The Conceptual Framework

Question 1

What is the purpose and status of the conceptual Framework?

Answer 1

ASSIST the IASB in its development of future standards

ASSIST the IASB by providing a basis for reducing the number of alternative accounting treatments permitted.

ASSIST preparers of financial statements in applying standards and dealing with topics that are not addressed by standards

ASSIST auditors in forming an opinion on stats.

HELP users of stats to interpret the information prepared.

PROVIDE those who are interested in the IASB with its approach to the formulation of standards.

Question 2

What is the general objective of stats to the user?

Answer 2

Provide information about the entity to existing and potential investors, lenders and other creditors.

The users need information about resources, claims against the entity, and how efficiently they have used their resources over the year.

Question 3

What is going concern?

Answer 3

Underlying assumption that the entity will continue to operate in to the future.

Question 4

What are the Qualitative Characteristic of Financial Statements?

Answer 4

FR CUVT

Faithful Representation
Relevance
Comparability
Understandability
Verifiability
Timeliness

Question 5

Fundamental Characteristics:

Answer 5

Faithful Representation

• Substance over form
• Neutrality
• Free from Error
• Completeness

Relevance

• Information that will influence decisions of users
• Affected by its nature and materiality

Question 6

Enhancing Characteristics:

Answer 6

Comparability - compare stats over different periods and across entities. Disclosure of accounting policies included. Consistent treatment unless more relevant or reliable treatment available.

Understandability - Relevant information should not be excluded on grounds that it may be difficult to understand.

Verifiability - Direct verification means direct observation, like counting cash. Indirect verification means checking the inputs to a model, formula or other technique and recalculating outputs.

Timeliness - Information needs to be available to influence users.

Question 7

What are the 5 elements of financial statements?

Answer 7

Asset - future benefits

Liabilities - future transfer of benefits

Equity - Residual amount (deduct liabilities from assets)

Income - inflows or enhancements of assets or decreases in liabilities

Expenses - outflows or decreases in assets or enhancement of liabilities

Question 8

Three criteria for a recognition of an element?

Answer 8

• Meet the definition
• Probable economic benefit to or from the entity
• Item can be measured reliably

Question 9

Measurements of elements

Answer 9

Historical Cost

Current Cost

Realisable Value

Present Value (discounted future cash flows)

Fair value

Question 10

What is the concept of capital and capital maintenance?

Answer 10

We recognise profit only when we exceed the initial capital we started with.

Return of capital is the whole amount of income generated, whereas return on capital is the additional amount of income, ie. profit

Financial capital maintenance - a profit is earned when net assets at end of period are larger than beginning

Physical capital maintenance - a profit is only earned if a company’s productive capacity at the end of period is larger than beginning.