2: The Conceptual Framework Flashcards
(29 cards)
purpose of the conceptual framework
- helping the IASB develop IFRS which are based on consistent concepts
- assisting those preparing FS to develop consistent accounting policies where no standard applies
- assisting all parties to understand and interpret standards
status of the conceptual framework
not an accounting standard
looking at foundations on which financial reporting is based
the objective of general purpose financial reporting
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
2 fundamental qualitative characteristics
relevance
faithful interpretation
fundamental qualitative characteristics: relevance
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
fundamental qualitative characteristics: faithful representation
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
4 enhancing qualitative characteristics
comparability
verifiability
timeliness
understanding
enhancing qualitative characteristics: comparability
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
enhancing qualitative characteristics: verifiability
information must be verifiable and capable of being interrogated/tested
direct or indirect verification
enhancing qualitative characteristics: timeliness
tradeoff between having information sooner and potentially less reliable, compared to waiting longer and having it be more reliable
enhancing qualitative characteristics: understandability
information should be presented in the best way possible so it is clear and concise
cost constraint on useful financial reporting
cost to producing information - balance between cost of the information and its use
going concern
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
5 elements of financial statements
assets (financial position)
liabilities (financial position)
equity (financial position)
income (financial performance)
expenses (financial performance)
asset
present economic resource controlled by the entity as a result of past events
liability
present obligation of an entity to transfer an economic resource as a result of past events
equity
assets - liabilities = equity
residual interest in the assets of the entity after deducting all liabilities
income
increases in assets or decreases in liability that result in increases in equity, other than those relating to contributions from holders of equity claims
expenses
decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions of holders of equity claims
recognition criteria
transaction meets the definition of an element
it provides useful information
- relevant, faithful representation
- cost-effective
derecognition
control of all or part of an asset is lost
no longer a present obligation in respect of all or part of a liability
2 measurement bases defined in the conceptual framework
historical cost
current value (which has 3 further measurement bases)
measurement: historical cost
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
measurement: current value
fair value
value in use (for assets) and fulfilment value (for liabilities)
current cost