The Financial Reporting Framework

Question 1

What is the objective of the conceptual framework?

Answer 1

Enable standard setters to achieve a consistent and coherent set of fundamental principles which will help users of financial statements to form more complete assessments of a companies performance

Question 2

What does the Conceptual Framework help?

Answer 2

• the IASB to develop IFRSs that are based on consistent concepts
• preparers of FS to develop consistent accounting policies
• all parties to understand and interpret the standards

Question 3

What does IAS 1 aim to provide?

Answer 3

A framework within which an entity presents fairly the effects of transactions and other events in a set of financial statements

Question 4

What do you have to do to get fair presentation?

Answer 4

An entity must comply with IFRSs but in the absence of a relevant accounting standard, an entity should refer to the definitions, recognition criteria and measurement concepts in the Conceptual Framework

Question 5

What are the 5 qualitative characteristics of financial information?

Answer 5

• Relevance
• Materiality
• Faithful Representation
• Prudence
• Substance over form

Question 6

Which 2 qualitative characteristics have changed since the the 2010 version?

Answer 6

• Prudence

- Substance over form

Question 7

Explain relevance

Answer 7

Relevant financial information makes a difference to the decision of the user.

• predictive value (can be used to predict future values)
• confirmatory value (feedback about previous evaluations)

Question 8

Explain materiality

Answer 8

A threshold quality of information. Information is material if it’s omission or misstatement could influence the decisions that users might make based on the financial statements of an entity

Question 9

Explain faithful representation

Answer 9

Information in the financial statements faithfully represents the transactions and other events it purports to represent.

• complete
• neutral
• free from error

Question 10

Explain prudence

Answer 10

Neutrality is supported by prudence; exercising caution when making judgements under conditions of uncertainty

Question 11

Explain substance over form

Answer 11

Faithful representation reflects the economic substance of an entity’s transactions even where this is difference from their legal form.

Question 12

Name 4 ways relevant and faithfully represented information can be improved

Answer 12

• Comparability
• Verifiability
• Timeliness
• Understandability

Question 13

When does an entity recognise an item in the financial statements? (The recognition criteria)

Answer 13

RECOGNITION 
- it meets the definition of an element 
- it provides useful information
   Relevant information 
   Faithful representation

DERECOGNITION

• Loses control of the asset
• No longer has a present obligation

Question 14

When does derecognition usually occur?

Answer 14

• The entity loses control of an asset

- The entity no longer has a present obligation for a liability

Question 15

What was the criteria for recognition in 2010?

Answer 15

• the item meets the definition of an element
• probable future economic benefits
• reliably measured

Question 16

What is the measurement basis under the Conceptual Framework?

Answer 16

• Historical Cost

- Current value

Question 17

What is current value split into under the measurement basis?

Answer 17

• fair value
• value in use
• Current Cost

Question 18

Explain fair value

Answer 18

The price that would be received to sell an asset

Question 19

Explain value in use

Answer 19

Present value of future cashflows

Question 20

Explain current cost

Answer 20

The cost of an equivalent asset at the measurement date

Question 21

What should an entity consider when selecting a measurement basis?

Answer 21

• Characteristics of asset being measured
• How the asset contributes to future cashflows?
• Whether there is measurement uncertainty?

Question 22

What does effective communication in financial statements require?

Answer 22

• Focussing on objectives and principles rather than on rules
• Classifying Information in a manner that groups similar items
• Aggregating Information in such a way that it is not obscured either by unnecessary detail or excessive summarisation

Question 23

What is the argument for reclassification to the profit and loss?

Answer 23

It ensures that profit and loss includes all relevant gains and losses. No items of income and expenses are excluded from the profit or loss permanently

Question 24

What are the 3 arguments against reclassification?

Answer 24

• Results in profit or losses being recorded in a different period from the change
• Creates complexity and may lead to confusion
• May lead to earnings management

Question 25

What is the definition of an asset?

Answer 25

A present economic resource by the entity as a result of past events.

Question 26

What is the definition of a liability?

Answer 26

A present obligation of the entity to transfer an economic resource as a result of past events.

Question 27

What is the definition of expenses?

Answer 27

Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders or equity claims.

Question 28

What’s the impact of the Conceptual Framework?

Answer 28

There may be more liabilities

Question 29

What is an economic resource?

Answer 29

A right that has the potential to produce economic benefits