Conceptual Framework

Question 1

Purpose of IASB Conceptual Framework?

Answer 1

Assist IASB in developing a consistent concept ensuring that it is coherent as a body

Assist preparers to develop consistent accounting policies where no relevant standard applies or there is a choice of accounting policy

Assist all parties to understand and interpret IFRS

Question 2

What should we apply when standard and concept clashes?

Answer 2

The standard should be applied when such an event occurs. (Framework underpins but not override the standard).

Question 3

Benefits of conceptual framework?

Answer 3

Helps to prevent political/business interference in standard setting

Help audit and enforcement of financial reporting (when no relevant standard/multiple standards could apply)

Question 4

Criticisms of Conceptual framework by brouwer et al (2015)

Answer 4

Inconsistencies exist between standard and framework. e.g. difference in treatment of enacted rates in IAS 12 deferred tax and asset under framework.

Question 5

Can standards be inconsistent with each other, if so, give example

Answer 5

Standards can be inconsistent with each other, such as IAS 12 vs IAS 36, where measurements of assets differ in discounting treatment.

Question 6

Ball (2016) argues that its delusional to use a framework for reporting as….

Answer 6

‘The world is complex and untidy, and not organised by a small set of ideas like a conceptual framework.’

Question 7

Ball (2016) is worries that standard setters will become too comitted into the framework, to the point where….

Answer 7

Solutions that would seem optimal can be blocked due to their inconsistency with the framework.

Question 8

What is the objective of general purpose financial accounting?

Answer 8

objective is to provide financial information regarding the reporting enity that is useful to users in making decisions relating to the entity. (IASB, 2018)

Question 9

Who are the users of financial accounts?

Answer 9

existing and potential Investers, lenders, and other creditors

….but not exclusive to

Question 10

Primary users need information about the resources of the entity to…. (2 points)

Answer 10

Assess entity’s prospects for future net cashflow

assess how effectively management has discharged their responsibility touse the entity’s existing resources (i.e. stewardship).

Question 11

Stewardship was made more prominent in IASB, 2018 Framework, though welcomed by commentators, pelger (2020) questioned…

Answer 11

the practicality of the prominence, as he argued that it is in name only.

Question 12

Stewardship is arguably the core reason for financial statements in the first place… however…

Answer 12

commentators questioned whether information required to buy/sell/hold shares is the same as for stewardship decisions (pelger, 2020)

Question 13

What are the characteristics of useful financial information?

Answer 13

V-CRUFT:

Verifiability

Comparability

Relevance

Understandability

Faithful representation

Timeliness

Question 14

Relevance definition

Answer 14

Information has the ability to influence economic decisions, is timely and has predictive/confirmatory value.

Question 15

Relevance takes into account materiality

what is materiality?

Answer 15

Information is considered material if omitting it could influence users’ decisions. (IASB, 2018)

Question 16

Faithful representation definition

Answer 16

Financial information should be complete, unbiased and free from error.

Question 17

What is substance over form?

Answer 17

It is the idea that faithful representation mean substance of an economic phenomenon instead of representation of its legal form only

Question 18

Example of substance over form?

Answer 18

Financial instruments in distinguishing between liability and equity.

Redeemable preference share, though legally deemed as equity. The shares include a promise to pay cash to the holder on redemption - thus in substance they are liabilities.

Question 19

What is the idea of prudence?

Answer 19

Exercise of caution when making judgements under uncertainty. (IASB, 2018)

Question 20

Relevance vs faithful representation

Answer 20

tradoff may exist between the two, e.g. most relevant info may be forward looking and uncertain, therefore may compromise faithful representation.

Question 21

Asymmetric vs cautious prudence example of one?

Answer 21

IAS 12 recognition of DTA vs DTL

DTA needs to be probable, where as no definitive threshold for DTL

Question 22

Is prudence also inconsistent with the framework?

Ball (2016) suggests that…

Answer 22

Prudence is not consistent with the framework.

E.g. IAS 36 allows for downward revaluations of an asset (impairment). But no upward revaluations.