Conceptual Framework Flashcards
(18 cards)
Conceptual Framework
May 2019, the Australian Accounting Standards Board (AASB) released the Conceptual Framework for Financial Reporting effective from 1 January 2020
Purpose of Conceptual Framework for Financial Reporting
- Describe the objectives of, and the concepts for general purpose financial reporting.
- Reporting entities are required to produce general-purpose financial statements
A set of general-purpose financial statements includes:
- Balance Sheet
- Income Statement
- Statement of owner’s equity/retained earnings
- Statement for cash flows
Asset
anything of value either owned by or owed to a business
Definition of elements (Asset)
- A present Economics resource controlled by the entity as a result of past events.
- Economic resource - a right that has the potential to produce economic benefits.
3 Aspects of the definition )(Asset):
-Right
-Potential to produce economic benefits
-Control
Recognition Criteria (Asset)
Relevance - relevant financial information is capable of making a difference in the decisions made by users.
Faithful representation - the asset has a cost or value that can be measured reliably (ie. in Monetary terms).
An asset may NOT be recognised if:
- ‘It is uncertain whether or not the asset exists’
- ‘It may exist, but the probability of an inflow of Economic benefits is low’
Applying the Conceptual Framework to definition of an Asset
- Receive cash from another party
(e.g. account receivable) - Receive goods or services from another party
(e.g. prepaid rent) - Rights over physical objects (e.g. property, equipment, inventories)
Applying the Conceptual Framework to recognition of an asset
- Relevance: the fact that the business owns a non-current asset such as motor vehicle is relevant to the users of the financial information to assist them with their decision making.
(e.g. whether to invest in the business)
- Faithful representation: the asset has a cost or value that can be measure reliably.
(e.g. the business would have been issued with a tax invoice when the motor vehicle was purchased that showed the cost of the asset,this will form the Historical Cost Value of the vehicle in the financial statements)
Liability
amount that a business owes to others
Definition of elements (Liability)
‘A present obligation of the entity to transfer an economic resources as a result of past events’
3 Criteria that must exist for a liability to exist:
- Entity has an obligation
- Obligation is to transfer an economic resource
- Obligation is a present obligation that exists as a result of past events
Recognition criteria (Liability)
- Relevance - relevant financial information is capable of making a difference in the decisions made by users.
- Faithful representation - the amount at which the settlement of the liability will take place can be measure reliably
A Liability may NOT be recognised if
- ‘It is uncertain whether or not the liability exists.’
- ‘It may exist, but the probability of an outflow of economic benefits is low.’
Applying the Conceptual Framework to definition of a Liability
Liability is defined as a present obligation of the entity to transfer an economic resource as a result of past events.
Applying the Conceptual Framework to recognition of a Liability
- Relevance: the fact that the business owes a financial institution money for a loan is relevant to the users of the financial information to assist them with their decision making.
(e.g. whether to invest in the business)
- Faithful representation: the liability has a cost or value that can bed measured reliably.
(e.g. the business would have been issued with loan documentation from the bank when the loan was taken out, that showed the principle amount to be repaid, the interest amount and the repayment schedule for the loan)
