FinAcc1 - Chapter 2

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43 Terms

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conceptual framework

system of objectives and fundamentals that lead to consistent standards within the financial world

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2 reasons why we need a conceptual framework

  1. increase usefulness

  2. solve problems more quickly

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what are the 3 levels of conceptual framework?

  1. objectives of financial reporting (the why)

  2. qualitative characteristics and elements (bridge)

  3. foundational principles (the how)

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2 fundamental qualitative characteristics

relevance and representational faithfulness

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what is relevance?

3 factors?

ability in making a difference in a decision

predictive value, feedback/confirmatory value, materiality

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predictive value

relevant info helps users make predictions about final outcome of past, present, and future events

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feedback/confirmatory value

relevant info helps users confirm or correct previous expectations

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materiality

relevant information makes a difference to the decision maker

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representational faithfulness?

4 factors?

how accurately info represents underlying economic substance

transparency, complete, neutral, free from material error

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transparency

represent economic reality

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complete

include all info to portray underlying events and transactions

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neutrality

info should be factual, truthful, and unbiased

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free from material error

how is this achieved?

info is reliable

achieved from good info systems and strong internal controls

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4 enhancing qualitative characteristics

comparability, verifiability, timeliness, understandability

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comparability

info is measured and reported in a similar manner (year to year, company to company)

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verifiability

independent users achieve similar results using same methods

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hard numbers

easy to verify with a reasonable degree of accuracy

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soft numbers

hard to measure, takes estimating

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timeliness

how to achieve

info is available to decision makers before losing ability to influence their decisions

publish quarterly statements

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understandability

info is clear enough to allow users to see its significance

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3 essential characteristics of assets

  1. right to produce economic benefits

  2. entity controls resource - can decide how to use asset

  3. resource results from past transaction/event

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3 essential characteristics of liabilities

  1. represent present obligation, with no ability to avoid them

  2. obligates entity to transfer an economic resource (asset)

  3. arises from past transaction or event

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under ASPE, revenues are

increases in economic resources, either by inflows of assets or settlement of liabilities, resulting from ordinary activities

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under IFRS, revenues are

increases in assets /decreases in liabilities from transactions other than those involving shareholders

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what makes gains/losses different from revenues/expenses?

gains and losses are from incidental transactions, not day to day

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what does the foundational principles explain? (3)

recognition, measurement, and presentation/disclosure

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4 principles of recognition/derecognition

economic entity assumption, control, revenue recognition and realization, matching principle

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under ASPE, elements of financial statements are recognized when they (3)

  • meet definition of an element (liability)

  • are probable

  • are reliably measurable

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under IFRS, elements of financial statements are recognized when they (2)

meet definition of element

provide users with relevant info that faithfully represents underlying transaction or event

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what does the economic entity assumption allow us to do? how?

allows us to be accountable, business activity should be kept separate and distinct from owners

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under ASPE, an investor has control over an investee when (1)

it has continuing power to make important decisions without help

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under IFRS, an investor has control over an investee when it has (3)

power over investee

potential to gain returns

influence amount of returns

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what 3 conditions must be met to recognize revenue under ASPE?

  1. risk and rewards have passed

  2. revenue is measurable

  3. revenue is collectible

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what is the 5 step approach when recognizing revenue under IFRS?

  1. identify contract

  2. identify performance obligations

  3. determine transaction price

  4. allocate price to obligation

  5. when obligation is satisfied, recognize revenue

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matching principle

attempt to match expenses with revenues within fiscal period

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measurement uncertainty rises in form of (2)

explain each one

existence uncertainty - unclear whether item should be recognized as asset/liability, or at all

outcome uncertainty - future inflows and outflows cannot be estimated

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5 assumptions of measurement

periodicity, monetary unit, going concern, historical cost principle, fv principle

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periodicity assumption

economic activities can be divided into artificial time periods (quarterly)

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monetary unit assumption

dollars are appropriate basis for accounting measurement

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going concern assumption

entity will continue in operation for foreseeable future

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historical cost principle

transactions are initially recognized at original cost

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what principle explains presentation and disclosure?

full disclosure principle

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5 main factors that may cause poor financial reporting

  1. canadian GAAP is principles based, so requires consistent professional judgement

  2. need to meet regulatory requirements

  3. potential for bias because mgmt bonuses are based on earnings

  4. capital markets focus on EPS

  5. measurement uncertainty