Conceptual Framework (ias and ifrs)
Standards need to follow the framework.
2 frameworks: principles based and rules-based. Principle based is what we study, USA
(FASB) is more rule based.
Principles based  depreciation, you can choose the policy depending on case.
Different to compare.
Rules-based  Standards based on rules, no option to choose how to account. Easier
to compare.
Why do we need the framework?
Harmonisation. Assists in preparing standards.
Answer to question – a. Because if standard is not in conformity with framework, IFRS
is followed.
Chapter 1: why we prepare financial statements
To provide information to a group of users. Under current framework, main users are
investors, lenders and other creditors.
Limitations of financial statements:
A set of financial statements will not provide all the information about a company.
Recently more info was being required such as ESG.
They are also not designed to show the value of the entity.
Regulators and members of the public that may need financial info do not have access
Chapter 2: Qualitative characteristics of financial information.
Fundamental  if info does not have these characteristics, it will not be useful. There
are 2 of these: Relevance and faithful representation.
Enhancing  if info is not enhancing, it’s not as useful as it should be. If info is
enhancing, it improves usefulness.
Relevance  something is relevant if it influences decisions of the users. Information
should have: Predictive, confirmatory value. Info should have predictive value as using
info on past events, I can predict future outcomes. For example, if a department of a
business is closing, users can have an idea of future revenues as business line has
closed. Confirmatory value can confirm on decisions already taken.
Materiality  something is material if when it is left out or obscured, it will influence
decisions.
Faithful representation
true and fair values are taken. All material info must be included. 3 main points:
complete, neutral, free from error.
Substance over form – look at notes
Prudence  answer to question (d)
Comparability
Verifiability – verifying means that whoever is doing or working on statements should
arrive at same value.
Timeliness – Should be provided in time for users to make decisions.
Understandability – Information must be prepared clearly and concisely. Assume that
users of accounts have reasonable knowledge of the business.
SOFP, Statement of financial performance (SOPL), SOCIE and notes to the accounts.
Reporting period – 1 year.
Going concern – important assumption – financial statements are provided assuming
that entity will continue operating in the foreseeable future.
Reporting entity is required or chooses to prepare financial statements.
Financial statements:
Consolidated accounts – when you have a minimum of 2 companies, where 1 controls
the other. These will show you how to prepare accounts in this scenario.
Chapter 4
Asset- highlight controlled on the notes.
Liability – highlight present obligation
Equity = Net Assets = Share Capital + Reserves, preference share capital can also be
included in equity.
Question:
(1) Liability, since workers are not assets as you cannot control them.
(2) Ignore it, since it is internally generated value.
(3) None, due to prudence it cannot be included as it is not yet realised.
(4) Liability, it is a provision since retailers are presently obliged to provide a
warranty.
Question definition of expense – answer is (d)
Question equity – answer is (a)
Chapter 5 – Recognition and Derecognition
Derecognition – when we lose control (sell it or destroyed) or no present obligation
Chapter 6 – Measurement
Historical cost – price we have cash paid or cash received from item. Framework states
there are other ways to value these items:
Current value  fair value, value in use, current cost
Fair value  price which is paid between market participants (buyers and sellers)
Value in use  seeing value on how long item will generate cash flows. Cash flows
generated in the future need to be discounted to present use.
Current cost  Cost of equipment on the measurement day.
Value in use – to find present value use this formula:
current value/(1+interest rate)^no number of years
Multiple choice slide 49
a) Wrong because going concern does not guarantee the business will last. Also it
does not assume 12 months
b) Wrong  substance over form. What is actually happening is important
c) Wrong  not included in statement of cash flows as no cash is involved
d) Correct  Since land does not get depreciated, profits are
overstated/understated if historical cost is not used.