The Financial Reporting Framework Flashcards
What is the objective of the conceptual framework?
Enable standard setters to achieve a consistent and coherent set of fundamental principles which will help users of financial statements to form more complete assessments of a companies performance
What does the Conceptual Framework help?
- the IASB to develop IFRSs that are based on consistent concepts
- preparers of FS to develop consistent accounting policies
- all parties to understand and interpret the standards
What does IAS 1 aim to provide?
A framework within which an entity presents fairly the effects of transactions and other events in a set of financial statements
What do you have to do to get fair presentation?
An entity must comply with IFRSs but in the absence of a relevant accounting standard, an entity should refer to the definitions, recognition criteria and measurement concepts in the Conceptual Framework
What are the 5 qualitative characteristics of financial information?
- Relevance
- Materiality
- Faithful Representation
- Prudence
- Substance over form
Which 2 qualitative characteristics have changed since the the 2010 version?
- Prudence
- Substance over form
Explain relevance
Relevant financial information makes a difference to the decision of the user.
- predictive value (can be used to predict future values)
- confirmatory value (feedback about previous evaluations)
Explain materiality
A threshold quality of information. Information is material if it’s omission or misstatement could influence the decisions that users might make based on the financial statements of an entity
Explain faithful representation
Information in the financial statements faithfully represents the transactions and other events it purports to represent.
- complete
- neutral
- free from error
Explain prudence
Neutrality is supported by prudence; exercising caution when making judgements under conditions of uncertainty
Explain substance over form
Faithful representation reflects the economic substance of an entity’s transactions even where this is difference from their legal form.
Name 4 ways relevant and faithfully represented information can be improved
- Comparability
- Verifiability
- Timeliness
- Understandability
When does an entity recognise an item in the financial statements? (The recognition criteria)
RECOGNITION - it meets the definition of an element - it provides useful information Relevant information Faithful representation
DERECOGNITION
- Loses control of the asset
- No longer has a present obligation
When does derecognition usually occur?
- The entity loses control of an asset
- The entity no longer has a present obligation for a liability
What was the criteria for recognition in 2010?
- the item meets the definition of an element
- probable future economic benefits
- reliably measured
What is the measurement basis under the Conceptual Framework?
- Historical Cost
- Current value
What is current value split into under the measurement basis?
- fair value
- value in use
- Current Cost
Explain fair value
The price that would be received to sell an asset
Explain value in use
Present value of future cashflows
Explain current cost
The cost of an equivalent asset at the measurement date
What should an entity consider when selecting a measurement basis?
- Characteristics of asset being measured
- How the asset contributes to future cashflows?
- Whether there is measurement uncertainty?
What does effective communication in financial statements require?
- Focussing on objectives and principles rather than on rules
- Classifying Information in a manner that groups similar items
- Aggregating Information in such a way that it is not obscured either by unnecessary detail or excessive summarisation
What is the argument for reclassification to the profit and loss?
It ensures that profit and loss includes all relevant gains and losses. No items of income and expenses are excluded from the profit or loss permanently
What are the 3 arguments against reclassification?
- Results in profit or losses being recorded in a different period from the change
- Creates complexity and may lead to confusion
- May lead to earnings management
What is the definition of an asset?
A present economic resource by the entity as a result of past events.
What is the definition of a liability?
A present obligation of the entity to transfer an economic resource as a result of past events.
What is the definition of expenses?
Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders or equity claims.
What’s the impact of the Conceptual Framework?
There may be more liabilities
What is an economic resource?
A right that has the potential to produce economic benefits
