The Qualitative Characteristics of Financial Information Flashcards
Conceptual Framework for Financial Reporting
- IFRS are based on these
- addresses underlying concepts
- assist to develop the standards
- assist when no standard applies/allows a choice
- assist for all standards to be understood/interpreted
Chapter 1 of Conceptual Framework
The objective of general purpose financial reporting
Chapter 2 of Conceptual Framework
Qualitative characteristics of useful financial info
Chapter 3 of Conceptual Framework
Financial Statements and the reporting entity
Chapter 4 of Conceptual Framework
The elements of the financial statements
One important assumption that Conceptual Framework sets out
Financial Statements prepared on the assumption that entity is a Going Concern
Going Concern
- entity will continue in operation for foreseeable future (12 months)
- has no intention/need to enter into liquidation/cease trading
What should happen if the going concern basis is not followed/true?
- statement must state why not a going concern
- prepared differently and describe basis used (break up value of assets)
Accrual Accounting
-effects of transaction/events are recognised when they occur and so recorded in that period that they relate to
- not recorded when cash received or paid but as revenue/expenses earned/incurred
- not an underlying assumption but in Conceptual Framework
Matching Convention
- revenue earned must be matched against expenditure incurred in earning it
- sales matches with cost of sale
net realisable value
- likely eventual sales price less any expenses incurred to make them saleable
- how assets recorded if at break-up value if not a going concern
Qualitative characteristics of financial info
attributes that make info in statement useful to users
Fundamental Qualitative Characteristics
Relevance
Faithful Representation
Enhancing Qualitative Characteristics
Comparability
Verifiability
Timeliness
Understandability
Relevance
- info is capable of making a difference in decisions made by users
- may have predictive value - future
- may have confirmatory value- confirm past
- the above are often interrelated
- affected by nature/materiality
Materiality
- material if omitting/misstating could influence decisions
- immaterial = too trivial to affect understanding
- important so that time/money not wasted open excessive detail
- context is important
Aggregation
- adding together/lumping of assets/liabilities/equity/income or expenses that have shared characteristics and included in same classification
e.g. sales as one figure not list of transactions - often summarised info and more detail in notes
Offsetting
- when asset and liability recognised/measured as separate unit of account but groups them into single net amount
- generally not appropriate as results in dissimilar items classified together
Faithful Representation
- reports represent economic phenomena in words/numbers
- info must be complete, neutral, free from error
Complete depiction
- all info necessary
- for user to understand phenomenon depicted
- include all necessary descriptions/explanations
Neutral depiction
- without bias
- not slanted/weighed/emphasised/de-emphasised/otherwise manipulated
- to be received favourably/unfavourably
- supported by prudence
Prudence
- exercise of caution when making judgements
- assets/income not overstated
liabilities/expenses not understated
Free from Error
- no errors/omissions in description of phenomenon
- process used to produce reports have no errors
- free from material error
Substance over Form
- characteristic of faithful representation
- commercial reality take precedent over legal form
- examples:
- sale with a right of return - not recognise sale until sure that it is a genuine sale
- Consignment arrangements- once entity has control over asset then record as asset
Comparability
- enable users to identify/understand similarities/differences
- info more useful if it can be compared
- entities must disclose their accounting policies
- over different periods/entities
Verifiability
- assure users that info faithfully represented
- info can be independently verified and all reach consensus
direct = counting cash
indirect = checking inputs/outputs
Timeliness
- info available to decision makers in time to be capable of influencing decisions
- has to be a balance between timeliness vs reliable info
- overriding consideration is best way to satisfy decision making
Understandability
- classifying, characterising, presenting info clearly/concisely makes it understandable
- assume users have reasonable knowledge
one line for revenue and then further detail may be provided - can’t exclude info just to make easier to understand as then would be incomplete
Consistency
- presentation/classification of items in statement should stay the same from one period to the next
UNLESS - change in operation
- a review/feedback
- required by IFRS
Business Entity
- financial statements always treat business as separate entity from owner
- applies whether or not business is separate in law
Equity = Net Assets
(breakdown of this equation)
Assets - Liabilities = share capital + reserves
Revenue
income that arises in course of ordinary activities of entity
Gains
other items meeting definition of income
Duality
- double entry bookkeeping
- financial transactions have two affects on general ledger accounts
What are the two measurement bases? and how to choose?
- historical cost
- current value
- choice depends on what info primary users of statements require/useful
Historical Cost
- for asset - cost that was incurred when acquired
- for liability - value of the consideration received when incurred
- traditional
- can be modified by revaluation in some instances for certain assets (buildings)
- reliable info
Adv.s of using historical costs
- objective as not so easy to manipulate
- reliable as can be verifiable, exist on documents
- statements of financial position/cash flows consistent
- readily understood
Current Value and bases
- uses updated info to reflect conditions at measurement date
- fair value
-Value in Use/Fulfilment Value - Current Cost
-relevant info
Fair Value
- price would be received to sell an asset/paid to transfer liability
- in orderly transaction on open market
- at measurement date
- when no active market can use estimates of future cash flows/time value of money
Value in use
- present value of the cash flows that an entity expects to derive from use/disposal of an asset
- can’t be directly observed
- looks at likely future value
- entity-specific
Fulfilment Value
- present value of cash that entity expects to be obliged to transfer as it fulfils a liability
- entity expects to incur to fulfil a liability
- can’t be directly observed
- entity-specific
Current Cost for Assets
- cost of equivalent asset at the measurements date comprised of consideration that would be paid plus transaction costs
Current Cost for Liabilities
- consideration that would be received for an equivalent liability at measurement date minus transaction costs incurred
Adv.s of Current value
- useful guide for management to decide on hold/sell assets/settle liabilities as uses expected benefits
- relevant to needs of users- stability/vulnerability of business
- evaluate performance of management
- judge future prospects
