Ch 7 - Conceptual Framework

Question 1

Identify 2 FUNDAMENTAL qualitative characteristics of financial information listed in the Board’s Framework?

Answer 1

• Relevance - information is relevant when it influences the economic decisions of users
• Fair representation - financial information needs to faithfully represent the transactions and other events it purports to represent.

Question 2

Explain RELEVANCE as 1 of the fundamental qualitative characteristics of financial info listed in the Board’s Framework?

Answer 2

Info is relevant when it influences the economic decisions of users by helping them evaluate past, present or future events. Some items may only become relevant once they are material, hence materiality is a threshold quality of info. INFO IS MATERIAL if its omission or misstatement could influence the decisions of users.

Question 3

Explain the Concept of Substance over Form meaning?

Answer 3

essentially, looking beyond the paperwork to understand the actual economic impact of a transaction.

Question 4

Explain FAITHFUL REPRESENTATION as 1 of the fundamental qualitative characteristics of financial info listed in the Board’s Framework?

Answer 4

Transactions and other events must be accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

Question 5

For financial information to be Faithfully Represented it needs to posses the following characteristics, explain?

Answer 5

COMPLETENESS - info must be complete and contain all necessary descriptions and explanations to enable a user to understand what is being portrayed.

NEUTRALITY - Info must be neutral / free from bias, also underpinned by the application of PRUDENCE. NOT for info to influence the making of a decision or judgement TO achieve a predetermined result or outcome.

FREE FROM ERROR - info must be free from error within bounds of materiality. If there was an error this can cause financial statement to be false or misleading and thus unreliable.

Question 6

What is prudence?

Answer 6

an accounting mindset which favours caution in situations of uncertain judgement.

Question 7

Free from error does not mean?

Answer 7

perfectly accurate in all respects! For example, where an estimate has been used the amount must be described clearly and accurately as being an estimate.

Question 8

Where an estimate has been used, described clearly and accurately as an estimate, what is this PHENOMENA?

Answer 8

Describing clearly and accurately as an estimate is a MEASUREMENT UNCERTAINTY.

Question 9

What is Aggregation according to the Framework?

Answer 9

Summarising a large volume of detailed info to make it more useful.

Question 10

What are the number of PURPOSES the Conceptual Framework for financial Reporting has?

Answer 10

• assist the IASB - to develop IFRS Standards - based on consistent concepts;
• assist preparers to develop consistent accounting policies when no IFRS Standard applies
• to assist all parties to understand and interpret the IFRS Standards

Question 11

What best defines relevant financial info to users of financial statements?

Answer 11

Information that influences the decision of users.

Question 12

What is the Conceptual Framework?

Answer 12

The Board developed a conceptual framework which lays out broad principles that
* should be applied and followed consistently when developing accounting standards and
* when determining appropriate accounting treatment.

Question 13

What are the elements of the financial statements?

Answer 13

The elements of financial statements are:-

• Assets
• Liabilities
• Equity
• Income
• Expenses

Question 14

Explain how the Framework defines an “Asset”?

Answer 14

An asset is defined as “a present economic resource controlled by the entity as a result of past events.

Question 15

The Conceptual Framework is broken down into 8 Chapters which covers certain topics, can you explain them:-

Answer 15

Ch 1 - objective of general purpose financial reporting
Ch 2 - Qualitative characteristics of useful financial info
Ch 3 - Financial statements & the reporting entity
Ch 4 - The elements of financial statements
Ch 5 - Recognition and derecognition
Ch 6 - Measurement
Ch 7 - Presentation and disclosure
Ch 8 - Concepts of capital and capital maintenance

Question 16

Conceptual Framework - Ch 1 - Objective of general purpose financial reporting - explain?

Answer 16

Provide financial info about the reporting entity that is USEFUL to users who are MAKING DECISIONS

Question 17

Who are the users of financial statement info?

Answer 17

• existing and potential investors
• lenders
• other creditors

Question 18

In order to make decisions what type of info will users require?

Answer 18

Info regarding :-
* performance (profits)
* position (asset levels and claims against the entity)

This enables assessment of the stewardship of the directors and their utilisation of the entity’s resources.

Question 19

What is a Qualitative characteristic?

Answer 19

These are the qualities that make information useful, such as RELEVANCE, COMPARABILITY and TIMELINESS

Question 20

What are the other qualitative characteristics of the Conceptual Framework that “would be nice to have” as in the ENHANCED?

Answer 20

The enhancing qualitative characteristics that “would be nice to have” are:-

• Comparability - users must be able to compare financial statements over a period of time in order to identify trends.
• Verifiability - occurs if information can be independently confirmed or verified by a knowledgeable third party
• Timeliness - means having information available to decision makers in time to be capable of influencing their decisions.
• Understandability - information needs to be readily understandable by users.

Question 21

What is my mnemonic for remembering the topics covered in the Conceptual Framework?

Answer 21

Often
Quick
Financial
Exams
Require
Memory
Practice
Clearly

Question 22

What do the mnemonic for Often, Quick, Financial, Exams, Require, Memory, Practice, Clearly ?

Answer 22

• O - objective
• Q - qualitative
• F - financial statements & financial entity
• E - elements
• R - relevance
• M - measurement
• P - presentation & disclosure
• C - capital & capital maintenance

Question 23

What is the mnemonic for the elements of the financial statements?

Answer 23

ALIEE

• A - assets
• L - liabilities
• I - income
• E - expenses
• E - equity

Question 24

What are the 2 concepts of capital?

Answer 24

The 2 concepts of capital are:-

1 - Financial concept of capital

2 - Physical concept of capital

Question 25

Can you explain the FINANCIAL CONCEPT OF CAPITAL?

Answer 25

With this method, Capital = net assets or equity of the entity. This concept should be used if the main concern of the user of financial statements is the maintenance of the nominal value invested capital. This is used by most entities too prepare financial statements.

Question 26

Can you explain the PHYSICAL CONCEPT OF CAPITAL?

Answer 26

With this method, Capital = productive capacity of the entity (measured as units of output per day). This method should be used if the main concern of the user of the financial statement is the operating capacity of the entity.

Question 27

What does CAPITAL MAINTENANCE mean?

Answer 27

Capital maintenance means preserving the value of the capital of the entity and reporting profit only if the capital of the entity has been increased by activities and events in the accounting period.

Question 28

Financial statement are normally prepared on THE ASSUMPTION?

Answer 28

Financial statements are normally prepared on the assumption that the reporting entity is a GOING CONCERN and will continue in operation for the foreseeable future.

Question 29

Explain how the Framework defines an "Equity"?

Answer 29

The Framework defines equity as 'the residual interest in the assets of the entity after deducting all its liabilities' TOTAL ASSETS minus TOTAL LIABILITIES

Question 30

What are the 2 measurement bases used to quantify the value of assets and liabilities?

Answer 30

* Historical Cost * Current Value - which include (Fair value, Value in use & Current Cost)