20.2: Financial Reporting Framework

Question 1

Where are the ideas of the IASB standards expressed? What is its objective?

Answer 1

IASB expresses its standards in the “Conceptual Framework for Financial Reporting”, which details the qualitative characteristics of financial statements and specifies the required reporting elements.

The objective of the framework is to provide financial information that is useful in making decisions about providing resources to an entity (resource providers include investors, lenders, and other creditors).

Question 2

What are the 2 qualitative characteristics described in IASB?

Answer 2

1. Relevance. Financial statements are relevant if the information in them can influence users’ economic decisions or affect users’ evaluations of past events or forecasts of future events.
2. Faithful representation. Information is free from error, complete, and neutral.

Question 3

Materiality is an aspect of which characteristic?

Answer 3

Materiality is an aspect of relevance.

Question 4

What are the four enhancing characteristics of IASB?

Answer 4

1. Comparability. Financial statements should be consistent.
2. Verifiability. Independent observers using the same method should obtain the same results.
3. Timeliness. Information is available to decision makers before the information is stale.
4. Understandability. Users with a basic knowledge of business and accounting who make a reasonable effort to study the financial statements should be able to readily understand the information presented.

Question 5

What are the 5 required reporting elements?

Answer 5

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

Question 6

When should an item be recognized in its financial statement element?

Answer 6

An item should be recognized in its financial statement element if a future economic benefit from the item is probable and the item’s value or cost can be measured reliably.

Question 7

How are the item’s amounts reported in the financial statement elements?

Answer 7

Items are reported in the financial statement elements depending on their measurement base.

Question 8

What are the 6 measurement bases? Define each.

Answer 8

1. Historical cost. The amount originally paid for the asset.
2. Amortized cost. Historical cost adjusted for depreciation, depletion, impairment.
3. Current cost. The amount the firm would have to pay today for the same asset.
4. Net realizable value. The estimated selling price of the asset in the normal course of business - selling costs.
5. Present value. The discounted value of the asset’ expected future cash flows.
6. Fair value. The price at which an asset could be sold, or a liability transferred, in an orderly transaction between willing parties.

Question 9

What is the cost-benefit tradeoff of the enhancing characteristics of IASB?

Answer 9

Benefit that users gain from the information should be greater than the cost of presenting it.

Question 10

What is a constraint of the Conceptual Framework?

Answer 10

A constraint of the Conceptual Framework is the fact that non-quantifiable information about a company cannot be captured directly in financial statements.

Question 11

What are the 2 underlying assumptions of financial statements?

Answer 11

1. Accrual accounting. Financial statements should reflect transactions at the time they actually occur, not necessarily when cash is paid.
2. Going concern. Assumes that the company will continue to exist for the foreseeable future.

Question 12

IAS No. 1 requires which financial statements?

Answer 12

1. Balance sheet
2. Statement of comprehensive income
3. Cash flow statement
4. Statement of changes in owners’ equity
5. Explanatory notes, including a summary of accounting policies

Question 13

What are the 9 general features for preparing financial statements in IAS No. 1?

Answer 13

1. Fair presentation
2. Going concern basis
3. Accrual basis
4. Consistency
5. Materiality
6. Aggregation of similar items and separation of dissimilar items
7. No offsetting of assets against liabilities or income against expenses
8. Reporting frequency must be at least annually
9. Comparative information for prior periods should be included

Question 14

What are the 3 structure and content of financial statements?

Answer 14

1. Most entities should present a classified balance sheet showing current and non-current assets and liabilities.
2. Minimum information is required on the face of each financial statement and in the notes.
3. Comparative information for prior periods should be included