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Framework

The Conceptual Framework

TermDefinition
The objective of general purpose financial reporting PROVIDE financial information about the company that is USEFULl to existing and potential investors, lenders and other creditors in making DECISION about PROVIDING RESOURCES
Users need information to help make DECISIONS, which are 1) buying, selling or holding equity 2) providing or settling loans 3) other forms of credit
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 To assess the prospects for future profit or returns, such as 1)The assets and liabilities of a company, and 2) How efficiently and effectively management have used the company’s resources (to make a profit)
Why is the Statement of Financial Position useful? Provide information about the entity’s FINANCIAL POSITION with details of its economic resources (ASSETS) claims against it (LIABILITIES
Why is the Statement of Profit or Loss useful? also provide information about the effects of transactions and other events that CHANGE a reporting entity’s economic resources and claims
Why is the Statement of Cash Flow useful? Information about an entity’s cash flows during a period helps users to assess ability to generate future net cash inflows
Benefit of Accruals accounting Transactions are 1) recognised when they occur 2) not recognised when cash changes hands 3) recorded in the accounting records for the period to which they relate 4) reported in the financial statements of the periods to which they relate
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 1) a resource controlled by the entity 2) as a result of past events and 3) from which future economic benefits are expected to flow to the entity
Liability 1) a present obligation of the entity 2) arising from past events, 3) the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
Equity the residual interest in the assets of the entity after deducting all its liabilities
Income 1) increases in economic benefits during the accounting period 2) in the form of inflows, enhancements of assets or decreases of liabilities 3) that result in increases in equity, 4) other than those relating to contributions from equity participants
Expenses 1) decreases in economic benefits during the accounting period 2) in the form of outflows, depletions of assets or incurrence of liabilities 3) that result in decreases in equity, 4) other than those relating to distributions to equity participants
When should an item be recognised in the financial statements 1) it is PROBABLE that any future economic benefit associated with the item will flow to or from the entity; and 2) the item has a cost or value that can be measured with RELIABILITY
Four different measurement bases 1) Historical cost 2) Current cost 3) Realisable value 4) Present value
Historical cost - Asset Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition
Current cost Assets are carried at the amount of cash that would have to be paid if the same or an equivalent asset was acquired currently (now). Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligation currently
Realisable value - Asset Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal
Present value - Asset Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business
Present value - Liability Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business
Historical cost - Liability Liabilities are recorded at the amount of proceeds received in exchange for the obligation at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business
Realisable (settlement) value - Liabilities Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business