2: The Conceptual Framework

Question 1

purpose of the conceptual framework

Answer 1

1. helping the IASB develop IFRS which are based on consistent concepts
2. assisting those preparing FS to develop consistent accounting policies where no standard applies
3. assisting all parties to understand and interpret standards

Question 2

status of the conceptual framework

Answer 2

not an accounting standard

looking at foundations on which financial reporting is based

Question 3

the objective of general purpose financial reporting

Answer 3

key thing is to provide financial information

information needs to be useful to several user groups: existing/potential investors, lenders and other creditors

information on economic resources an entity has as well as claims against the entity, and how efficiently/effectively the entity’s management and governing board have run the business

accruals accounting

Question 4

2 fundamental qualitative characteristics

Answer 4

relevance

faithful interpretation

Question 5

fundamental qualitative characteristics: relevance

Answer 5

information has to have predictive, confirmatory value or both

materiality is fundamental to this - information and how relevant it is is affected by the nature of information but also materiality
- information is material if its omission or misstatement could influence the decision users make

Question 6

fundamental qualitative characteristics: faithful representation

Answer 6

where the legal form and substance differ, it is more important that the FS shows the substance since you want a faithful representation

statements should be complete, neutral and free from error

Question 7

4 enhancing qualitative characteristics

Answer 7

comparability

verifiability

timeliness

understanding

Question 8

enhancing qualitative characteristics: comparability

Answer 8

information is more useful if we can compare it

consistency is about the use of the same methods for the same items from period to period within the same entity

Question 9

enhancing qualitative characteristics: verifiability

Answer 9

information must be verifiable and capable of being interrogated/tested

direct or indirect verification

Question 10

enhancing qualitative characteristics: timeliness

Answer 10

tradeoff between having information sooner and potentially less reliable, compared to waiting longer and having it be more reliable

Question 11

enhancing qualitative characteristics: understandability

Answer 11

information should be presented in the best way possible so it is clear and concise

Question 12

cost constraint on useful financial reporting

Answer 12

cost to producing information - balance between cost of the information and its use

Question 13

going concern

Answer 13

FS normally prepared with the underlying assumption of going concern

business expected to continue in the foreseeable future

opposite would be the break up basis where the business is in financial trouble
- all assets become current

Question 14

5 elements of financial statements

Answer 14

assets (financial position)

liabilities (financial position)

equity (financial position)

income (financial performance)

expenses (financial performance)

Question 15

asset

Answer 15

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

Question 16

liability

Answer 16

present obligation of an entity to transfer an economic resource as a result of past events

Question 17

equity

Answer 17

assets - liabilities = equity

residual interest in the assets of the entity after deducting all liabilities

Question 18

income

Answer 18

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

Question 19

expenses

Answer 19

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

Question 20

recognition criteria

Answer 20

transaction meets the definition of an element

it provides useful information
- relevant, faithful representation
- cost-effective

Question 21

derecognition

Answer 21

control of all or part of an asset is lost

no longer a present obligation in respect of all or part of a liability

Question 22

2 measurement bases defined in the conceptual framework

Answer 22

historical cost

current value (which has 3 further measurement bases)

Question 23

measurement: historical cost

Answer 23

definite and certain

historical cost + any directly attributable cost to get it to where it needs to be and set up where it needs to be

Question 24

measurement: current value

Answer 24

fair value

value in use (for assets) and fulfilment value (for liabilities)

current cost

Question 25

current value: fair value

Answer 25

price you expect to receive if you sell an asset or the amount you expect to pay if you transfer a liability in an orderly transaction sometimes no market exists - look at future cash flows and discount them to adjust for time value of money more judgemental but more relevant

Question 26

current value: value in use (assets) and fulfilment value (liabilities)

Answer 26

present value of future cash flows fulfilment value as the present value of the cash you have to pay to effectively get out of the liability

Question 27

current value: current cost

Answer 27

what would it cost you to buy an equivalent asset more relevant but less reliable

Question 28

2 concepts relating to capital

Answer 28

1. financial concept of capital - capital as net assets or equity of an entity 2. physical concept of capital - capital as the productive capacity/capability of the entity

Question 29

capital maintenance

Answer 29

profit results if physical productive capacity of the business is greater at year-end than it was at the beginning of the year, excluding shareholder transactions