Conceptual Framework of Financial Reporting Flashcards
(15 cards)
Purpose of the Framework
1 - Development and interpretation of IFRS
2 - Consistent preparation and auditing of financial statements
3 - Aiding decision making where no IFRS applies
Objective of Financial Reporting
Provide useful information about a company’s financial performance to investors, lenders and other creditors to drive decisions about resource allocation
Also supports assessment of management
Entity’s financial performance and position
Key Stakeholders & Their Interests
Investors - growth, profitability, risk
Employees/Management - job security, future performance
Lenders - liquidity, solvency
Suppliers - Payment reliability
Customers - continuity of goods/services
Governments - compliance, tax payments
Public - transparency, economic/social contribution
Fundamental Qualitative Characteristics of FS
FAITHFUL REPRESENTATION - financial information should be complete, neutral, and as free from error as possible
RELEVANCE - includes materiality, would inclusion or exclusion from the FS affect decision making
PRUDENCE - caution should be exercised when dealing with uncertainty
SUBSTANCE over FORM - the reporting of a transaction should reflect its economic reality, not simply its legal form
Enhancing Qualitative Characteristics of FS
COMPARABILITY - FS should be able to be compared across time and between entities, standardisation
TIMELINESS - FS should be provided at consistent reporting dates, in time for decision-making
UNDERSTANDABILITY - Clear classification and explanations
VERIFIABILITY - Information in the FS can be audited and substantiated
Going Concern Basis
FS are prepared on a going concern basis
- The entity should continue for the foreseeable future
- If the company is at risk of a solvency crisis, this must be disclosed
Elements of FS: Assets & Liabilities
Assets - present economic resources controlled by the company as a result of past events
Liabilities - present obligations to transfer economic resources arising as a result of past events
Elements of FS: Income, Expenses, Equity
Equity - Residual interest in assets after deducting liabilities
Income - Increases in assets or decreases in liabilities that increase equity (excluding shareholder contributions)
Expenses - Decreases in assets or increases in liabilities that decrease equity (excluding shareholder distributions)
Recognition Criteria
An item is recognised if:
It meets the definition of an element (asset, liability, etc.)
It results in relevant and faithfully represented information
Derecognition Criteria
Removal of all/part of a recognised asset or liability
Must reflect the nature and risks retained or transferred
Measurement Bases
Historical Cost - Original cost, often amortised
Fair Value - Current market-based exchange price
Value in Use / Fulfilment Value
Entity-specific, based on future cash flows
Current Cost - Cost to acquire the same asset or settle the same liability today
Presentation and Disclosure: P&L
Ensure clear, consistent, and useful presentation
Statement of Profit or Loss: Day-to-day financial performance
Other Comprehensive Income
OCI: Other gains/losses not yet realised in P/L but still relevant (e.g., revaluation surplus)
Recycling
Some OCI items may be reclassified to profit or loss in future periods (e.g., foreign exchange gains/losses)
Capital Maintenance Concepts
Financial Capital Maintenance (Nominal)
Net assets ↑ at historical cost
Financial Capital Maintenance (Real)
Net assets ↑ at current prices
Physical Capital Maintenance
Productive capacity ↑
Formula: Opening Equity + Profit - Distributions = Closing Equity
