The Conceptual Framework for Financial Reporting

Question 1

What is purpose of IASB’s Conceptual Framework?

Answer 1

• assist IASB in the development of future IFRS and review of existing IFRS
• basis for reducing number of alternative accounting treatments permitted by IFRS, assisting harmonisation of regulations, accounting standards and procedures relating to financial reporting
• assist national standard setting bodies in developing national standards
• assist preparers of financial statements in applying IFRS and dealing with topics that are not covered by a standard or where there is a choice of accounting policy
• assist auditors in forming an opinion as to whether financial statements comply with IFRS
• assist users of financial statements in interpreting the financial statements prepared in compliance with IFRS
• provide those who are interested in the work of the IASB with info about its approach to the formulation of IFRS

Question 2

Why is there a need for businesses to prepare financial statements for their users?

Answer 2

• investors: decide about buying/selling shares by providing info about level of dividend and any changes in share price. See prospects, present liquidity position and how shares compare with competitors
• employees/management: company performance is related to security of employment and future prospects for jobs in the company. Position and performance help management.
• lenders: decide whether to lend to company. Info checked for adequacy of the value of security, ability to make interest and capital repayments and to ensure financial covenants have not been breached
• suppliers: interested in information to assess whether the company will be a good customer and pay its debts
• customers: should be in a good position to continue producing and supplying goods/services
• govt: compliance with tax and company law, ability to pay tax and general contributions to economy
• public: all above

Question 3

Meaning of faithful representation

Answer 3

Completeness: all info users need to understand the item is given

• neutral/unbiased: no bias in selection or presentation
• free from error: no omissions, errors or inaccuracies in process to produce info

“Substance over form” is key

Question 4

Management commits to purchase assets in the future. Does this give rise to a liability?

Answer 4

Essential characteristic: entity has a present obligation. Obligation to transfer economic benefit as a result of past transactions or events.

Must distinguish between present obligation and future commitment.

Question 5

How report a transactions that fails to satisfy recognition criteria

Answer 5

If not recorded as asset, liability, income or expense - can be disclosed in explanatory notes if relevant to users of the report in making and evaluating their decisions. Revised recognition criteria refer explicitly to the qualitative characteristics of useful information.

Question 6

Explain most commonly used measurements in financial statements

Answer 6

• Historical cost
• assets on finance leases are to be carried at the lower of (1) fair value at date of acquisition; or (2) discounted value of the minimum lease payments at that dates
• construction contracts shall be carried at historical cost plus a proportion of the expected profit
• inventories are also measured as per IAS 2 at the lower cost and net realisable value