Regulation And The Conceptual Framework

Question 1

Purpose of the Conceptual Framework

Answer 1

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

Question 2

Step 1 of the Framework

Answer 2

define the boundaries of financial reporting in that the conceptual framework was to deal only with general purpose financial reporting

Question 3

Step 2 of the Framework

Answer 3

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

Question 4

Step 3 of the Framework

Answer 4

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

Question 5

Step 4 of the Framework

Answer 5

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

Question 6

Reporting Entity Indicators

Answer 6

separation of management from economic interest

economic or political importance/influence

financial characteristics

Question 7

General Purpose Financial Reporting

Answer 7

the conceptual framework points out that general purpose financial reports do not, and cannot, provide all of the information needs of users

Question 8

Qualitative Characteristics

Answer 8

relevance

faithful representation

comparability

verifiability

timeliness and understandability

Question 9

Relevance

Answer 9

financial information must have a quality that makes a difference in a decision of an economic nature made by users

Question 10

Faithful Representation

Answer 10

information must be complete, neutral and free from material error

Question 11

Comparability

Answer 11

enables users to identify and understand similarities in, and differences among, items

Question 12

Verifiability

Answer 12

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

Question 13

Timeliness

Answer 13

having information available to decision makers in time to be capable of influencing their decisions

Question 14

Understandability

Answer 14

information can be understood by the average user

Question 15

Cost Constraints on Relevant, Faithfully Representative Information

Answer 15

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

Question 16

Assets in the Current Framework

Answer 16

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

Question 17

Liabilities in the Current Framework

Answer 17

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

Question 18

Equity in the Current Framework

Answer 18

the residual interest in the assets of the entity after deducting all its liabilities

Question 19

Income in the Current Framework

Answer 19

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

Question 20

Expenses in the Current Framework

Answer 20

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

Question 21

Asset Recognition

Answer 21

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

Question 22

Liability Recognition

Answer 22

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

Question 23

Income Recognition

Answer 23

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

Question 24

Expense Recognition

Answer 24

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

Question 25

Different Measurement Bases

Answer 25

historical cost

current cost

realisable value

present value

Question 26

financial capital

Answer 26

capital synonymous with the net assets or equity of the entity

Question 27

physical capital

Answer 27

the operating capability of the assets