Topic 10- Regulatory and conceptual framework

Question 1

what is the IFRS foundation structure diagram

Answer 1

IFRS Foundation = IASB

IFRIC + IFRSAC feed into the IASB

Question 2

what does the advisory council do and their objectives

Answer 2

The IFRS Advisory Council provides a forum for organisations and individuals to participate in the standard-setting process.

It is way the IASB consults with the outside world.

The objectives of the IFRS Advisory Council Care:

▪ To give advice to the IASB on agenda decisions and priorities in its work;
▪ To inform the IASB of the views of organisations and individuals on the Council on major standard-setting
projects;
▪ To give other advice to the Board or to the Trustees.

Question 3

Each standard is preceded by an ___ which gives the public the opportunity to comment

Answer 3

exposure draft

This is published before a standard is issued to which the public can come back with any comments

Question 4

at any stage of the setting standards process, the board might issue a ____

Answer 4

discussion paper

Question 5

what does the interpretations committee /what do they do do

Answer 5

The IFRS Interpretations Committee was originally established in 2002. They provide guidance on specific practical issues in the interpretation of IFRS.

Question 6

what arethe interpretations committee responsibilities

Answer 6

The responsibilities of the IFRS IC:

1. To review on a timely basis, newly identified financial reporting issues not specifically addressed in IFRSs
2. To clarify issues where unsatisfactory or conflicting interpretations have developed or seem likely to develop in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate treatment.

They may also go to the IASB and say “we are currently providing guidance on X, but you may potentially need to issue a new standard

Question 7

give an example of a financial reporting issue not addressed in IFRS

Answer 7

IAS 37 Provision/contingent..

You are not allowed to recognise a contingent asset or a liability.

However, on consolidation if a subsidiary has a contingent asset/liability we actually recognise this because we have to use fair values on consolidation

Question 8

explain the standard setting process

Answer 8

The IASB prepares IFRSs in accordance with due process.

▪ Establishment of a consultative group to give advice on the issues arising on the project. The IASB will consult with this committee and IFRS advisory council throughout the process.

▪ On acceptance of a project a steering committee is set up (chaired by board members);

▪ On major projects, the IASB develops and publishes a Discussion Document for public comment (1st draft);

▪ Following the receipt and review of comments, an Exposure Draft is produced for public comment;

▪ Following the receipt and review of comments, the final IFRS will be issued.

Question 9

what is the conceptual framework

Answer 9

It is a

• Coherent system of interrelated objectives and fundamental principles
• A framework which prescribes the nature, function and limits of financial accounting and financial statements

without CF, standard setters will find it difficult to produce account standards that are consistent with one another

Question 10

What are the contents of a conceptual framework

Answer 10

The 2018 revised Conceptual Framework sets out:

–> objective of general purpose financial reporting;

–> qualitative characteristics of useful financial information;

–> a description of the reporting entity and its boundary;

–> definitions of an asset, a liability, equity, income and expenses ;

–> criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition);

–> measurement bases and guidance on when to use them;

–> concepts and guidance on presentation and disclosure; and

–> concepts relating to capital and capital maintenance

Question 11

1) what is the objective of financial statements

Answer 11

To provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making decisions.

defines users as existing and potential investors, lenders and other creditors

Question 12

2) what are the underlying assumptions the financial statements are prepared under

Answer 12

Going concern

accruals basis

Question 13

what is accruals basis

Answer 13

the effects of transactions and other events are recognised when they occur and not when cash transfers.

They are reported in the financial statements in the period to which they relate.

Question 14

what is going concern

Answer 14

the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future

Question 15

3) what does the Qualitative characteristics of financial statements do

Answer 15

qualitative characteristisc are the attributes that make the information provided in the FS useful to users

Question 16

3) what are the 3 groups that include Qualitative characteristics of financial statements

Answer 16

1) Fundamental characteristics
2) Enhancing characteristics
3) Other accounting concepts

Question 17

what is fundamental characteristics i.e. what

Answer 17

1) Relevance (includes materiality)

2) Faithful representation

Question 18

what is relevance and qualities that make information relevant

there are 3

Answer 18

For information to be useful, information must be relevant to the decision-making needs of the user.

1) Influences economic decisions of user (information is capable of making a difference in the decisions made by users)
2) Predictive and or Confirmatory Value (Relevant information assists in the predictive ability of financial statements.
(past) information should be presented in a manner that assists users to assess an entity’s ability to take advantage of opportunities and react to adverse situations.
3) Materiality is a threshold or cut-off point for information whose omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. (Considered by preparers and auditors not the standard setters)

Question 19

what is Faithful representation (definition)

Answer 19

a transaction or other event is faithfully represented if the way in which it is recognised, measured or presented in the financial statements corresponds closely to the effect of that transaction or event.

Faithful representation means presenting transactions according to their economic substance rather than their legal form.

Financial statements will generally show a fair presentation when

• They conform with accounting standards
• They conform with the any relevant legal requirements
• They have applied the qualitative characteristics from the Framework.

Question 20

what qualities that make information Faithful represent

there are 3

Answer 20

Complete
Neutral (objectivity)
Free from error

Question 21

what is neutrality

Answer 21

information is not neutral if it has been selected or presented in such a way as to influence the making of a decision or judgement in order to achieve a predetermined result or outcome.

Question 22

what is free from error

Answer 22

– means there are no errors or omissions in the description of and no errors in the process by
which the financial information was produced.

Question 23

what are the enhancing characteristics

i.e. list

Answer 23

Comparability
Verifiability
Timeliness
Understandability

Question 24

what is verifiability

Answer 24

Financial information is verifiable when it enables knowledgeable and independent observers to reach a consensus on whether a particular depiction of an event or transaction is a faithful representation.

Question 25

what is Comparability

Answer 25

users must be able to compare the financial statements of an entity from period to period and from company to company

Question 26

what is Timeliness

Answer 26

having information available to decision-makers in time to be capable of influencing their decisions.

Question 27

what is Understandability

Answer 27

assuming users have a reasonable knowledge of business and a willingness to study information with reasonable diligence, the financial statements should be readily understandable to users.

Understandability is enhanced when the information is:

classified

characterised

presented clearly and concisely

Question 28

what are the three other accounting concepts i.e. list

Answer 28

Fair presentation

Consistency

The business entity concept

Question 29

what is Fair presentation

Answer 29

For this to happen the following is required

▪ Compliance with accounting standards

▪ Presentation of information in a manner which provides relevant, reliable, comparable and understandable information

▪ Additional disclosure when required

Question 30

what is Consistency

Answer 30

the presentation and classification of items in the financial statements should stay the same from period to the next.

Question 31

what is The business entity concept

Answer 31

– to treat the business separate to its owner, this means the transactions of the owners should never be mixed with the business transactions.

Question 32

4_ what are the Elements of financial statements

list them

Answer 32

Assets
Liabilities
Equity
Income
Expenses

Question 33

what is definition of an asset

Answer 33

An asset is a present economic resource controlled by the entity as a result of past events

Note- OWNERSHIP is not mentioned in the definition as it is possible to obtain control without even becoming the owner e.g. through a lease agreement

Question 34

what is definition of a liability

Answer 34

A liability is a present obligation of the entity to transfer an economic resource as a result of past events

Question 35

what is the definition of equity

Answer 35

Equity is the residual interest in the assets of the entity after deducting all it’s liabilities

Equity= Assets- Liabilities

Question 36

what is the definition of income

Answer 36

Income is increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims

Question 37

what is the definition of expenses

Answer 37

Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims

Question 38

5) when are the elements of finaancial statements recognised

Answer 38

Elements are recognised ONLY if recognition provides users with useful information

In other words, recognition must provide

• Relevant information
• a faithful representation of the asset or liability and resulting income, expenses or equity movements

Question 39

6- There are a number of measurement bases mentioned in the IASB Conceptual Framework.

What are the 4 types

Answer 39

• Historical cost
• Current cost
• Realisable value (fair value)
• Present value in use

Question 40

what is capital maintenance and what types are there

Answer 40

Capital maintenance is a theoretical concept which tries to ensure that excessive dividends are not paid in times of changing prices

1) Physical capital maintenance
2) Financial Capital maintenance

Question 41

what is physical capital maintenance

Answer 41

PCM sets aside profits in order to allow the business to continue to operate at current levels of activity. In practice, this tends to mean adjusting opening capital by SPECIFIC price changes ( I.e. specific inflation)

Question 42

what is Financial capital maintenance and what types are there

Answer 42

FCM sets aside profits in order to preserve the value of shareholders’ funds in either monetary terms (money financial capital) or constant purchasing power (real financial capital).

Real Financial capital maintenance (INFLATION)

Money (monetary) Financial capital maintenance- (will be what it is in CURRENT terms)

Question 43

To provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making decisions.

Who are the users

Answer 43

defines users as existing and potential investors, lenders and other creditors

Question 44

List 3 purpose of the IASB’s conceptual framework

Answer 44

To assist the board in the preparation and review of IFRS Standards

To assist the auditors in forming an opinion on whether FS comply with IFRS standards

To assist in determining the treatment of items not covered by an existing IFRS standards