Chapter 2 - Conceptual Framework for Financial Reporting

Question 1

The IFRS Foundation

Answer 1

• Independent not-for-profit corporation
• The parent entity of the IASB
• Its trustees exercise oversight and raise necessary funding for the IASB to carry out its role as a standard setter
• The IFRS Foundation trustees appoint the IASB members
• Reviews broad strategic issues affecting accounting standards.

Question 2

IASB Standard-Setting Process (required stages)

Answer 2

• Consultation with the Trustees and IFRS Advisory Council on whether the issue should be added to the IASB’s agenda
• Publication of an ED, together with any dissenting opinions held by IASB members and a basis of conclusions
• Consideration of all comments received on an exposure draft during the comment period
• Approval of the standard by voting by the IASB members
• Publication of the standard should include a basis for conclusions, a description of the due process undertaken and the dissenting opinion of any IASB member.

Question 3

Preface to IFRSs

Answer 3

• Sets out the objectives and due process of the IASB.

- It also explains the scope, authority and timing of the application of IFRS.

Question 4

Conceptual Framework

Answer 4

• Sets out the concepts that underlie the preparation and presentation of financial statements
• It is important because:
• • it assits the IASB in the development of new standards and the revision of existing standards
• • provides a rationale for reducing the number of alternative accounting treatments and promoting harmonisation of accounting standards and regulations
• • assists national standard setters in developing their national standards on a basis consistent with international principles
• • assists preparers in applying IFRS and general principles
• • assists auditors in forming an opinion on whether financial statements conform with IFRS
• • assists users in their interpretation of financial statements
• • provides information on the work carried out by the IASB
• It is not an accounting standard and it does not contain detailed requirements on how financial statements should be prepared or presented.
• The F/S must not avoid complex issues for the sake of understandability

Question 5

Objective of General Purpose Financial Reporting

Answer 5

• To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Question 6

Changes in economic resources and claims

Answer 6

Can be distinguished as:

• Financial performance reflected by accrual accounting
• Financial performance reflected by past cash flows
• Changes not resulting from financial performance (eg share issues and dividends).

Question 7

Qualitative Characteristics of F/S - Relevance (fundamental)

Answer 7

• Information is relevant if it has the ability to influence the economic decisions of users and is provided in time to influence those decisions.
• Has 2 characteristics: a predictive value and a confirmatory value.

Question 8

Qualitative Characteristics of F/S - Faithful Representation (fundamental)

Answer 8

• Information must be complete, neutral and free from error

Question 9

Qualitative Characteristics of F/S - Comparability (enhancing)

Answer 9

• Information should be consistently prepared (i.e. adopting the same accounting policies from one period to the next - IAS 8)

Question 10

Qualitative Characteristics of F/S - Verifiability (enhancing)

Answer 10

• Ensures the faithful representation of issues.

Question 11

Qualitative Characteristics of F/S - Timeliness (enhancing)

Answer 11

• The information must be available to the users in time to be capable of influencing their decisions.

Question 12

Qualitative Characteristics of F/S - Understandability (enhancing)

Answer 12

• Depends, in part on the way in which information is presented
• Assuming that users have: (a) a reasonable knowledge of business and accounting, and (b) willingness to study with reasonable diligence the information provided.

Question 13

Underlying assumption (Conceptual Framework)

Answer 13

• The accrual basis of accounting - has been removed and is discussed in IAS 1
• The going concern basis - assumes that the entity will continue to trade for the forseeable future. If not an alternative basis may need to be used and disclosed.

Question 14

Statement of Financial Position (Balance Sheet)

Answer 14

• Provides information about an entity’s financial position

Question 15

Statement of Profit or Loss and OCI

Answer 15

• Profit is used as the measure of financial performance.

Question 16

Statement of Changes in Equity

Answer 16

• Provides a link between the financial position and performance of an entity.

Question 17

Statement of Cash Flows

Answer 17

• Provides an assessment of changes in an entity’s financial position and is largely free from the more judgmental issues that arise when items are included in the Balance Sheet and Profit or Loss statement.

Question 18

Elements of F/S - Asset

Answer 18

A resource controlled by an entity ‘as a result of past events and from which future economic benefits are expected to flow’ to the entity

Question 19

Elements of F/S - Liability

Answer 19

A present obligation of the entity ‘arising from past events, the settlement of which is expected to result in an outflow’ of an entity’s resources.

Question 20

Elements of F/S - Equity

Answer 20

The residual interest in an entity’s assets after deducting all of its liabilities.

Question 21

Elements of F/S - Income

Answer 21

• Increases in economic benefits not resulting from contributions made by equity holders.
• Comprises both revenue and gains
• Revenue arises from an entity’s normal operations
• Gains are increases in economic benefits as is revenue and therefore are not separately identified within the Framework

Question 22

Elements of F/S - Expenses

Answer 22

Include losses, for example write-downs of non-current assets

Question 23

Recognition

Answer 23

• The process of incorporating in the financial statements an item that meets the definition of an element.
• An item is classified as ‘recognized’ when it is included in the F/S
• An item should be recognized if it is probable that there will be an inflow or outflow of economic benefits associated with the asset or liability and the asset and liability can be measured reliably.
• Revenue should be earned before it is recognized
• Expenses are recognized when there is a decrease in an asset or an increase in a liability
• Matching is a key concept (there are 2 sides to each transaction).

Question 24

Measurement bases used in IFRS (primarily based on historical cost)

Answer 24

• Historical cost - assets are recorded at their original cost. Liabilities are recorded at their original amount received or the cash expected to be paid out to settle them.
• Current cost - Assets are recorded at the amount that would have to be paid out at the end of the reporting period for an equivalent asset. Liabilities are recorded at the value that they could be settled for at the end of the reporting period.
• Realizable or settlement value - Assets are recorded at the amount that they could be sold for now and similarly liabilities are recorded at the amount expected to be paid out.
• Present value - involves discounting future cash flows to account for the time value of money.

Question 25

Profit

Answer 25

- Any amount over and above that required to maintain the capital at the beginning of the period. - The residual amount that remains after expenses have been deducted from income.