The accounting of framework

Question 1

Is Conceptual Framework an accounting standard?

Answer 1

No it is not an accounting standard

Question 2

What is Conceptual framework?

Answer 2

It is a system of interrelated objectives and fundamentals used to lead to consistent standards.

Question 3

What does Conceptual framework help with?

Answer 3

1) Set New IFRS/Accounting standards
2) Deal with issues with current accounting standards
3) Not repeat all accounting standards since conceptual framework consist of fundamental principles

Question 4

If we get the same principle for all accounting standards, does this make it consistent or contextual and why?

Answer 4

We should consistent accounting standards due to same principles

Question 5

Do all accounting standards agree with conceptual framework?

Answer 5

No all accounting standards agree with conceptual framework due to proactive but not reactive standards.

Question 6

What are the argument for Conceptual framework?

Answer 6

1) May be theoretical but highly practical
2) Without framework, the standards will not be consistent.
3) Without framework, it may become rule based. The rules gets added to as situations arise and finally become cumbersome.

Question 7

What does the framework provide?

Answer 7

What should be brought to the accounts, when it should be brought to the accounts and how much it should be measured

Question 8

What are the arguments against framework

Answer 8

1) Financial statements are prepared by different users in which one principle may not be agreed by all
2) Different users may need different information hence different measurement and bases
3) Even with framework principle, standard go through large analysis processes i.e. Revenue exposure draft has now been re-exposed.

Question 9

What is the objective of financial reporting?

Answer 9

Provide information/financial information to Investors and lenders.

Question 10

Observe the objective of financial reporting and state the factors

Answer 10

1) Wide Scope - it’s scope is wider than financial statement. It is financial reporting in general.
2) Users - Financial reporting is mainly aimed at Capital providers although other users may find it useful.
3) Decisions and stewardships -

Decisions made are solely relied on quality of info.

FR also assess stewardship of resources committed to the entity. This helps management generate cash and also allows investors to assess management’s performance.

Question 11

What are the limitations of Financial reporting

Answer 11

Estimates,Judgement and one source of information.

Question 12

What are the qualitative characteristics of good financial information

Answer 12

Fundamental and Enhancing

Question 13

What are the fundamental characteristics of good information

Answer 13

Relevance and Faithful Representation

Question 14

How do you consider relevant information

Answer 14

When it is predictive, confirmatory and on time

Question 15

What is Enhancing information

Answer 15

Comparability,Understandable,Timely,Verifiable.

Question 16

What is the difference between enhancing and fundamental qualitative characteristic?

Answer 16

Without Fundamental: the financial report will not be useful, however without enhancing, it will still be useful ( although it is better with them).

Question 17

What is the role of Prudence?

Answer 17

A degree of caution when making judgement needing to make decision/estimates under condition of uncertainty.

Question 18

What is the main purpose of Prudence

Answer 18

The main purpose of Prudence is to make sure we do not overstate assets/income and understate liabilities and expenses.

Question 19

Why was prudence removed?

Answer 19

Not being consistent.

It was biased.

Question 20

What does standards of accounting policies states in terms of prudence?

Answer 20

It states that management should use its judgement that results in prudence.

Question 21

What does standard of provision state in regards to prudence?

Answer 21

Potential liabilities should be ‘probable’ and potential assets should be ‘reasonably certain’

Question 22

What does standard of Fair Value state in regards to prudence?

Answer 22

Assets and liabilities need risk adjustment when there is a significant amount of uncertainty.

Question 23

When bringing back prudence, what has the IASB highlighted?

Answer 23

The IASB has proposed we should keep neutral when exercising caution whilst making judgement under conditions of uncertainty.

Question 24

What makes good measurement methods

Answer 24

1) benefit>Cost
2) Relevant Info
3) Infrequent Changes
4) Initial Method + Subsequent method = should be the same, so that you can compare and be consistent.

Question 25

What does measurement of uncertainty have an effect on?

Answer 25

Relevance

Question 26

Why use different measurement method?

Answer 26

Relevant information is different in different circumstance e.g. Business Model.

Question 27

If you have loan keeping till maturity, what method do you use?

Answer 27

Amortised cost.

Question 28

If you buy and sell loan, what method do you use?

Answer 28

FV Method.

Question 29

Most measurement methods are uncertain and estimates when there is measurement of uncertainty.

True or False

Answer 29

True

Question 30

What are the specific problems about measurement?

Answer 30

1) Should we use exit or entry values
2) Business models
3) Deprival values
4) Entity Specific

Question 31

What two tests do you have in order for the item to be recognised?

Answer 31

1) When there is probable economic flow

2) When reliably measured

Question 32

What is an asset?

Answer 32

Control, expected benefits

Question 33

What is a liability?

Answer 33

Present Obligation, expected outflow

Question 34

What is an income?

Answer 34

When assets go up and liabilities go down

Question 35

What is an expense?

Answer 35

When assets go down and liabilities go up.

Question 36

When something gets converted from OCi to P/L Accounts, what is this called?

Answer 36

Recyclable

Question 37

When an items does not get converted from OCI to P/L accounts?

Answer 37

Non-recyclable

Question 38

What gets recycled in OCi to P/L

Answer 38

1) Cashflow hedge gains
2) Foreign Curreny (Group) Gains
3) When sub is sold

Question 39

What gets not recycled?

Answer 39

1) Revaluation gain
2) Actuarial measurement
3) Fair Value through OCI

Question 40

What is the problem for splitting P/L and OCI?

Answer 40

1) No consistency
2) No conceptual reasons
3) Difficult to know what needs to go in OCi and P/L

Question 41

What are the things IASB consider when splitting OCI and P/L?

Answer 41

1) Understandable
2) Comparable
3) Assess future CF ( Useful)

Question 42

What is OCI and why was it used?

Answer 42

It is known as a dumping ground for anything controversial

It was used for low reliability number
Protecting P/L intergrity

Question 43

What is the new conceptual framework for OCI ( State the 3 approaches)

Answer 43

1) Approach 1 - No OCI
2) Approach 2 - Narrow ( re-cycled) consisting of bridging items and mismatching remeasurement
3) Approach 3 - Broad ( recycled when relevant)

Question 44

What is Bridging item?

Answer 44

When P/L uses different measurement ( Armotised cost) and SFP uses a different measurement ( Fair value),

The balance goes to OCI.

Question 45

What is mismatching re-measurement?

Answer 45

When something in I/S has little relevance to financial performance.

For example when derivatives are hedging against forecast transaction, if the derivative changes before the forecast transaction is realised, the derivative will be in OCI till the forecast is realised which then will be converted to I/S.

Question 46

What is IASB Preliminary view for P/L and OCI

Answer 46

P/L = Primary source of info about your returns

OCI : Used to make P/L more relevant