Conceptual Framework

Question 1

What do you remember about a Principles-based system?

Answer 1

A principles-based system (CF is based on Principles)
consists of principles
more flexible
requires judgement

Question 2

What do you remember about a Rules-based system?

Answer 2

A rules-based accounting system
consists of rules
less flexible
more comparable and consistent
very descriptive

Question 3

Name the Fundamental characteristics of good information

Answer 3

1) Faithful Representation
2) Relevance

Question 4

What does Faithful Representation mean?

Answer 4

FUNDAMENTAL CHARACTERISTICS (without them = USELESS)
1) Faithful Representation
Substance over form
Represents economic phenomena

Question 5

State examples of Faithful representation

Answer 5

1. Sell + buy back = LOAN
2. Convertible Loans is always split between Equity (capital) + Debt (interest)
3. No 0% finance - So interest is always taken out of the inflated cost price
4. Redeemable Preference Shares - shown as debt - never equity
5. Factored Receivables WITH recourse (“FULL recourse”) - There are still receivables until the debtor has paid
6. Factored Receivables WITHOUT recourse - recognized

Question 6

What do you know about Relevance?

Answer 6

2) Relevance
Info should be predictive or confirmatory e.g. Discontinued column

Question 7

What do you know about Enhancing Characteristics?

Answer 7

ENHANCING CHARACTERISTICS (without them = LESS USEFUL)
1) Comparable - Good for Trend analysis,
Change in A/C Policy means changing the comparatives too
2) Timely - In time for decisions
3) Verifiable - This allows independent observers to agree that a transaction is faithfully represented
4) Understandable - Understandability is enhanced when the information is:
1. classified
2. characterised
3. presented clearly and concisely