Stream III - Conceptual Framework Flashcards
What is a Conceptual Framework?
According to the IASB a Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users
What are some advantages of a Conceptual Framework?
- Clarifies conceptual understandings of proposed accounting standards
- Enables standards to be developed on consistent basis
- Reduces the need to debate fundamental issues each time a standard is developed or revised
What are some limitations of the Conceptual Framework?
- Decisions on accounting issues inevitably rest on judgment of qualitative factors to a considerable extent
- A framework can give direction but does not guarantee that everyone will reach the same conclusion
What do users need to make economic decisions?
An evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation
What may notes and supplementary statements include info about?
- Key accounting policies
- Key assumptions
- Risks and uncertainties facing enterprise
- Resources not recognised in financial statements e.g. mineral reserves
What do accruals provide information about?
- Past transactions involving cash flows
- Obligations to pay cash in future
- Resources representing cash to be received in the future
Why might the provision of financial statements that meet the needs of investors meet the needs of other users?
Because they are providers of risk capital to the entity
What did the Framework say about stewardship in the past? What was the response of Ernst & Young (2004)
It says that it is a subset of the information needed for making economic decisions about investing. EY said that regulators are far more interested in the proper stewardship of assets that currently exist than in predicting future cash flows.
Other than the prediction of cash flows and stewardship what other uses do financial statements have?
- Assessment of taxation
- Determination of dividends
- Setting up other contracts such as bonuses
What has the IASB said in recent years about stewardship?
The information needed to assess stewardship is not overlapping fully with the information needed to help users assess the prospects of future net cash flows to the entity (there are no clear implications of this)
Why should abnormal or infrequent items of income or expense be separately disclosed?
This improves the predictive value the income statement
Why can it be argued that the Framework emphasises the balance sheet at the expense of the matching concept?
This is because the Framework states that the matching concept does not allow for the recognition of items which do not meet the definitions of assets or liabilities
What is the argument against using the matching concept?
Baxter says that matching is a misnomer as there are often rises or falls income that have no match e.g. storm damage, overheads
What two characteristics of statements is there a conflict between when considering timeliness?
Relevance and reliability
What is the definition of reliable information and why is it circular?
Information is reliable if it can be depended upon to represent what it purports to represent. This is basically just saying it is reliable if it’s reliable.
