Regulation And The Conceptual Framework Flashcards
Purpose of the Conceptual Framework
develop standards that were consistent and logically formulated
provide guidance to accountants in areas where no standards existed
enable users of financial reports to understand better the standards developed
Step 1 of the Framework
define the boundaries of financial reporting in that the conceptual framework was to deal only with general purpose financial reporting
Step 2 of the Framework
define the reporting entity
establishes the criteria by which a reporting entity is recognised to exist, in order to determine which entities should prepare general purpose financial reports
Step 3 of the Framework
establish the objectives of general purpose financial reporting
this step also identifies the users of financial reports, their information needs, and the types of reports which best meet those needs
Step 4 of the Framework
used the broad framework established in the first three steps to develop the qualitative characteristics of financial information the elements of the reporting processes and recognition and measurement of those elements
Reporting Entity Indicators
separation of management from economic interest
economic or political importance/influence
financial characteristics
General Purpose Financial Reporting
the conceptual framework points out that general purpose financial reports do not, and cannot, provide all of the information needs of users
Qualitative Characteristics
relevance
faithful representation
comparability
verifiability
timeliness and understandability
Relevance
financial information must have a quality that makes a difference in a decision of an economic nature made by users
Faithful Representation
information must be complete, neutral and free from material error
Comparability
enables users to identify and understand similarities in, and differences among, items
Verifiability
different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular piece of information is a faithful representation of the economic phenomena
Timeliness
having information available to decision makers in time to be capable of influencing their decisions
Understandability
information can be understood by the average user
Cost Constraints on Relevant, Faithfully Representative Information
reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information
- collection
- storage
- retrieval
- presentation
- analysis + interpretation
- loss of competitive position
Assets in the Current Framework
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
Liabilities in the Current Framework
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
a present obligation needs to be distinguished from a future commitment
Equity in the Current Framework
the residual interest in the assets of the entity after deducting all its liabilities
Income in the Current Framework
increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants
gains are usually disclosed in the income statement net of any related expenses, whereas revenues are reported at a gross amount
Expenses in the Current Framework
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
Asset Recognition
an asset is to be recognised only when both the probability and the reliable measurement criteria are satisfied.
the term ‘probability’ refers to the degree of certainty that the future economic benefits will flow to the entity
reliable measurement of internally generated goodwill has been difficult, and therefore such goodwill has not been recognised as an asset
Liability Recognition
a liability is recognised in the statement of financial position/balance sheet when it is probable that an outflow of resources embodying economic benefits will result from settling the present obligation and the amount at which the settlement will take place can be measured reliably
Income Recognition
income is recognised in the income statement when an increase in future economic benefits relating to an increase in an asset or decrease in a liability can be measured reliably.
separate recognition criteria provided for each different category of revenue
- revenue from sale of goods
- revenue from rendering services
- revenue from interest, royalties and dividends
- income from contributions
- liabilities forgiven
- government grants received
Expense Recognition
expenses are recognised in the income statement when a decrease in future economic benefits relating to a decrease in an asset or increase in a liability can be measured reliably
an expense is also recognised in the income statement when the entity incurs a liability without the recognition of any asset
Different Measurement Bases
historical cost
current cost
realisable value
present value
financial capital
capital synonymous with the net assets or equity of the entity
physical capital
the operating capability of the assets
