The accounting of framework Flashcards
Syllabus B - Understanding the concept of conceptual Framework
Is Conceptual Framework an accounting standard?
No it is not an accounting standard
What is Conceptual framework?
It is a system of interrelated objectives and fundamentals used to lead to consistent standards.
What does Conceptual framework help with?
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
If we get the same principle for all accounting standards, does this make it consistent or contextual and why?
We should consistent accounting standards due to same principles
Do all accounting standards agree with conceptual framework?
No all accounting standards agree with conceptual framework due to proactive but not reactive standards.
What are the argument for Conceptual framework?
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.
What does the framework provide?
What should be brought to the accounts, when it should be brought to the accounts and how much it should be measured
What are the arguments against framework
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.
What is the objective of financial reporting?
Provide information/financial information to Investors and lenders.
Observe the objective of financial reporting and state the factors
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.
What are the limitations of Financial reporting
Estimates,Judgement and one source of information.
What are the qualitative characteristics of good financial information
Fundamental and Enhancing
What are the fundamental characteristics of good information
Relevance and Faithful Representation
How do you consider relevant information
When it is predictive, confirmatory and on time
What is Enhancing information
Comparability,Understandable,Timely,Verifiable.
What is the difference between enhancing and fundamental qualitative characteristic?
Without Fundamental: the financial report will not be useful, however without enhancing, it will still be useful ( although it is better with them).
What is the role of Prudence?
A degree of caution when making judgement needing to make decision/estimates under condition of uncertainty.
What is the main purpose of Prudence
The main purpose of Prudence is to make sure we do not overstate assets/income and understate liabilities and expenses.
Why was prudence removed?
Not being consistent.
It was biased.
What does standards of accounting policies states in terms of prudence?
It states that management should use its judgement that results in prudence.
What does standard of provision state in regards to prudence?
Potential liabilities should be ‘probable’ and potential assets should be ‘reasonably certain’
What does standard of Fair Value state in regards to prudence?
Assets and liabilities need risk adjustment when there is a significant amount of uncertainty.
When bringing back prudence, what has the IASB highlighted?
The IASB has proposed we should keep neutral when exercising caution whilst making judgement under conditions of uncertainty.
What makes good measurement methods
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.
What does measurement of uncertainty have an effect on?
Relevance
Why use different measurement method?
Relevant information is different in different circumstance e.g. Business Model.
If you have loan keeping till maturity, what method do you use?
Amortised cost.
If you buy and sell loan, what method do you use?
FV Method.
Most measurement methods are uncertain and estimates when there is measurement of uncertainty.
True or False
True
What are the specific problems about measurement?
1) Should we use exit or entry values
2) Business models
3) Deprival values
4) Entity Specific
What two tests do you have in order for the item to be recognised?
1) When there is probable economic flow
2) When reliably measured
What is an asset?
Control, expected benefits
What is a liability?
Present Obligation, expected outflow
What is an income?
When assets go up and liabilities go down
What is an expense?
When assets go down and liabilities go up.
When something gets converted from OCi to P/L Accounts, what is this called?
Recyclable
When an items does not get converted from OCI to P/L accounts?
Non-recyclable
What gets recycled in OCi to P/L
1) Cashflow hedge gains
2) Foreign Curreny (Group) Gains
3) When sub is sold
What gets not recycled?
1) Revaluation gain
2) Actuarial measurement
3) Fair Value through OCI
What is the problem for splitting P/L and OCI?
1) No consistency
2) No conceptual reasons
3) Difficult to know what needs to go in OCi and P/L
What are the things IASB consider when splitting OCI and P/L?
1) Understandable
2) Comparable
3) Assess future CF ( Useful)
What is OCI and why was it used?
It is known as a dumping ground for anything controversial
It was used for low reliability number
Protecting P/L intergrity
What is the new conceptual framework for OCI ( State the 3 approaches)
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)
What is Bridging item?
When P/L uses different measurement ( Armotised cost) and SFP uses a different measurement ( Fair value),
The balance goes to OCI.
What is mismatching re-measurement?
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.
What is IASB Preliminary view for P/L and OCI
P/L = Primary source of info about your returns
OCI : Used to make P/L more relevant
