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The Conceptual Framework (2018)

The objective of general purpose financial reporting PROVIDE financial information that is USEFUL to users in making DECISION relating to PROVIDING RESOURCES to the entity
Users' decisions involve decisions about 1) buying, selling or holding equity or debt instruments 2) providing or settling loans and other forms of credit 3) voting, or otherwise influencing management's actions
THREE primary USERS 1) existing and potential INVESTORS, 2) existing and potential LENDERS and 3) existing and potential OTHER CREDITORS
How does financial reporting help the users - what to they need to assess 1) prospects for future net cash inflows to the entity 2) management’s stewardship of the entity’s economic resources
TO make their assessment USERS need information about 1) a reporting entity’s economic resources, claims and changes in resources and claims 2) how efficiently and effectively management has discharged its responsibilities to use the entity’s economic resources
How would you define Stewardship how effectively and efficiently management has discharged their responsibilities to use the entity's existing resources.
Benefit of Accruals accounting it depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period
The qualitative characteristics of useful financial information If financial information is to be useful, it must be (a) relevant and (b) faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable
Relevance Relevant financial information is capable of making a difference in the decisions made by users
Materiality information is material if omitting it or misstating it could influence the decisions that users make on the basis of financial information about a specific reporting entity
faithful representation To be a perfectly faithful representation, information must be Complete – including all necessary information Neutral – completely unbiased Error-free – both in description AND process to produce
Substance over form the principle that financial statements should report the commercial and economic substance of a transaction, rather than its strict legal form
Enhancing qualitative characteristics (four) 1) Comparability, 2) verifiability, 3) timeliness and 4) understandability
Comparability information about a reporting entity is more useful if it can be COMPARED with similar information about other entities and with similar information about the same entity for another period or another date
Verifiability means that different knowledgeable and independent observers could reach CONSENSUS, although not necessarily complete agreement, that a particular depiction is a faithful representation
Timeliness means having information available to decision-makers IN TIME to be capable of INFLUENCING their decisions
Understandability Classifying, characterising and presenting information clearly and concisely makes it UNDERSTANDABLE
Going Concern Statements are prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future ie the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations;
The elements of the financial statements (five) 1) Assets 2) Liabilities 3) Equity 4) Income and 5) Expenses
Asset An ASSET is a present economic resource controlled by the entity as a result of past events An economic resource is a right that has the potential to produce economic benefits
Liability A LIABILITY is a present obligation of the entity to transfer an economic resource as a result of past events An obligation is a duty or responsibility that the entity has no practical ability to avoid
Equity the residual interest in the assets of the entity after deducting all its liabilities
Income Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
Expenses Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims
When should an item be recognised in the financial statements Recognition is appropriate if to results in both relevant information about the [assets] and a faithful representation of those items because the aim is to provide information that is useful to investors, lenders and other creditors
Four different measurement bases 1) Historical cost 2) Fair Value 3) Value in use (for assets) / fulfilment value (for liabilities) 4) Current Cost
Historical cost Assets would be recorded at the price paid to acquire them. Liabilities are recorded at the amount of proceeds received in exchange for the obligation
Current cost Assets are carried at the current purchase price. Liabilities are carried at the amount required to settle the obligation currently
Fair value Assets are carried at the amount that could currently be obtained by selling the asset. Liabilities are carried at the amount required to settle them.
Value in use Assets are carried at the discounted value of the future cash inflows that the item will generate. Liabilities are carried at the discounted value of the future cash outflows required to settle them.
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