Topic 10- Regulatory and conceptual framework Flashcards
what is the IFRS foundation structure diagram
IFRS Foundation = IASB
IFRIC + IFRSAC feed into the IASB
what does the advisory council do and their objectives
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.
Each standard is preceded by an ___ which gives the public the opportunity to comment
exposure draft
This is published before a standard is issued to which the public can come back with any comments
at any stage of the setting standards process, the board might issue a ____
discussion paper
what does the interpretations committee /what do they do do
The IFRS Interpretations Committee was originally established in 2002. They provide guidance on specific practical issues in the interpretation of IFRS.
what arethe interpretations committee responsibilities
The responsibilities of the IFRS IC:
- To review on a timely basis, newly identified financial reporting issues not specifically addressed in IFRSs
- 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
give an example of a financial reporting issue not addressed in IFRS
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
explain the standard setting process
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.
what is the conceptual framework
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
What are the contents of a conceptual framework
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
1) what is the objective of financial statements
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
2) what are the underlying assumptions the financial statements are prepared under
Going concern
accruals basis
what is accruals basis
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.
what is going concern
the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future
3) what does the Qualitative characteristics of financial statements do
qualitative characteristisc are the attributes that make the information provided in the FS useful to users
3) what are the 3 groups that include Qualitative characteristics of financial statements
1) Fundamental characteristics
2) Enhancing characteristics
3) Other accounting concepts
what is fundamental characteristics i.e. what
1) Relevance (includes materiality)
2) Faithful representation
what is relevance and qualities that make information relevant
there are 3
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)
what is Faithful representation (definition)
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.
what qualities that make information Faithful represent
there are 3
Complete
Neutral (objectivity)
Free from error
what is neutrality
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.
what is free from error
– means there are no errors or omissions in the description of and no errors in the process by
which the financial information was produced.
what are the enhancing characteristics
i.e. list
Comparability
Verifiability
Timeliness
Understandability
what is verifiability
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.
what is Comparability
users must be able to compare the financial statements of an entity from period to period and from company to company
what is Timeliness
having information available to decision-makers in time to be capable of influencing their decisions.
what is Understandability
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
what are the three other accounting concepts i.e. list
Fair presentation
Consistency
The business entity concept
what is Fair presentation
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
what is Consistency
the presentation and classification of items in the financial statements should stay the same from period to the next.
what is The business entity concept
– to treat the business separate to its owner, this means the transactions of the owners should never be mixed with the business transactions.
4_ what are the Elements of financial statements
list them
Assets Liabilities Equity Income Expenses
what is definition of an asset
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
what is definition of a liability
A liability is a present obligation of the entity to transfer an economic resource as a result of past events
what is the definition of equity
Equity is the residual interest in the assets of the entity after deducting all it’s liabilities
Equity= Assets- Liabilities
what is the definition of income
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
what is the definition of expenses
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
5) when are the elements of finaancial statements recognised
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
6- There are a number of measurement bases mentioned in the IASB Conceptual Framework.
What are the 4 types
- Historical cost
- Current cost
- Realisable value (fair value)
- Present value in use
what is capital maintenance and what types are there
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
what is physical capital maintenance
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)
what is Financial capital maintenance and what types are there
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)
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
defines users as existing and potential investors, lenders and other creditors
List 3 purpose of the IASB’s conceptual framework
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
