accounting - topic 10

purpose of the conceptual framework

describes the objectives of, and the concepts for, general purpose financial reporting

purpose of the conceptual framework assistance 1

this assists the AASB to ensure that the australian accounting standards are developed based on concepts which are consistent across all standards which brings transparency, accountability and efficiency to australian financial markets

purpose of the conceptual framework assistance 2

this assists preparers to develop accounting policies that are consistent when no standards exist for a particular time, or when there is a choice of accounting policies within a standard and also assists all individuals to understand and interrupt the standards

fundamental characteristics

characteristics that financial information must have which includes relevance and faithful representation

enhancing characteristics

characteristics if present will enhance/make better financial information which includes comparability, verifiability, timeliness and understandability

relevance

relevance in financial reports means information must be capable of making a difference in users decisions, this applies even if users already know the information or choose not to use it, it supports general purpose financial reports by helping users judge past, present and future events and to be relevant information need to have a predictable and/or confirmatory value

predictable values

helps forecast future outcomes

confirmatory values

confirms past events

relevance - materiality

knowing what is important which can relate to the nature or size of the transaction

faithful representation

financial reports must faithfully represent the substance of economic phenomena, not just their legal form which ensures that the information provided is complete, neutral and free from error

faithful representation - complete

the information must include all costs and state the valuation method, covering purchase price plus additional charges like taxes, transport and installation

faithful representation - neutral

the information must be without bias, avoiding inflated or deflated figures for purposes like selling a business or reducing tax

faithful representation - free from error

the information must disclose valuation methods and ensure accurate figures which are supported by strong internal and external control

comparability

enables users to identify similarities and differences in financial information across businesses and time periods, it relies on consistent accounting methods and standards to allow fair evaluation

verifiability

ensures information faithfully represents events, allowing users with different skills to reach similar conclusions, it can be either direct (invoices) or indirect (reviewing valuation methods) but budgets are excluded as future amounts may not be verifiable

timeliness

information must be available quickly enough to aid decision-making as the older the data the less useful it is, listed companies must report twice a year within 3 months and small proprietary companies must report once a year within 6 month

understandability

information should be clear to users with reasonable business knowledge who are willing to study it, complexity should not be removed if relevant and users should seek professional help if needed

asset - definition

a present economic resource controlled by the entity as a result of past events and an economic resource is a right that has the potential to produce economic benefits

asset/liability - recognition

recognised only if recognition of that asset or liability and of any resulting income, expenses or changes in equity provides users of financial statements with information that is useful

liability - definition

a present obligation of the entity to transfer an economic resource as a result of past events

equity - definition

a residual interest in the assets of the entity after deducting all its liabilities

income - definition

increases assets or decreases liabilities that result in increases in equity other than those relating to contribution from holders of equity claims

recognition - conceptual framework

links the statement of financial position and performance which arises because the recognition or change of one item requires the recognition, or derecognition, of one or more items

expense - definition

increases liabilities or decreases assets that result in decreases in equity other than those relating to distributions to holders of equity claims

statement of financial position elements

assets, liabilities and equity

derecognition

the removal of all or part of a recognised asset or liability form an entitys statement of financial position

income - recognition

the initial recognition of an asset, or an increase in the carrying amount of an asset OR the derecognition of a liability, or an decrease in the carrying amount of a liability

expenses - recognition

the initial recognition of a liability, or an increase in the carrying amount of an liability OR the derecognition of an asset, or a decrease in the carrying amount of an asset

financial reports

statement of comprehensive income, statement of financial position, statement of changes in equity and statement of cashflows