2. The Conceptual Framework for Financial Reporting

Question 1

What are the six subheadings of the Conceptual Framework?

Answer 1

1. The objective of general purpose financial reporting
2. The qualitative characteristics
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Presentation and disclosure
6. The concepts of capital and capital maintenance

Question 2

Full Conceptual Framework for financial reporting

Answer 2

Question 3

Purpose of the Conceptual Framework?

Answer 3

• to assist the IASB in the development of future IFRS and in its review of existing IFRS (and IAS);
• to provide a basis for reducing the number of alternative accounting treatments permitted by IFRS, thus assisting the harmonisation of regulations, accounting standards and procedures relating to financial reporting;
• to assist national standard setting bodies in developing national standards;
• to assist preparers of financial statements in applying IFRS, or when dealing with topics that are not covered by a standard or where there is choice of accounting policy;
• to assist auditors in forming an opinion as to whether financial statements comply with IFRS;
• to assist users of financial statements in interpreting the financial statements prepared in compliance with IFRS; and
• to provide those who are interested in the work of the IASB with information about its approach to the formulation of
  IFRS.

Question 4

1. Objective and general purpose of financial reporting
   Purpose of financial reporting?

Answer 4

Investors
Employees + management
Lenders
Suppliers
Customers
Governments and agencies
The public

Question 5

2. The qualitative characteristics
   What are the fundamental qualitative characteristics of IASB CF?

Answer 5

Relevance
= capable of influencing the decisions of users

Faithful Representation
= FI must meet three criteria: completeness, neutrality and be free from error.

* Completeness: all information that users need to understand the item is given.
* Neutral or unbiased: there is no bias in the selection or presentation of information.
* Free from error: there are no omissions, errors or inaccuracies in the process to produce the information

Prudence = exercise of caution when making judgements under conditions of uncertainty. It supports neutrality of info not overstate A+I or understate L+E

Measurement uncertainty is a factor that can affect faithful representation

The idea of ‘substance over form’ is key for the faithful representation of financial information

Question 6

2. The qualitative characteristics
   What are the enhancing fundamental qualitative characteristics?

Answer 6

Comparability
Accounting methods applied consistently
Important for comparability of financial statements

Verifiability
Info in fs checked/ demonstrated to be true, accurate or justified

Timeliness
Important due to decision making needs of users of fs

Understandability
Information should be understandable through appropriate classification, characterisation and presentation of info

Question 7

3. Financial statements and the reporting entity
   Under the FS and reporting entity, what is referred to?

Answer 7

Reporting Period
Financial statements are prepared for a specified period of time, referred to as a ‘reporting period’ - typically 1 year

Going Concern
FS prepared on a going-concern basis
IAS 1 guidance on GC assumption

Question 8

4. Elements of financial statements
   Explain the elements and the two subheadings?

Answer 8

Elements of SOFP = *Assets, *Liabilities and Equity
Elements of SOPL = Income + Expense

Categoristion of Assets + Liabilities (c/nc etc)

1. Recognition and derecognition
2. Measurement
   Historical cost
   Current value basis

Question 9

Recognition and derecognition

Answer 9

Recognition
Item meeting definition of element (asset, liability etc)

Recognised when their recognition provides users of fs with info that is both relevant and a faithful representation

Must be recognised for inclusion on SOFP or SOPL

Question 10

Asset recognition criteria?

Answer 10

• a present economic resource with potential to produce future economic benefits
• its access or use is presently controlled by the entity

Question 11

Liability recognition criteria?

Answer 11

A liability is a present obligation of the entity to transfer an economic resource or provide services to other entities as a
result of past events.

Question 12

Equity recognition criteria?

Answer 12

Equity is the residual interest in the assets of the entity after deducting all of its liabilities.

Question 13

Income recognition criteria?

Answer 13

Income = revenue and gains
Increase in assets or reduction in liabilities of the entity, which
results in an increase in equity

Revenue = sales, fees, royalties, rent received
Gains = disposing of nc asset, finance income (dividends and interest)

Question 14

Expenses recognition criteria?

Answer 14

Day-to-day expenses
Loss of future economic benefits (< in assets, > in liabilities’)

Question 15

How you would report a transaction that fails to satisfy the recognition criteria?

Question 16

What is derecognition?

Answer 16

Criteria on when to remove or derecognise assets and liabilities in financial statements.

Question 17

What is the measurement historical cost?

Answer 17

Historical price of transaction - price paid or cost incurred to acquire or create an asset

Assets and liabilities presented at historical cost reflect the prices at the dates of transactions, rather than at the date of the fs

Guidelines in:
* IAS 16 (Property, Plant and Equipment)
* IAS 38 (Intangible Assets)
* IAS 40 (Investment Property)

Question 18

What is the measurement current value basis?

Answer 18

Based on current monetary value, updated to reflect conditions at the measurement date.

Measurement bases include:
Fair value
Fair value refers to the estimated current value of an asset or liability, reflecting the price a willing buyer and seller would agree upon in an orderly transaction
IFRS 13 IAS 40

Value in use for assets and fulfilment value for liabilities
The value that reflects entity-specific current expectations about the amount, timing and uncertainty of future cash flows
IAS 36

Current cost
Reflects the current amount required to be paid to acquire an equivalent asset or received to settle an equivalent obligation or liability.

Question 19

What is presentation and disclosure?

Answer 19

Info about assets, liabilities, equity, income and expenses is communicated through presentation and disclosure in the financial statements.

Effective communication. SF are relevant and faithfully represented.

SOPL and OCI

OCI

Recycling

Question 20

What is the concept of capital maintenance?

Answer 20

Profit recognised if total value of assets at the end of accounting period exceeds value at the beginning.

Financial capital maintenance

Physical capital maintenance

Question 21

What is the financial concept of capital maintenance?
(most organisations use)

Answer 21

Capital of the entity, linked to the net assets, which is the equity of the entity

The financial statements can be viewed by users as:
Opening equity (net assets) + profit – distributions = closing equity (net assets).
Where: assets – liabilities = equity
The financial concept of capital maintenance can be further categorised as
* money financial capital maintenance - considers time value/ inflation

• real financial capital maintenance - time value ignored

Question 22

What is the physical concept of capital maintenance?

Answer 22

Capital is regarded as its production capacity

This production capacity may be based on units of output. The main concern of users of these financial statements is
with the maintenance of the operating capability of the entity. T