Conceptual Framework

Question 1

What is Conceptual Framework and what is it’s purpose

Answer 1

• Provide guidance and consistent concepts for IFRS from IASB
• Provide guidance for accounting policies where no standard applies
• To assist in understanding and interpreting the standards

Question 2

What two things must an entity’s financial statements comply with?

Answer 2

• IFRS standards
• Conceptual framework for financial reporting

Question 2

True or False: Conceptual Framework exactly matches IFRS standards

Answer 2

False- there are slight discrepencies but the conceptual framework cannot override any standard requirements

Question 3

What is the Objective of financial reporting?

Answer 3

To provide financial information to lendors, investors and creditors - economic resources of entity and how efficiently and effectively

Question 4

What is meant by Accrual Accounting?

Answer 4

Reporting of Entity’s economic resources and claims are recognised in the period which they occur even if cash is recieved at a later date

Question 5

What are the fundamental qualitative characteristics of useful financial information?

Answer 5

Relevance and Faithfuol representation

Question 6

What is meant by materiality?

Answer 6

Information which if ommitted or misstated could influence decisions - can be material due to size, nature so it is entity specific and judgement based

Question 7

Explain the fundamental value of Relevance as a qualitative charcteristic

Answer 7

Financial informaiton is capable of making a difference in decision making. Due to predictive or confirmatory value - material information

Question 8

Explain the qualitative characteristic of Faithful representation

Answer 8

Information should faithfully represent the substance - complete, neutral and free from error

Question 9

What is meant by Prudence in Conceptual Framework

Answer 9

Exercising of caution when making judegmetns under uncertaintiy- income only stated when realised, liabilities stated when foreseen

Question 10

What are the four enhancing characteristics of useful financial information?

Answer 10

• Comparability
• Verifiability
• Timeliness
• Understandability

Question 11

What is the difference between comparability and consistency

Answer 11

• Comparable - entities which are similar can be compared
  -Consistency - use of same methods for same items

Question 12

Explain enhancing characteristic of verifiability

Answer 12

independent observers could reach consensus that information is a faithful representation: can be direct(verify ammount) or indirect (checking inputs to formula)

Question 13

Explain enhancing characteristic of timliness

Answer 13

• When infromation is available for users
• Newest informaiton is most useful

Question 14

Explain enhancing characteristic of Understandability

Answer 14

• Classifying, presenting information clearly to understand
• Without excluding complex information

Question 15

What is meant by the cost constraint of useful financial reporting

Answer 15

Conceptual framework asks to consider whether the benefits of reporting particular financial information justify the costs incurred to provide it

Question 16

What is meant by going concern?

Answer 16

Underlying assumption whereby financial statements are normally prepared assuming entity is going operation in the forseeable future.

Question 17

What does the three elements of Asset, Liability and Equity relate to on financial statement

Answer 17

An Entity’s financial position

Question 18

What does the elements of Income and expense relate to on financial statement

Answer 18

An Entity’s performance

Question 19

Define asset

Answer 19

Present economics resource - right has the potential to produce economic benefits- controlled by entity as a result of of past events

Question 20

What is the accounting formula on the SOFP

Answer 20

Assets= Liabilities + Equity

Question 21

What are the three conditions to recognise an asset

Answer 21

• Control: entity must be able to direct use of economic resource
• Potential to produce economic benefit: resource : cash inflow, reduction of liabilities
• Right: entity has rights to recieve rg. cash, good/service or PPE

Question 22

Define Liability as per Conceptual framework

Answer 22

Present obligation of the entity to transfer an economic resource as a result of past events

Question 23

What are the three criteria to recognise liability

Answer 23

• Obligation: (legal or contractual), cannot be avoided
• Transfer of economic resource: Cash payment, delivery of good or service
• Present obligation due to past events: entity has already obtained economic benefits in the past,

Question 24

Define Equity

Answer 24

Residual interest in the assets of an entity after deducting liabilities Equity = Assets- Liabilities

Question 25

Define Income

Answer 25

Increase in assets or decrease in liabilities - result in increase in equity (other than relating to contributions from holders of equity claims)

Question 26

Define Expenses

Answer 26

Decreases in assets or increase in liability - that result in decrease in equity (other than those relating to distributions to holders of quity claims)

Question 27

What is recognition criteria?

Answer 27

An iten is recognised and included in SOFP or SPL when - it meets the definition of the elements - AND is Relevant AND Faithful representation - At a cost which does not outweigh benefits of providing information

Question 28

What is meant by derecognition

Answer 28

- Removal of all or part of recognised asset or liability - when control of part or all of an asset is lost - No longer a present obligation in respect of liability

Question 29

What is meant by measurement basis?

Answer 29

How element is quantified in monetary terms - Historical Cost : cost inccured in acquiring asset + transactional costs - Current Value: not from transactional price but price on the measurement date

Question 30

What are the three types of current value

Answer 30

1. Fair Value: market price of asset or liability or estimated using futture cash flows and discounting to reflect time value 2. Value in use or fulfillment value: present value of cash flow 3. Current cost: cost of an equibalent asset at measurement date

Question 31

What are the two concepts relating to capital

Answer 31

Financial concept of capital: Net Assets or Equity of an entity Physical Concept of Capital: Productive Capacity of entity eg. output per day

Question 32

What is the concept of financial capital maintenance?

Answer 32

Finacial capital maintenace: Profit earned if financial amout of net asssets at end of period > beginning - excluding ditrubutions to and contributions from holders of Equity

Question 33

What is the concept of physical capital maintenance?

Answer 33

A profit is made if physical productive capacity or operating cabability of entity at end of period is > begining - exluding any distributions to/contributions from holders of equity