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SBR- Conceptual framework Flashcards

1
Q

what is the IFRS foundation structure diagram

A

IFRS Foundation = IASB

IFRIC + IFRSAC feed into the IASB

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2
Q

what does the advisory council do and their objectives

A

The IFRS Advisory Council provides a forum for organisations and individuals to participate in the standard-setting process.

It is way the IASB consults with the outside world.

The objectives of the IFRS Advisory Council Care:

▪ To give advice to the IASB on agenda decisions and priorities in its work;
▪ To inform the IASB of the views of organisations and individuals on the Council on major standard-setting
projects;
▪ To give other advice to the Board or to the Trustees.

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3
Q

Each standard is preceded by an ___ which gives the public the opportunity to comment

A

exposure draft

This is published before a standard is issued to which the public can come back with any comments

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4
Q

at any stage of the setting standards process, the board might issue a ____

A

discussion paper

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5
Q

what does the interpretations committee /what do they do do

A

The IFRS Interpretations Committee was originally established in 2002. They provide guidance on specific practical issues in the interpretation of IFRS.

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6
Q

explain the standard setting process

A

The IASB prepares IFRSs in accordance with due process.

▪ Establishment of a consultative group to give advice on the issues arising on the project. The IASB will consult with this committee and IFRS advisory council throughout the process.

▪ On acceptance of a project a steering committee is set up (chaired by board members);

▪ On major projects, the IASB develops and publishes a Discussion Document for public comment (1st draft);

▪ Following the receipt and review of comments, an Exposure Draft is produced for public comment;

▪ Following the receipt and review of comments, the final IFRS will be issued.

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7
Q

what is the conceptual framework

A

The Conceptual Framework sets out the fundamental concepts for financial reporting that guide the Board in developing IFRS Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, so as to provide useful information for investors, lenders and other creditors.

The Conceptual Framework also assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction, and more broadly, helps stakeholders to understand and interpret the Standards.

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8
Q

What are the contents of a conceptual framework

A

The 2018 revised Conceptual Framework sets out:

1 objective of general purpose financial reporting;

2 qualitative characteristics of useful financial information;

3 a description of the reporting entity and its boundary;

4 definitions of an asset, a liability, equity, income and expenses ;

5 criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition);

6 measurement bases and guidance on when to use them;

7 concepts and guidance on presentation and disclosure; (effective presentation aggregation, Profit and loss & OCI and classification)

8 concepts relating to capital and capital maintenance

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9
Q

1) what is the objective of financial statements

A

Conceptual Framework states that the purpose of financial reporting is to provide information to current and potential investors, lenders and other creditors that will enable them to make decisions about providing economic resources to an entity.

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10
Q

1) what are the underlying assumptions the financial statements are prepared under

A

Going concern

accruals basis

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11
Q

what is accruals basis

A

the effects of transactions and other events are recognised when they occur and not when cash transfers.

They are reported in the financial statements in the period to which they relate.

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12
Q

what is going concern

A

the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future

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13
Q

2) according to the CF, What is useful financial information

A

The Conceptual Framework states that financial information is only useful if it is:
 relevant
 a faithful representation of an entity’s transactions.

Relevance and faithful representation are the FUNDAMENTAL characteristics of
useful financial information.

The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable.

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14
Q

2) what is relevance and it’s 3 characteristic

A

Relevant financial information is capable of making a difference in the decisions made by users.

has 3 characteristics

  • > Predictive value
  • > confirmatory value
  • > Materiality

The predictive value and confirmatory value of financial information are interrelated. Information that has predictive value often also has confirmatory value. For example, revenue information for the current year, which can be used as the basis for predicting revenues in future years, can also be compared with revenue predictions for the current year that were made in past years. The results of those comparisons can help a user to correct and improve the processes that were used to make those previous predictions

materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.

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15
Q

2) what is faithful representation and it’s 3 characteristics

A

Faithful representation means presenting transactions according to their economic substance rather than their legal form.

Financial statements will generally show a fair presentation when

  • Complete
  • Neutral (objectivity)
  • Free from error
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16
Q

what is neutrality

A

• information is not neutral if it has been selected or presented in such a way as to influence the making of a decision or judgement in order to achieve a predetermined result or outcome.

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17
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18
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19
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20
Q

2) what are the enhancing characteristics, list them

A

Comparability
Verifiability
Timeliness
Understandability

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21
Q

Define the below:

Comparability
Verifiability
Timeliness
Understandability

A

 Comparability – investors should be able to compare an entity’s financial information year-on-year, and one entity’s financial information with another.

 Timeliness – older information is less useful.

 Verifiability – knowledgeable users should be able to agree that a particular depiction of a transaction offers a faithful representation.

 Understandability – information should be presented as clearly and concisely as possible.

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22
Q

.3) what is the reporting entity

A

A reporting entity is one that prepares financial statements (either through choice, or as a result of legal requirements

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23
Q

.3) what are combined financial statements

A

Financial statements produced for two or more entities that are not parent/subsidiaries are called ‘combined financial statements’.

It can be difficult in these circumstances to determine the boundary of the reporting entity.

***Conceptual Framework does not stipulate how or when to prepare COMBINED financial statements, although the Board may develop a standard on
this issue in the future

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24
Q

3) what are consolidated financial statements

A

Financial statements produced for a reporting entity that comprises a parent company and its subsidiaries are called ‘consolidated financial statements’.

These financial statements show the parent and its subsidiaries as a single economic entity. This information is important for investors in the parent
because their economic returns are dependent on distributions from the subsidiary to the parent.

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25
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26
Q

what is an economic resource

A

.An economic resource is a ‘right that has the potential to produce economic
benefits’

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27
Q

4) the elements of financial statements: Define economic resource (asset)

A

‘A present economic resource controlled by an entity as a result of a past event’

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28
Q

4) the elements of financial statements: Define economic claim (liability)

A

A present obligation of the entity to transfer an

economic resource as a result of a past event’

29
Q

4) the elements of financial statements: Define economic claim (equity)

A

The residual interest in the net assets of an entity.

30
Q

4) the elements of financial statements: Define Changes in economic resources and claims as a result of financial performance (income)

A

Increases in assets or decreases in liabilities that

result in an increase to equity (excluding contributions from equity holders).

31
Q

4) the elements of financial statements: Define Changes in economic resources and claims as a result of financial performance (expenses)

A

Decreases in assets or increases in liabilities that

result in decreases to equity (excluding distributions to equity holders).

32
Q

4) the elements of financial statements: Define Other changes in economic resources and claims

A

Contributions from, and distributions to, equity holders.

Exchanges of assets and liabilities that do not
increase or decrease equity

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35
Q

5) When are elements recognised

A

Elements are recognised if recognition provides users with useful information

Judgement is required in deciding if recognition of an element is appropriate. This is why specific recognition criteria vary from one IFRS Standard to another.

36
Q

5) which characteristics must be met to recognise elements

A

• Relevant information e.g. if there is uncertainty over existence of the element OR if theres low probability of inflow or outflow of economic resources

-> e.g. IAS 37 prohibits recognistion of contingent liab & assets because it’s not probable resources will flow from or to the reporting entity

• Faithful representation e.g. recognition might not provide faithful representation if there’s high degree of measurement uncertainty

–> If an asset or liability is not recognised, disclosures may be required to ensure users fully understand the reporting entity’s economic transactions and the
implications that these may have on future earnings and future cash flows.

37
Q

5) When are elements de-recognised

A

when the entity:
 loses control of the asset, or
 has no present obligation for the liability

38
Q

5) Accounting for derecognition should faithfully represent the changes in an entity’s net assets, as well as any assets or liabilities retained.

how is this achieved?

A

This is achieved by:

 derecognising any transferred, expired or consumed component
 recognising a gain or loss on the above, and
 recognising any retained component.

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41
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42
Q

6) When recognised in the financial statements, elements must be quantified in monetary terms.

The Conceptual Framework outlines two broad measurement bases: ??

A

 Historical cost

 Current value (this includes fair value, value-in-use, and current cost)

43
Q

6) how do you select a measurement basis

A

The information provided to users by the measurement base must be useful. In other words it must be relevant and offer a faithful representation of the transactions that have occurred.

When selecting a measurement basis, the Conceptual Framework states that relevance is maximised if the following are considered:
 The characteristics of the asset and/or liability
 The ways in which the asset and/or liability contribute to future cash flows.

This applies to the Board when developing or revising an IFRS Standard. It also applies to preparers of financial statements when applying an IFRS Standard
that permits a choice of measurement bases.

44
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46
Q

7) concepts and guidance on presentation and disclosure;

what is the guidance on effective presentation & disclosure by CF

A

Effective presentation and disclosure is a balance between allowing entities to flexibly report relevant information about their financial performance and
position, and requiring information that enables comparisons to be drawn year-on-year and with other entities.

The Board believes that:
 entity specific information is more useful than standardised descriptions
 duplication makes financial information less understandable.

47
Q

7) concepts and guidance on presentation and disclosure;

what is the guidance on classification and offsetting by CF

A

Classification of an asset or liability into separate components may provide relevant information if the components have different characteristics. E.g. current and non current liabilities

Offsetting classifies dissimilar items together and is therefore generally not appropriate. e.g. cash balance 3m and overdraft 1m offsetting to show 2m

48
Q

7) concepts and guidance on presentation and disclosure;

what is the guidance on aggregating by CF

A

Aggregation is useful because it summarises information that would otherwise be too detailed. However, too much aggregation obscures relevant information.

Different levels of aggregation will be required throughout the financial statements.
-> For example, the statement of profit or loss may be heavily aggregated, but accompanying disclosure notes will disaggregate the information

49
Q

8) what is capital maintenance and what types are there

A

Capital maintenance is a theoretical concept which tries to ensure that excessive dividends are not paid in times of changing prices

1) Physical capital maintenance
2) Financial Capital maintenance

50
Q

what is physical capital maintenance

A

PCM sets aside profits in order to allow the business to continue to operate at current levels of activity. In practice, this tends to mean adjusting opening capital by SPECIFIC price changes ( I.e. specific inflation)

51
Q

what is Financial capital maintenance and what types are there

A

FCM sets aside profits in order to preserve the value of shareholders’ funds in either monetary terms (money financial capital) or constant purchasing power (real financial capital).

Real Financial capital maintenance (INFLATION)

Money (monetary) Financial capital maintenance- (will be what it is in CURRENT terms)

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56
Q

what are some of the critisims of CF

List them- 8

A
  • Historical info
  • Unrecognised assets and liabilities
  • clutter
  • financial/non fin information
  • estimates
  • professional judgement
  • use of historical cost
  • policy choices
57
Q

what are some of the critisims of CF

briefly explain: • Historical info

A

• Historical info-P&L reports on past info but investors interested in future profits. by the time FS published, they are several months old

58
Q

what are some of the critisims of CF

briefly explain: • • Unrecognised assets and liabilities

A

• Unrecognised assets and liabilities e.g. internally generated good will. comp’s reputation and employees skills are important in it’s success - not shown in FS

59
Q

what are some of the critisims of CF

briefly explain: • clutter

A

• clutter- AS A RESULT OF EXTENSIVE DISCLOSURE REQUIREMENTS. The disclosures can be very generic making it difficult for users to find relevant info

60
Q

what are some of the critisims of CF

briefly explain: • • financial/non fin information

A

• financial/non fin information - Current and past profits and cash flows are not the only determinate of future success. Long-term success is also dependent on how an entity is governed, the risks to which it is exposed and how well these are managed, and whether its business activities are sustainable into the medium and long-term. Financial statements prepared in accordance with IFRS Standards say little about these areas.

61
Q

what are some of the critisims of CF

briefly explain: •estimates

A

• estimates- Financial reporting uses many estimates (e.g. depreciation rates).

Estimates are subjective and could be manipulated in order to achieve particular profit targets.

The subjective nature of estimates reduces comparability between companies.

The statement of cash flows somewhat compensates for the impact of accounting estimates.

However, the cash position of an entity can also be
window-dressed (such as by delaying payments to suppliers).

62
Q

what are some of the critisims of CF

briefly explain: •professional judgement

A

• professional judgement- e.g. by lessors when classifying a lease as finance or operating. subjective decisions reduce comparability and increase the risk of bias

63
Q

what are some of the critisims of CF

briefly explain:• use of historical cost.

A

• use of historical cost. e.g. IAS 16 allows historical cost. In times of rising prices, the statement of profit or loss will not show a sustainable level of profit.

64
Q

what are some of the critisims of CF

briefly explain:• policy choices

A

• policy choices- Some standards, such as IAS 16 Property, Plant and Equipment and IAS 40 Investment Properties, allow entities to choose between cost and fair value models.

This makes it harder to investors to compare financial statements on a like-for-like basis.

65
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68
Q

what are some other CF concepts

A

cost constraint

FR & SBR (27 decks)

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