The Qualitative Characteristics of Financial Information Flashcards
(44 cards)
1
Q
Conceptual Framework for Financial Reporting
A
- IFRS are based on these
- addresses underlying concepts
- assist to develop the standards
- assist when no standard applies/allows a choice
- assist for all standards to be understood/interpreted
2
Q
Chapter 1 of Conceptual Framework
A
The objective of general purpose financial reporting
3
Q
Chapter 2 of Conceptual Framework
A
Qualitative characteristics of useful financial info
4
Q
Chapter 3 of Conceptual Framework
A
Financial Statements and the reporting entity
5
Q
Chapter 4 of Conceptual Framework
A
The elements of the financial statements
6
Q
One important assumption that Conceptual Framework sets out
A
Financial Statements prepared on the assumption that entity is a Going Concern
7
Q
Going Concern
A
- entity will continue in operation for foreseeable future (12 months)
- has no intention/need to enter into liquidation/cease trading
8
Q
What should happen if the going concern basis is not followed/true?
A
- statement must state why not a going concern
- prepared differently and describe basis used (break up value of assets)
9
Q
Accrual Accounting
A
-effects of transaction/events are recognised when they occur and so recorded in that period that they relate to
- not recorded when cash received or paid but as revenue/expenses earned/incurred
- not an underlying assumption but in Conceptual Framework
10
Q
Matching Convention
A
- revenue earned must be matched against expenditure incurred in earning it
- sales matches with cost of sale
11
Q
net realisable value
A
- likely eventual sales price less any expenses incurred to make them saleable
- how assets recorded if at break-up value if not a going concern
12
Q
Qualitative characteristics of financial info
A
attributes that make info in statement useful to users
13
Q
Fundamental Qualitative Characteristics
A
Relevance
Faithful Representation
14
Q
Enhancing Qualitative Characteristics
A
Comparability
Verifiability
Timeliness
Understandability
15
Q
Relevance
A
- info is capable of making a difference in decisions made by users
- may have predictive value - future
- may have confirmatory value- confirm past
- the above are often interrelated
- affected by nature/materiality
16
Q
Materiality
A
- material if omitting/misstating could influence decisions
- immaterial = too trivial to affect understanding
- important so that time/money not wasted open excessive detail
- context is important
17
Q
Aggregation
A
- adding together/lumping of assets/liabilities/equity/income or expenses that have shared characteristics and included in same classification
e.g. sales as one figure not list of transactions - often summarised info and more detail in notes
18
Q
Offsetting
A
- when asset and liability recognised/measured as separate unit of account but groups them into single net amount
- generally not appropriate as results in dissimilar items classified together
19
Q
Faithful Representation
A
- reports represent economic phenomena in words/numbers
- info must be complete, neutral, free from error
20
Q
Complete depiction
A
- all info necessary
- for user to understand phenomenon depicted
- include all necessary descriptions/explanations
21
Q
Neutral depiction
A
- without bias
- not slanted/weighed/emphasised/de-emphasised/otherwise manipulated
- to be received favourably/unfavourably
- supported by prudence
22
Q
Prudence
A
- exercise of caution when making judgements
- assets/income not overstated
liabilities/expenses not understated
23
Q
Free from Error
A
- no errors/omissions in description of phenomenon
- process used to produce reports have no errors
- free from material error
24
Q
Substance over Form
A
- characteristic of faithful representation
- commercial reality take precedent over legal form
- examples:
- sale with a right of return - not recognise sale until sure that it is a genuine sale
- Consignment arrangements- once entity has control over asset then record as asset
25
Comparability
- enable users to identify/understand similarities/differences
- info more useful if it can be compared
- entities must disclose their accounting policies
- over different periods/entities
26
Verifiability
- assure users that info faithfully represented
- info can be independently verified and all reach consensus
direct = counting cash
indirect = checking inputs/outputs
27
Timeliness
- info available to decision makers in time to be capable of influencing decisions
- has to be a balance between timeliness vs reliable info
- overriding consideration is best way to satisfy decision making
28
Understandability
- classifying, characterising, presenting info clearly/concisely makes it understandable
- assume users have reasonable knowledge
one line for revenue and then further detail may be provided
- can't exclude info just to make easier to understand as then would be incomplete
29
Consistency
- presentation/classification of items in statement should stay the same from one period to the next
UNLESS
- change in operation
- a review/feedback
- required by IFRS
30
Business Entity
- financial statements always treat business as separate entity from owner
- applies whether or not business is separate in law
31
Equity = Net Assets
(breakdown of this equation)
Assets - Liabilities = share capital + reserves
32
Revenue
income that arises in course of ordinary activities of entity
33
Gains
other items meeting definition of income
34
Duality
- double entry bookkeeping
- financial transactions have two affects on general ledger accounts
35
What are the two measurement bases? and how to choose?
- historical cost
- current value
- choice depends on what info primary users of statements require/useful
36
Historical Cost
- for asset - cost that was incurred when acquired
- for liability - value of the consideration received when incurred
- traditional
- can be modified by revaluation in some instances for certain assets (buildings)
- reliable info
37
Adv.s of using historical costs
- objective as not so easy to manipulate
- reliable as can be verifiable, exist on documents
- statements of financial position/cash flows consistent
- readily understood
38
Current Value and bases
- uses updated info to reflect conditions at measurement date
- fair value
-Value in Use/Fulfilment Value
- Current Cost
-relevant info
39
Fair Value
- price would be received to sell an asset/paid to transfer liability
- in orderly transaction on open market
- at measurement date
- when no active market can use estimates of future cash flows/time value of money
40
Value in use
- present value of the cash flows that an entity expects to derive from use/disposal of an asset
- can't be directly observed
- looks at likely future value
- entity-specific
41
Fulfilment Value
- present value of cash that entity expects to be obliged to transfer as it fulfils a liability
- entity expects to incur to fulfil a liability
- can't be directly observed
- entity-specific
42
Current Cost for Assets
- cost of equivalent asset at the measurements date comprised of consideration that would be paid plus transaction costs
43
Current Cost for Liabilities
- consideration that would be received for an equivalent liability at measurement date minus transaction costs incurred
44
Adv.s of Current value
- useful guide for management to decide on hold/sell assets/settle liabilities as uses expected benefits
- relevant to needs of users- stability/vulnerability of business
- evaluate performance of management
- judge future prospects
