REVISION - TOPIC 3 - Conceptual Framework - Alongside Elliott chap 7 Flashcards
Define a conceptual framework
FASB 1967 definition is “A conceptual framework is a constitution, a coherent system of inter-related objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function and limits of financial accounting and financial statements”
What is the regulatory reasonings?
Regulators used to codify good practice (Whittington empirical inductive approach)
Now moved beyond this, seeking to mould and improve
Political considerations - if seen to be an independent force need a source of ideas apart from just copying practices of regulated companies
What is the IASB/FASB conceptual framework project?
This aims to update and refine existing concepts to reflect changes in markets, business practices and the economic environment that have occurred in the two or more decades since the concepts were first developed.
The overall objective is to create a sound foundation for future accounting standards
Developments in IASB - September 2017
The IAS Board met on 21 September 2017 to discuss comments on the pre-ballot draft of the revised Conceptual Framework for Financial Reporting (Conceptual Framework) related to measurement uncertainty and the application of the fundamental qualitative characteristics of useful financial information.
What did the Board decide when they met on 21 September 2017
They decided that Chapter 2- Qualitative characteristics of useful financial information in the revised CF should:
- Clarify that a trade-off may need to be made between relevance and faithful representation and specifically between relevance and uncertainty; but not discuss how such a trade-off is made. All 14 Board members agreed
What does the Conceptual Framework for Financial Reporting describe?
It is a practical tool that:
- assists the IASB to develop Standards that are based on consistent concepts.
- assists preparers to develop consistent accounting policies when no Standard applied to a particular transaction or event, or when a Standard allows a choice of accounting policy; and
- assists others to understand and interpret the Standards.
Why is the CF being revised? What was missing? 5
The following areas were not covered in enough detail:
- measurement
- financial performance (including use of SOCI)
- presentation and disclosure
- de-recognition; and
- the reporting entity
What does the revised version clarify on the existing CF?
This exposure draft clarifies:
- the information needed to meet the objective of financial reporting including information that can be used to help assess managements stewardship of the entity’s resources
- explains the roles of prudence and substance over form in financial reporting
- clarifies that important decisions on, for example, recognition and measurement are driven by considering the nature of the resulting information about both financial performance and position.
- Clearer definitions of assets and liabilities
- Updates the parts that are out of date - eg the role of probabilities in the definitions of assets and liabilities.
What is substance over form?
Faithful representation represents the substance of an economic phenomenon instead of merely representing its legal form
What does Chapter 1 - The objective of general purpose financial reporting assess?
Stewardship - The new changes within the Draft focus primarily on how information contained within the financial statements for the main purpose of stakeholders, be it investors, potential investors etc are interpreted to the extent to which the user is able to assess the entity’s stewardship of assets within these statements.
What does Chapter 2 - Qualitative characteristics of useful financial information focus on?
Qualitative aspects of information eg. Relevance, materiality, measurement for the user.
Main changes relate to:
Measuring uncertainty - this arises when a measure for an asset or liability cannot be observed directly and must instead be estimated. This is heavily linked to substance over form. The information must represent economic phenomenon and not simply the legal form.
What does Chapter 3 - Finance statements and the reporting entity primarily focus on?
No new changes in draft, this focuses on the role of the financial statements and the reporting entity. The entity must be reported to represent the entity as a while, and not tailed for a specific target group.
What is the Concepts of capital?
Capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.
This should be selected based upon the needs of the users of its financial statements.
