Part 1: The Conceptual framework for financial reporting

Question 1

List four primary users to whom general purpose financial statements are directed in terms of the Conceptual Framework for Financial Reporting (2018

Answer 1

Primary users:
 Existing investors
 Potential investors
 Lenders
 Other creditors

Question 2

What are the two fundamental qualitative characteristics of useful financial information in terms of the Conceptual Framework for Financial Reporting (2018)?

Answer 2

Fundamental qualitative characteristics of financial information:
 Relevance
 Faithful presentation

Question 3

What are the four enhancing qualitative characteristics of useful financial information in terms of the Conceptual Framework for Financial Reporting (2018)?

Answer 3

Enhancing qualitative characteristics of financial information:
 Comparability
 Verifiability
 Timeliness
 Understandability

Question 4

What is the purpose of the Conceptual Framework for Financial Reporting (2018)?

Answer 4

 Assist the Board (IASB) in the development of future standards based on consistent concepts
 Assist preparers of financial reports to develop consistent policies where no Standard applies or where there is a choice
 Assist all parties to understand and interpret Standards

Question 5

Which one of the following statements is correct?
a) The Conceptual Framework is a standard of IFRS and sets standards for specific measurement and disclosure matters.

b) There can be contradictions between the Conceptual Framework and a standard of IFRS. In those cases the principals of the Conceptual Framework should enjoy preference.

c) In cases where there are contradictions, the requirements of the standard of IFRS should dominate those of the Conceptual Framework.

d) The Conceptual Framework serves only as a general guideline in the preparation of financial statements and may be ignored.

e) Both a) and c) are correct

Answer 5

(c)

Question 6

Choose the correct answer. The following are the four enhancing qualitative characteristics of financial statements:
a) Prudence, understandability, faithful representation and completeness.

b) Comparability, verifiability, timeliness and understandability.

c) Reliability, consistency, relevance and prudence.

d) Assets, liabilities, income and expenses.

e) Completeness, neutrality and free from error.

Answer 6

(b)

Question 7

What are the criteria that have to be met, in terms of the Conceptual Framework (2018), before an item is recognised in the financial statements?

Answer 7

• The item must meet the definition of one of the elements of the financial statements
• The recognition of the item needs to provide useful information by meting the fundamental qualitative characteristics of relevance and faithful representation

Question 8

List the elements of financial statements, as identified by the Conceptual Framework for Financial Reporting (2018)

Answer 8

 Income
 Expenses
 Equity
 Assets
 Liabilities

Question 9

An asset is an element of the financial statements of an entity. Which one of the following statements, which relate to an asset, is incorrect?
a) Physical form is not necessary for the existence of an asset.
b) Ownership is not a determining factor for the existence of an asset.
c) The potential to produce economic resources must be likely.
d) Legal rights are not a pre-requisite to comply with the definition of an asset.
e) Assets can be obtained by purchasing them, manufacturing them or receiving them by means of a donation.

Answer 9

(c)

Question 10

What is a Framework for financial reporting?

Answer 10

Provides guidance to preparers of financial reports regarding:
* which business, economic and other events should be accounted for, and
* how these events should be measured and communicated to users

Question 11

True or false

A framework for financial reporting is a standard and can override other IAS/IFRS

Answer 11

FALSE

A framework for financial reporting is NOT a standard and CANNOT override other IAS/IFRS

Question 12

State the limitations of general purpose financial reporting

Answer 12

Only provides financial information
Not designed for all users
Not designed for all decisions
Only provides historic information

Question 13

What are fundamental qualitative characteristics?

Answer 13

• Relevance
• Faithful representation

Question 14

What does relevance consist of?

Answer 14

-Makes a difference to decision making
-Has predictive and confirmatory value
-Related to materiality

Question 15

What does faithful representation consist of?

Answer 15

-Neutral
- Complete
-Free from error

Question 16

State the types of qualitative characteristics?

Answer 16

• Fundamental characteristics
• Enhancing characteristics

Question 17

Define an asset

Answer 17

• An asset is a resource
• Controlled by the entity
• As a result of passed events
• From which future economic benefits
• Are expected to flow to the entity

Question 18

What is an right?

Answer 18

Rights that have potential to produce economic benefits take many
forms, such as:
* Rights corresponding to an obligation of another party (par 4.6a):
* to receive cash
* to receive goods or services
* to exchange economic resources with another party on favorable terms
* to benefit from an obligation of another party to transfer an economic
resource if a specified uncertain future event occurs

Question 19

How is an right established?

Answer 19

Through:
- contract
- legislation; or
- similar means

Question 20

Which rights does not correspond to an obligation of another party?

Answer 20

• Right over physical objects (PPE/Inventories)
• Rights to use intellectual property

Question 21

Discuss recognition of assets

Answer 21

Not all rights are assets: to qualify as assets, rights must:
* Have the potential to produce economic benefits beyond those available to
all other parties; and
* Be controlled by the entity (Par 4.9)

Question 22

True or false

Each right is a separate asset.
For accounting purposes, related rights are usually treated as a single asset.
(Par 4.11)
- Right to use an object.
- The right to sell the rights over an object

Answer 22

True

Question 23

Define economic resource

Answer 23

Necessitates the potential to produce economic benefits

Question 24

State the exception to the potential to produce economic benefit

Answer 24

A right will produce economic benefits.
Rather, a right must exist and in at least one circumstance, that right would
produce economic benefits beyond those available to all other parties. (Par
4.14)

Question 25

Explain an economic resource

Answer 25

- a right - that has the potential to produce economic benefits

Question 26

True or False A right can be an asset even if the probability that it will produce economic benefits is low. (Par 4.15) The economic resource is the present right that contains that potential, not the present economic benefits that the right may produce. (Par 4.17)

Answer 26

False A right can be an asset even if the probability that it will produce economic benefits is low. (Par 4.15) The economic resource is the present right that contains that potential, not the future economic benefits that the right may produce. (Par 4.17)

Question 27

True or false Assessing the existence of control helps to identify the economic resource for which the entity accounts.

Answer 27

True

Question 28

What should an entity do for control to exist?

Answer 28

* Have a present ability to direct the use of the economic resource * Obtain the economic benefits that flow from the resource * Have the present ability to prevent other parties from directing the use of the economic resource * Have the present ability to prevent other parties from obtaining the economic benefits that flow from the resource(Par 4.20)

Question 29

How is a present ability to direct the use of an economic resource is evidenced?

Answer 29

* A right (of an entity) to use the economic resource in its activities; or * To allow another party to use the economic resource in its activities

Question 30

When does control arise?

Answer 30

* From an ability to enforce legal rights. * If an entity has a means, other than a legal right, to ensure that no other party has the present ability to direct the use of an economic resource.

Question 31

True or false For an entity to control an economic resource, the present economic benefits arising from that economic resource should flow to the entity – directly or indirectly.

Answer 31

False For an entity to control an economic resource, the future economic benefits arising from that economic resource should flow to the entity – directly or indirectly.

Question 32

True or False Exposure to significant variations in the amount of economic benefits may indicate control.

Answer 32

True

Question 33

Define an liability

Answer 33

- a present obligation of the entity - to transfer an economic resource - as a result of past events

Question 34

Explain present obligation

Answer 34

A present obligation is: - a duty or responsibility that an entity - has no practical ability to avoid

Question 35

State the criteria for liabilities to exist

Answer 35

* Entity has a present obligation * Obligation to transfer an economic resource * As a result of past events

Question 36

How is obligation formed?

Answer 36

Through: - contract - legislation - legally enforceable - from an entity’s customary practices, published policies or specific statements of the entity; entity should have no practical ability to act in a manner that is not consistent with the published policies, practices or statements.

Question 37

Discuss transfer of an economic resource

Answer 37

* The obligation must have the potential to require the entity to transfer an economic resource to another party. * For that potential to exist, it does NOT need to be certain, or even likely, the entity will be required to transfer an economic resource. * It is only necessary that, in at least one circumstance, the entity would be required to transfer an economic resource to another entity. (Par 4.37) * An obligation may exist even if the probability of a transfer of an economic resource is low. (Par 4.38)

Question 38

When does a present obligation exist?

Answer 38

* A present obligation exists as a result of a past event if: * The entity has already obtained economic benefits or taken an action; and * As a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer. (Par 4.43) * A present obligation can exist even if a transfer of economic resources cannot be enforced until some point in the future. (Par 4.46) * If the criteria in Par 4.43 are not satisfied, then the entity does not have an obligation.

Question 39

Define unit of account

Answer 39

“the right, the obligation, or the group of rights and/or obligations, to which recognition criteria and measurement concepts are applied"

Question 40

What is include in the unit of account?

Answer 40

* An individual right or individual obligation * All rights, all obligations, or all rights and all obligations, arising from a single source (e.g. a contract) * A subgroup of those rights and/or obligations (e.g. a subgroup of rights over an item of PPE for which the useful life and pattern of consumption differ from those of the other rights over that item of PPE * A group of rights and/or obligations arising from a portfolio of similar items.

Question 41

Define executory contracts

Answer 41

“A contract, or portion thereof, that is equally unperformed – neither party has fulfilled any of its obligations or both parties have partially fulfilled their obligations to an equal extent”.

Question 42

What does executory contracts do?

Answer 42

* Establishes a combined right and obligation to exchange economic resources; both are interdependent. (Par 4.57) * Combined right constitutes a single asset or liability. * To the extent that either party fulfils its obligations under the contract, the contract is no longer executory.

Question 43

Discuss substance over legal form

Answer 43

* Contracts create rights and obligations for an entity. * The rights and obligations created by contracts have to be represented faithfully. To do this, the substance of the rights and obligations is what is reported on in the financial statements. * Consider all terms – implicit and explicit – in a contract, provided they have substance. (Par 4.60) * Terms have no substance if they have no discernible effect on the economics of a contract.

Question 44

Define an equity

Answer 44

The residual interest in the assets of the entity after deducting all its liabilities [Assets less (-) liabilities]

Question 45

Define income

Answer 45

- increases in assets, or - decreases in liabilities - other than those relating to contributions from holders of equity claims

Question 46

Define expenses

Answer 46

- decreases in assets - increases in liabilities - other than those relating to distributions to holders of equity claims

Question 47

What are the elements of financial statements?

Answer 47

- Financial position - Financial performance

Question 48

Complete the sentence Financial positions are...

Answer 48

- Assets - Liability - Equity

Question 49

Complete the sentence Financial performance are...

Answer 49

- Income - Expenses

Question 50

Explain the phrase 'controlled by entity'

Answer 50

- Ability to direct use (legal rights) & obtain benefits - Prevent other parties to obtain benefits

Question 51

Analysis the phrase "transfer economic resource"

Answer 51

- Prevent other parties to obtain benefit

Question 52

Measurement is?

Answer 52

Elements recognised in financial statements are quantified in monetary terms

Question 53

Measurement bases is?

Answer 53

- Historical cost - Current value (reflects conditions at measurement date)

Question 54

How is historical cost calculated/

Answer 54

Cost less depreciated cost

Question 55

Current value consist of?

Answer 55

- Current cost - Fair value - value in use

Question 56

What is qualitative characteristics?

Answer 56

Are the qualities that make information contained in financial reports useful to users in predicting future cash flows and assessing stewardship

Question 57

Explain relevance (fundamental qualitative characteristics)

Answer 57

* Information is relevant if can influence the decisions made by users of the financial statements. * Financial information can influence the decisions made by users if it has a predictive value or confirmatory value.

Question 58

Explain faithful representation (fundamental qualitative characteristics)

Answer 58

* Information must faithfully represent the substance of what it purports to represent. * A faithful representation is, as far as is possible, complete, neutral, and free from error. * A faithful representation is affected by a

Question 59

Explain comparability (enhancing qualitative characteristics)

Answer 59

* Comparability enables users to identify and understand similarities in, and differences among, items. * Comparability ≠ Consistency ≠ Uniformity

Question 60

Explain verifiability (enhancing qualitative characteristics)

Answer 60

Verifiability * Verifiability ≈ different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful. representation * Can be direct or indirect.

Question 61

Explain timeliness (enhancing qualitative characteristics)

Answer 61

* Timeliness ≈ availing information for users’ decision making needs in time. * Relevance of information reduces with time.

Question 62

Explain understandability (enhancing qualitative characteristics)

Answer 62

* Is achieved by classifying, characterizing and presenting information clearly and concisely.