Chapter 1: Framework

Question 1

What does the Conceptual Framework describe?

Answer 1

It describes the objective of, and concepts for, general purpose financial accounting

Question 2

What is the purpose of the Conceptual Framework?

Answer 2

• assist the IASB to develop IFRSs
• assist preparers to develop accounting policies
• assist all other parties to understand and interpret the standards

Question 3

Is the Conceptual Framework IFRS?

Answer 3

No, it is not. Nothing in the framework overrides any specific IFRS. Where there is a conflict, the requirements of the IFRS prevail the framework.

Question 4

What is the objective of general purpose financial reporting?

Answer 4

• to provide useful financial information to existing and potential, lenders and other creditors in making decisions about providing resources to the entity

Question 5

What information do potential lenders and creditors need about an entity?

Answer 5

• economic resources
• claims against the entity
• changes in those resources and claims
• how efficiently and effectively those resources were used by the management and governing board

Question 6

What are the fundamental qualitative characteristics of financial information and define them.

Answer 6

• Relevance: Information should be relevant to the decision making needs of a user. Information is relevant if it helpls users in prediciting future trends (predictive value), or confirming or correcting any past predictions they have made (confirmatory value)
• Faithful representation: Information is complete, neutral and free from error
  • > Complete: includes all info necessary for a user t understand the phenomenon being depicted, ann necessary descriptions and explanations
  • > Neutral: without bias in the selection or prresentation of financial information. Exercise of prudence : assets and income are not overstated and liabilioties and expenses are not understated.
  • > Free from error: there are no errors or omissions in the description of the phenomenon and the process used to produce thhe reported information has been selected and applied with no errors. However, it doesnt mean perfectly accurate in all aspects.

Question 7

What are the enhancing qualitative characteristics of financial information and define them.

Answer 7

They enhance the usefulness of information that is already relevant and faithfully represented.

1. Comparability: can be compared with similar info about other entities and with similar info about the same entity for another period or date. Consistency is important: use of the same methods for the same items either from period to period or in a single period across entities
2. Verifiability: different and knowledgeable and independent observers could reach consensus, although not complete agreement, that a particular depiction is a faithful representation. Information is verifiable if it can be audited
3. Timeliness: having information available to decision-makers in time to be capable of influencing their decisions. It shouldn’t be significantly delayed or else it will be of little or no value
4. Understandability: classifying, characterizing, and presenting information clearly and concisely. Some phenomena might be too complex to understand, but excluding them would lead to incomplete and possibly misleading. Thus, financial reports are prepared for users with a reasonable knowledge of business and economic activities

Question 8

What kind of costs are incurred from financial reporting and who bears those costs?

Answer 8

Providers: costs of collecting, processing, verifying, and disseminating financial information
Users ultimate bear those costs in the form of reduced returns

Question 9

What are financial statements and what are its objective

Answer 9

Financial statements provide information about economic resources of the reporting entity, claims against the entity and changes in those resources and claims

Objective: to provide financial information about the reporting entity’s assets, liabilities, equity, income, expenses that are useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and in assessing management’s stewardship of the entity’s economic resources

Question 10

What is Going Concern?

Answer 10

financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future
Thus, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. If such intention or need exist, FS have to be prepared on a differen basis

Question 11

What is a reporting entity?

Answer 11

An entity that is required, or chooses, to prepare financial statements. Not necessarily a legal entity. Can be single or a portion of an entity or more than one entity.

Question 12

What are consolidated financial statements, unconsolidated financial statements, and combined financial statements?

Answer 12

• when a reporting entity comprises both the parent and its subsidiaries
• when a reporting entity is the parent alone
• when a reporting entity comprises two or more entities that are not linked by a parent-subsidiary relationship

Question 13

Define assets and control

Answer 13

Present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

Control links the economic resources to the entity: An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it

Question 14

Define liabilities

Answer 14

Three criteria that must be satisfied:

1. entity has an obligation
   - > a duty or responsibility that an entity has no practical ability to avoid. Legal obligations are legally enforceable by the party to whom they are owned.
2. obligation is to transfer an economic resource, which include
   - > to pay cash
   - > to deliver goods or provide services
   - > exchange economic resources with another party on favourable terms
   - > transfer economic resource if a specified ucnertain future event occurs
   - > issue a financial instrument is that instrument will oblige the entity to transfer an economic resource
3. obligation is a present obligation that exists as a result of past events, only if:
   - > the entity has already obtained economic benefits or taken an action
   - > as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer

Question 15

Define equity and equity claims

Answer 15

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

• claims on the residual interest in the assets of the entity after deducting all its liabilities. They are claims against the entity that do not meet the definition of a liability

Question 16

Define income and expenses

Answer 16

Income: increase in assets, or decrease in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
Expenses: decreases in assets, or increase in liabilities, other than those relating to distributions to holders of equity claims
* relates to the financial performance of an entity

Question 17

Define recognition and carrying amount

Answer 17

Process of capturing for inclusion in the statement of financial position or the statement of the financial performance of an item that meets the definition of one of the elements of financial statements

Carrying amount: the amount at which an asset, a liability or equity is recognized in the statement of financial position

Question 18

When does the recognition of income and expenses occur?

Answer 18

Income:

a. initial recognition of an asset, or an increase in the carrying amount of an asset
b. derecognition of liability, or a decrease in the carrying amount of a liability

Expenses:

a. initial recognition of a liability, or an increase in the carrying amount of liability
b. derecognition of an asset, or a decrease in the carrying amount of an asset

Question 19

what is the matching of costs with income?

Answer 19

the simultaneous recognition of income and related expenses

Question 20

What is recognized in the statement of financial position?

Answer 20

only items that meet the definition of an asset, liability or equity

Question 21

What is recognized in the statement of financial performance>

Answer 21

Only items that meet the definition of income or expenses

Question 22

When is an asset or liability recognized?

Answer 22

An asset or liability is recognized only if recognition of that asset or liability and of any resulting income, expenses or changes in equity provides users of financial statements with information that is useful (relevant and a faithful representation).

Question 23

Define derecognition and when it occurs

Answer 23

removal of all or part of a recognized asset or liability from an entity’s statement of financial position.

Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability:

a. For an asset, derecognition normally occurs when the entity loses control of all or part of the recognized asset; and
b. For a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the recognized liability.

Question 24

Define measurement basis

Answer 24

identified feature of an item being measured

Question 25

Define historical cost

Answer 25

provide monetary information about assets, liabilities and related income and expenses, using information derived, at least in part, from the price of the transaction or other event that gave rise to them.

Question 26

Define historical cost of an asset

Answer 26

it is acquired or created is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs.
The historical cost of an asset is updated over time to depict, if applicable:
a)The consumption of part or all of the economic resource that constitutes the asset (depreciation of amortization)
;b)Payments received that extinguish part or all of the asset;
c)The effect of events that cause part or all of the historical cost of the asset to be no longer recoverable (impairment); and
d) Accrual of interest to reflect any financing component of the asset.

Question 27

Define historical cost of a liability

Answer 27

the value of the consideration received to incur or take on the liability minus transaction costs.
The historical cost of a liability is updated over time to depict, if applicable:
a)Fulfilment of part or all of the liability;
b)The effect of events that increase the value of the obligation to transfer the economic resources needed to fulfil the liability to such an extent that the liability becomes onerous. A liability is onerous if the historical cost is no longer sufficient to depict the obligation to fulfil the liability;
c)Accrual of interest to reflect any financing component of the liability.

Question 28

Define current value

Answer 28

• provides monetary information about assets, liabilities, and related income and expenses, using information updated to reflect conditions at the measurement date.
• not derived form the price of the transactions or other events
• measurement bases: fair value, value in use for assets and fulfilment value for liabilities and current cost

Question 29

Define fair value

Answer 29

• the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
• n some cases, fair value can be determined directly by observing prices in an active market, in other cases, it is determined indirectly using measurement techniques. Fair values do not include transaction costs.

Question 30

Value in use

Answer 30

the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal.

Question 31

Fulfilment value

Answer 31

the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability.

Question 32

current cost of asset

Answer 32

the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date.

Question 33

current cost of liability

Answer 33

the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs that would be incurred at that date.