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Flashcards

1.4 The IASB Conceptual Framework

Ed Blocksidge Financial Accounting & Reporting ACA English 57 cards

Cards in this deck (57)

  1. 1Describe the two Conceptual Frameworks and when they existed (2)1. Pre 2010: IASB Framework for the Preperation & Presentation of Financial Statements (all IASs and IFRSs based on this)
    2. This is gradually being replaced by the Conceptual Framework for Financial Reporting which determines:
    a) How financial statements are prepeared
    b) The information they contain
  2. 2What was the first phase of the IASB/FASB joint project for conceptual framework (1)Chapters 1 and 3 published in September 2010 (1)
  3. 3What is the current state of the Conceptual Framework for Financial Reporting? (4)Chapter 1: The objective of general purpose financial reporting
    Chapter 2: The reporting entity (to be issued)
    Chapter 3: Qualitative characteristics of useful financial information
    Chapter 4: Remaining text of the 1989 framework
  4. 4What are the five sections included in Chapter 4? (5)1. Underlying assumption
    2. The elements of financial statements
    3. Recognition of elements of financial statements
    4. Measurement of elements of financial statements
    5. Concepts of capital and capital maintenance
  5. 5Describe the contents of the introduction to the conceptual framework (7)Provides a list of the purposes of the conceptual framework:
    1. To assist the Board in the development of future IFRSs and in its review of existing IFRSs
    2. To assist the board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs
    3. To assist national standard-setting bodies in developing national standards
    4. To assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS
    5. To assist auditors in forming an opinion as to whether financial statements comply with IFRSs.
    6. To assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs
    7. To provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs
  6. 6In case of a conflict between the conceptual framework and an IFRS, which prevails? (1)IFRS (1)
  7. 7Give the objective of the conceptual framework as stated in Chapter 1 (1)'The objective of general purpose financial reporting is to provide 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.'
  8. 8In Chapter 1, what does the CF state users need infoormation about? (3)1. The economic resources of the entity
    2. The claims against the entity
    3. Changes in the entity's economic resources and claims
  9. 9Why is information about the economic resources of the entity and claims against the entity useful? (1)In assessing the entity's liquidity and solvency and its likely needs for additional financing (1)
  10. 10Why is information about the entity's financial resources (changes in economic resources and claims)? (2)1. Helps users understand the return that the entity has produced on its economic resources
    2. Indicator of how efficiently and effectively management has used the resources of the entity and is useful in predicting future returns
  11. 11What other features of the Conceptual Framework are stated in Chapter 1? (2)1. Information should be prepared on an accruals basis
    2. Information about a reporting entity's cash flows during a period also helps users assess the entity's ability to generate future net cash inflows and gives users a better understanding of its operations
  12. 12What are the two fundamental characteristics of financial information in Chapter 3, define each. (2)1. Relevance: Relevant financial information is capable of making a difference in the decisions made by the users
    2. Faithful representation: A perfectly faithful representation should be complete, neutral and free from error
  13. 13Draw the tree of Qualitative Characteristics (16)Check book
  14. 14Define materiality (1)Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information of a specific reporting entity (1)
  15. 15Define the three characteristics and one implied characteristic of faithful representation (4)1. Complete: A compete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations
    2. Neutral: A neutral depiction is without bias in the selection or presentation of financial information. This means that information must not be manipulated in any way in order to influence the decisions of users
    3. Free from error: Means that there are no omissions or errors in the description of the phenomenon and no errors made in the process by which the financial information was produced. It does not mean that no inaccuracies can arise, particularly where estimates have to be made
    4. IMPLIED IN FAITHFUL REPRESENTATION Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form
  16. 16List three examples of accounting for substance over form (3)1. Sale and repurchase agreement
    2. Leases
    3. Group financial statements
  17. 17Define comparability (1)The qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. (1)
  18. 18Define consistency (1)Refers to the use of the same methods for the same items (i.e. consistency of treatment) either from period to period within a reporting entity or in a single period across entities (1)
  19. 19Define verifiability (1)Helps assure users that information faithfully represents the economic phenomena it purports to represent. It means that different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation (1)
  20. 20Define timeliness (1)Information may become less useful if there is a delay in reporting it. There is a balance between timeliness and the provision of reliable information (1)
  21. 21Define understandability (1)Should be understandable for users who have a reasonable knowledge of business an economic activities and who review and analyse the information diligently. However, matters should not be left out of financial statements simply due to their difficulty as this could be incomplete and misleading (1)
  22. 22Summarise the 'cost constraint' on financial reporting (3)- A pervasive constraint (1)
    - When information is provided, its benefits must exceed the costs of obtaining and presenting it (1)
    - Subjective, as benefits and costs vary for different users (1)
  23. 23Define the 'elements of financial statements' as laid out in the conceptual framework (2)Financial position, SOFP:
    - Assets
    - Liabilities
    - Equity (1)
    Performance , statement of profit/loss & other comprehensive income:
    - Income
    - Expenses
    - Other comprehensive income (1)
  24. 24Define 'asset' (2)- Resource controlled by entity as a result of past events and from which future economic benefits are expected to flow to the entity (1)
    - Technically, the asset is the access to future economic benefits, not the underlying item of property itself (1)
  25. 25Define 'Liability' (2)- A present obligation of the entity arising from past events, the settlement of which is expected to lead to the outflow from the entity of resources embodying economic benefits (1)
    - An obligation implies that the entity is not free to avoid the outflow of resources (1)
  26. 26Define 'Equity' (2)- The residual amount found by deducting all of the entity's liabilities from all the entity's assets (1)
    - Equity = ownership interest = net assets.
    For a company this usually comprises shareholders' funds (ie capital and reserves) (1)
  27. 27Define 'income' (2)- Increases in economic benefits in the form of asset increases/ liability decreases not resulting from contributions from equity participants (1)
    - Income comprises revenue and gains, including all recognised gains on non-revenue items (eg revaluations of NCAs) (1)
  28. 28Define 'expenses' (2)- Decreases in economic benefits in the form of net asset decreases/ liability increases not resulting from distribution to equity participants (1)
    - Expenses include losses, including all recognised losses on non-revenue items (such as write-downs of NCAs) (1)
  29. 29Describe the 'balance sheet approach' that is adopted by the conceptual framework (1)Performance statements, such as the statements of profit and loss, are treated as a means of of reconciling changes in the financial position amounts shown in the statement of financial position (1)
  30. 30Define 'future economic benefit' (1)The potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity (1)
  31. 31Define 'obligation' (3)- A duty or responsibility to act or perform in a certain way (1)
    - Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement (1)
    - May also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner (1)
  32. 32What is a 'constructive obligation'? (1)When management's decision is implemented in a way which creates expectation in the minds of customers, suppliers or employees, which therefore becomes an obligation (1)
  33. 33Which time requirement is there in order for a liability to exist? (1)- Must arise from PAST transactions or events (1)
  34. 34What is the link between an entity's equity and the market value of its shares? (1)There is none (1)
  35. 35What is the most important distinction between equity and liabilities? (1)Creditors have the right to insist that the transfer of economic resources is transferred to them regardless of the entity's financial position, but the owners do not (1)
  36. 36Define 'gains' (1)Increases in economic benefits. As such they are no different in nature from revenue (1)
  37. 37Define 'losses' (1)Decreases in economic benefits. As such they are no different in nature from other expenses (1)
  38. 38Define 'recognition' (3)- The process of incorporating in the statement of financial position, statement of profit or loss or statement of other comprehensive income an item that meets the definition of an element and satisfies the following criteria for recognition: (1)
    It is probable that any future economic benefit associated with the item will flow to or from the entity, and... (1)
    The item has cost or value that can be measured with reliability (1)
  39. 39What other considerations, aside from the fundamental definition, should be taken for 'recognition' (3)- Materiality (1)
    - Items that might meet the two criteria one at a time, might be recognised subsequently (1)
    - An item that fails to meet the criteria, may still merit disclosure in the notes to the financial statements (1)
  40. 40Which factors should be considered in assessing the 'probability' of future economic benefits (3)- Characteristics of the entity's environment (1)
    - Evidence available when statements are prepared (1)
    - 'Is it more probable than not' is working definition (1)
  41. 41What are the three considerations for when expenses and income should be recognised? (3)- Accruals basis: They should be recognised in the correct period (1)
    - Expenses should be recognised immediately when expenditure is not expected to result in the generation of future economic benefits (1)
    - Expenses should also be recognised immediately when a liability is incurred without the corresponding recognition of an asset (1)
  42. 42What are the four IFRS measurement bases? (4)1. Historical cost
    2. Current cost
    3. Realisable/Settlement value
    4. Present value
  43. 43Describe 'historical cost' (2)- Assets are recorded at the amount of cash or cash equivalent paid or the fair value of consideration given to acquire them at their time of acquisition (1)
    - Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business (1)
  44. 44Define 'current cost' (2)- Assets are carried at the amount of cash or cash equivalents that would have to paid if the same or equivalent asset were acquired currently (1)
    - Liabilities are carried at the undisclosed amount of cash or cash equivalents that would be required to settle the obligation currently (1)
  45. 45Define 'realisable value' (1)The amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal (1)
  46. 46Define 'settlement value' (1)The undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business (1)
  47. 47Define the 'present value' measurement basis (1)A current estimate of the present discounted value of the future net cash flows in the normal course of business (1)
  48. 48What is the most commonly adopted measurement basis? (1)Historical cost (1)
  49. 49How should concepts of capital and capital maintenance be presented? (2)- Choice made on basis of needs of the users of the FSs (1)
    - IASB has no present intention of prescribing a particular model (1)
  50. 50Define 'financial capital maintenance' (1)Under a financial concept of capital maintenance, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity (1)
  51. 51What is the financial concept of capital? (1)Profit is only earned in an accounting period if the equity at the end of the period is greater than it was at the start, having excluded the effects of distributions/contributions to/from the owners during the period (1)
  52. 52What is the problem with the monetary measurement of capital? (1)It is debased by even quite low rates of general inflation over long periods, such as 20 years, so comparisons can be invalid (1)
  53. 53What is the 'constant purchasing power' variant on the monetary measurement of capital? (4)- The opening capital is uprated by the change in a broadly based proce index, often a retail prices index, over the year (1)
    - Transactions during year also uprated by change in the same index (1)
    - So a profit is only earned if the capital at the end of the year exceed the uprated values (1)
    - Capital maintenance adjustment can be thought of as an additional expense (1)
  54. 54Define 'Physical Capital Maintenance' (1)Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day (1)
  55. 55Describe the process of physical capital maintenance (3)- Looks behind monetary values to the underlying physical productive capacity of the entity (1)
    - Based on approach that entity is nothing other than means of producing saleable outputs... (1)
    - So profit only earned after that productive capacity has been maintained by a capital maintenance adjustment (1)
  56. 56What are the advantage of the physical capital maintenance approach? (1)Comparisons over 20 years should be more valid than under a monetary approach (1)
  57. 57Describe the difficulty in making the capital adjustment for physical capital maintenance (1)Difficulty lies in finding appropriate indices appropriate to the productive capacity of a particular entity (1)

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ACA Financial Accounting & Reporting (Reporting Framework & Ethics) Flashcards on 1.4 The IASB Conceptual Framework, created by Ed Blocksidge on 23/12/2014.
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