Question Tag: IASB Conceptual Framework

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 4 Marks

FR – May 2019 – L2 – Q5c – Conceptual Framework for Financial Reporting

Summary of the scope of the IASB Conceptual Framework for Financial Reporting, focusing on its core components.

The IASB Conceptual Framework for Financial Reporting provides a set of principles that guide the preparation and presentation of financial statements. These principles form the basis for the development of accounting standards and provide a reference for resolving accounting issues not directly addressed by a specific standard.

Required: Summarize the contents (scope) of the IASB’s Conceptual Framework for Financial Reporting.

Scope of the IASB Conceptual Framework for Financial Reporting:

  1. Objective of General Purpose Financial Reporting:
    • The framework establishes that the primary objective of financial reporting is to provide useful financial information to a wide range of users, including investors, lenders, and other creditors, to help them make informed economic decisions about providing resources to the entity. This objective highlights the importance of meeting the needs of external users who do not have the ability to demand specific financial information.
  2. Qualitative Characteristics of Useful Financial Information:
    • Fundamental Qualities:
      • Relevance: Information is relevant when it can make a difference in users’ decisions by providing predictive or confirmatory value.
      • Faithful Representation: Information must be complete, neutral, and free from material error to accurately represent what it claims to depict.
    • Enhancing Qualities:
      • Comparability: Users should be able to compare financial statements across different periods and entities.
      • Verifiability: Different knowledgeable and independent observers should be able to reach the same conclusions regarding the information provided.
      • Timeliness: Information must be provided in time to influence decision-making.
      • Understandability: Information should be clear and concise, making it accessible to users with reasonable financial knowledge.
  3. Elements of Financial Statements:
    • The framework defines the key elements of financial statements, including:
      • Assets: Resources controlled by the entity that provide future economic benefits.
      • Liabilities: Present obligations that are expected to result in an outflow of economic resources.
      • Equity: The residual interest in the entity’s assets after deducting liabilities.
      • Income: Increases in economic benefits during an accounting period that result in an increase in equity.
      • Expenses: Decreases in economic benefits that result in a decrease in equity.
  4. Recognition and Derecognition:
    • The framework provides criteria for recognizing elements in the financial statements:
      • Recognition occurs when it is probable that future economic benefits associated with an item will flow to or from the entity and the item has a cost or value that can be reliably measured.
      • Derecognition involves the removal of assets or liabilities from the balance sheet, usually when the entity no longer controls the asset or is no longer obligated by the liability.
  5. Measurement:
    • The framework discusses different measurement bases that can be used to quantify elements in financial statements:
      • Historical Cost: Assets and liabilities are recorded at their original transaction price.
      • Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
      • Current Cost: The cost that would be incurred to acquire or replace an asset or settle a liability today.
  6. Presentation and Disclosure:
    • The framework emphasizes the importance of presenting financial information clearly and appropriately. This includes determining how elements should be aggregated or disaggregated and how financial performance and position should be displayed in financial statements. The framework also calls for relevant disclosures to ensure that users have the necessary information to understand an entity’s financial position and performance.
  7. Capital and Capital Maintenance:
    • The framework discusses the concept of capital maintenance, which ensures that the capital of an entity is maintained either in financial terms (financial capital) or in operational terms (physical capital). The distinction helps to determine whether the entity has maintained its capital intact over a reporting period.

Summary:

The IASB Conceptual Framework provides the fundamental principles that guide the preparation of financial statements, including the objectives of financial reporting, the qualitative characteristics of useful information, the elements of financial statements, recognition and measurement principles, presentation and disclosure requirements, and the concept of capital maintenance. These principles are essential for ensuring that financial statements are relevant, reliable, and useful for users’ decision-making.

  • 6 Marks

FR – Nov 2015 – L2 – Q4a – Conceptual Framework for Financial Reporting

This question asks for an explanation of the qualitative characteristics of understandability and comparability in financial reporting, along with the role of consistency in comparability.

(a) Two of the enhancing qualitative characteristics of useful financial information contained in the IASB’s Conceptual Framework for Financial Reporting are understandability and comparability.

Required:
Explain the meaning and purpose of the above characteristics in the context of financial reporting and discuss the role of consistency within the characteristic of comparability in relation to changes in accounting policy. (6 marks)

(a) Understandability
Financial information is intended to assist users in making economic decisions. For this purpose, it is important that financial information is presented in a form that users can understand. However, this does not mean that complex matters which some users may find difficult to understand, and which some directors may like an excuse to exclude, should be left out of financial statements. Reports from which data has been excluded could be incomplete and misleading. The Conceptual Framework states that users can be assumed to have reasonable knowledge of business and economic activities and be prepared to review and analyze the information diligently.

Comparability
In understanding the financial performance of an entity, users will want to compare its results with those of other entities in the same sector and with its own results for previous periods. The concept of comparability is, therefore, very important. Comparison between entities is made more possible by IFRSs in which most allowed alternatives have been removed and by the requirement to disclose accounting policies. So, if two entities have applied different accounting policies, users can be aware of that and allow for it.

Comparing an entity’s results with its performance in prior years requires the application of consistency. An entity should treat financial items and transactions in a consistent manner from year to year, by applying the same accounting policies. Where there is a change of accounting policy from one year to the next, the comparative information must be restated to show what the results for the previous year would have been if the new accounting policy had been applied. The statement of changes in equity also shows the effect on the previous year’s equity balances of the change of accounting policy. The user is therefore able to adjust for the change of accounting policy and observe the changes in underlying performances.

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope