1 Conceptual framework Flashcards
What is the conceptual framework?
A conceptual framework,is a statement of generally accepted theoretical principles which form the frame of reference for financial reporting.
What are the advantages of a conceptual framework?
Some standards may concentrate on profit or loss whereas some may concentrate on the valuation of net assets (statement of financial position)
As stated above, the development of certain standards (particularly national standards) have been subject to considerable political interference from interested parties. Where there is a conflict of interest between user groups on which policies to choose, policies deriving from a conceptual framework will be less open to criticism that the standard-setter buckled to external pressure
The situation is avoided whereby standards are developed on a patchwork basis, where a particular accounting problem is recognised as having emerged, and resources were then channelled into standardising accounting practice in that area, without regard to whether that particular issue was necessarily the most important issue remaining at that time without standardisation
What are the disadvantages of a conceptual framework?
(a) Financial statements are intended for a variety of users, and it is not certain that a single conceptual framework can be devised which will suit all users. (b) Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose (and with different concepts as a basis). (c) It is not clear that a conceptual framework makes the task of preparing and then implementing standards any easier than without a framework.
GAAP signifies all the rules, from whatever source, which govern accounting. In individual countries this is seen primarily as a combination of:
National company law National accounting standards Local stock exchange requirements
Although those sources are the basis for the GAAP of individual countries, the concept also includes the effects of non-mandatory sources such as:
International accounting standards Statutory requirements in other countries
The preface emphasises the way financial statements are used to make economic decisions and thus financial statements should be prepared to this end. The types of economic decisions for which financial statements are likely to be used include the following.
Decisions to buy, hold or sell equity investments Assessment of management stewardship and accountability Assessment of the entity’s ability to pay employees Assessment of the security of amounts lent to the entity Determination of taxation policies Determination of distributable profits and dividends Inclusion in national income statistics Regulations of the activities of entitied
The introduction gives a list of the purposes of the Conceptual Framework:
(a) To assist the Board in the development of future IFRSs and in its review of existing IFRSs (b) To assist the Board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs (c) To assist national standard-setting bodies in developing national standards (d) To assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS (e) To assist auditors in forming an opinion as to whether financial statements comply with IFRSs (f) To assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs (g) To provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs
The Conceptual Framework deals with:
(a) The objective of financial statements (b) The qualitative characteristics that determine the usefulness of information in financial statements (c) The definition, recognition and measurement of the elements from which financial statements are constructed (d) Concepts of capital and capital maintenance
The Conceptual Framework states that:
‘The objective of general purpose financial reporting is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.’
These users need information about:
The economic resources of the entity The claims against the entity Changes in the entity’s economic resources and claims
What is accrual basis?
Accruals basis. The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Explain going concern?
Going concern. The entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.
The two fundamental qualitative characteristics are
relevance and faithful representation
Relevance is?
Relevance. Relevant information is capable of making a difference in the decisions made by users. It is capable of making a difference in decisions if it has predictive value, confirmatory value or both.
Materiality is?
Materiality. Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.
Faithful representation is?
Faithful representation. Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it purports to represent.
