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conceptual framework
system of objectives and fundamentals that lead to consistent standards within the financial world
2 reasons why we need a conceptual framework
increase usefulness
solve problems more quickly
what are the 3 levels of conceptual framework?
objectives of financial reporting (the why)
qualitative characteristics and elements (bridge)
foundational principles (the how)
2 fundamental qualitative characteristics
relevance and representational faithfulness
what is relevance?
3 factors?
ability in making a difference in a decision
predictive value, feedback/confirmatory value, materiality
predictive value
relevant info helps users make predictions about final outcome of past, present, and future events
feedback/confirmatory value
relevant info helps users confirm or correct previous expectations
materiality
relevant information makes a difference to the decision maker
representational faithfulness?
4 factors?
how accurately info represents underlying economic substance
transparency, complete, neutral, free from material error
transparency
represent economic reality
complete
include all info to portray underlying events and transactions
neutrality
info should be factual, truthful, and unbiased
free from material error
how is this achieved?
info is reliable
achieved from good info systems and strong internal controls
4 enhancing qualitative characteristics
comparability, verifiability, timeliness, understandability
comparability
info is measured and reported in a similar manner (year to year, company to company)
verifiability
independent users achieve similar results using same methods
hard numbers
easy to verify with a reasonable degree of accuracy
soft numbers
hard to measure, takes estimating
timeliness
how to achieve
info is available to decision makers before losing ability to influence their decisions
publish quarterly statements
understandability
info is clear enough to allow users to see its significance
3 essential characteristics of assets
right to produce economic benefits
entity controls resource - can decide how to use asset
resource results from past transaction/event
3 essential characteristics of liabilities
represent present obligation, with no ability to avoid them
obligates entity to transfer an economic resource (asset)
arises from past transaction or event
under ASPE, revenues are
increases in economic resources, either by inflows of assets or settlement of liabilities, resulting from ordinary activities
under IFRS, revenues are
increases in assets /decreases in liabilities from transactions other than those involving shareholders
what makes gains/losses different from revenues/expenses?
gains and losses are from incidental transactions, not day to day
what does the foundational principles explain? (3)
recognition, measurement, and presentation/disclosure
4 principles of recognition/derecognition
economic entity assumption, control, revenue recognition and realization, matching principle
under ASPE, elements of financial statements are recognized when they (3)
meet definition of an element (liability)
are probable
are reliably measurable
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
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
under ASPE, an investor has control over an investee when (1)
it has continuing power to make important decisions without help
under IFRS, an investor has control over an investee when it has (3)
power over investee
potential to gain returns
influence amount of returns
what 3 conditions must be met to recognize revenue under ASPE?
risk and rewards have passed
revenue is measurable
revenue is collectible
what is the 5 step approach when recognizing revenue under IFRS?
identify contract
identify performance obligations
determine transaction price
allocate price to obligation
when obligation is satisfied, recognize revenue
matching principle
attempt to match expenses with revenues within fiscal period
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
5 assumptions of measurement
periodicity, monetary unit, going concern, historical cost principle, fv principle
periodicity assumption
economic activities can be divided into artificial time periods (quarterly)
monetary unit assumption
dollars are appropriate basis for accounting measurement
going concern assumption
entity will continue in operation for foreseeable future
historical cost principle
transactions are initially recognized at original cost
what principle explains presentation and disclosure?
full disclosure principle
5 main factors that may cause poor financial reporting
canadian GAAP is principles based, so requires consistent professional judgement
need to meet regulatory requirements
potential for bias because mgmt bonuses are based on earnings
capital markets focus on EPS
measurement uncertainty