful?
(1) Relevance - if information can help influencer users’ economic decision or affect their evaluation of past events or forecast future events.
- To be relevant, information needs to have predictive and/or confirmative value.
-Materiality is also an aspect of relevance.
(2) Faithful Representation - Information is complete, neutral, and free from error.
What are the four key characteristics which enhances relevance and faithful representation in information?
- Comparability
- Financial Statement presentation should be consistent among firms and across time periods - Verifiability
- Independent observers, using the same methods, obtain similar results - Timeliness
- Information is available to decision makers before the information is stale - Understandability
- Users with basic knowledge of business and accounting and who make reasonable effort to study financial statements should be able to readily understand information
what are the 6 items included in measurement bases?
Historical Cost (amt originally paid for assets)
Amortized cost (historical cost adjusted for depreciation, amortization, depletion and impairment)
Current Cost (amount firm would have to pay today for same asset)
Present Value
Fair value
What are the two constraints of the Conceptual Framework?
(1) Cost-benefit tradeoff of enhancing characteristics
- Accordingly, benefits users gain from the information should be greater than cost of presenting it.
(2) Non-quantifiable information about a company, such as brand loyalty, reputation, capacity for innovation cannot be captured directly in financial statements.
