CH 5 Conceptual Framework and Sustainability

Why is regulation important?

1. Reliability and utility

2. FS inform economic decisions

3. The universality of FS allows for global engagement

What is the purpose of the ISSB?

1. Develop standards for sustainability disclosures

2. Meet investor information needs

3. Facilitate interoperability

What are Financial Statements (FS)?

Documents which provide financial information used by the intended user to make informed decisions.

What are the key qualitative characteristics identified by the IFRS?

1. Relevance

2. Faithfulness

What makes a financial statement RELEVANT?

If it helps users evaluate events or confirm valuations.

Which two valuations might Relevant information have?

1. Predictive value

2. Confirmatory value

Which four characteristics make a financial statement FAITHFUL?

It must be:

1. Complete

2. Neutral

3. Free from error

4. Substance over form

ACRONYM: FFESOFNC

What are the four enhancing characteristics?

1. Comparability

2. Verifiability

3. Timeliness

4. Understandability

How is comparability promoted?

1. Information about selected accounting policies is disclosed

2. Common approach adopted by different entities

3. The scope to change policies is limited

What is the Going Concern concept?

1. The underlying assumption that a business is financially stable enough to continue operating and meet its financial obligations for the next 12 months.

2. An assumption that there is no intention of liquidation.

Describe the two Asset/Liability measurement bases used by the IFRS?

1. Historic Cost - Assets/Liabilities are recorded at the initial amount paid/received. This removes subjectivity.

2. Current Value. Irrelevant for the exam.

Are the IAS regulations surrounding presentation compulsory?

No, but recommended.

How does the IAS require information is presented?

Fairly - Faithful representation of transactions in line with the Conceptual Framework.

Financial statements must present what view according to CA 2006?

A true and fair view.

How are departures dealt with according to the IAS?

1. First, an entity that complies with IAS must disclose this fact.

2. If departure is necessary, the entity must disclose this fact along with an explanation.

What does the IAS state about comparative information?

The FS must include comparative information relating to the previous period.

What is materiality?

Materiality is a subjective category of information which, if omitted, misstated, or obscured, could influence the economic decisions of users.

What is offsetting?

Offsetting is when assets and liabilities, or income and expenses, are subtracted from one another BEFORE they are entered in the FS.

What is sustainability?

Development that meets the needs of the present without compromising the ability of the future to meet its own needs

What are the two main Climate-related risks faced by businesses?

1. Transition Risk: This is risk associated with the process of moving towards a low-carbon economy.

2. Physical Risk: The tangible negative effects of climate change.

What do the IFRS Sustainability Disclosure Standards require?

1. The disclosure of material information about the sustainability risks and opportunities faced by an entity.

2. To identify the risks and opportunities to monitor and report.

3. Select appropriate metrics and targets to report with

What are the four headings the Sustainability Disclosure appear under?

1. Governance

2. Risk Management

3. Strategy

4. Metrics and targets

In what two ways do an entity’s “Sustainability risks and opportunities” arise?

1. Impacts

2. Dependencies

What are impacts?

Impacts refer to the effect OF the entity on ESG issues.

What are some examples of an entity’s impact?

1. Human rights

2. Worker rights

3. Health and safety

4. Carbon emissions

5. Scarce natural resources

What are dependencies?

Dependencies refer to the effect of ESG issues ON the organisation’s ability to create and maintain value.

What are some examples of effects on an entity?

1. Employee welfare

2. Environmental pollution and change

3. Supplier and customer relationships

What does the IFRS require companies to report on?

1. Physical and transition risks and their potential impact on the move to a low-carbon economy.

2. Select appropriate metrics and targets for climate-related reporting.