Tecnologías de la Comunicación y la Información (TICs)
5.8. Mesa de coordinación provincial de Policía Canaria (MECOP)
We discussed above how a conceptual Framework can be useful in a regulatory environment. Many of the points raised above are true for the Framework and the IASB’s standard- setting process. It will provide a reference point for those developing standards and help them provide consistent guidance. It does remove the need to address the underlying principles in each individual standard.
Where new technical issues and problems are raised and not covered specifi cally by an accounting standard, a short-term solution is provided by the IASB until it can be addressed fully. The International Financial Reporting Interpretations Committee (discussed in Chapter 7) issues such guidance and can use the Framework to ensure that the guidance it provides is consistent with the agreed underlying principles.
8.6 Summary
Having completed this chapter, we can now explain the purpose, status and scope of the Framework. We can identify the main topics included in the Framework and explain briefl y what they cover. A number of points have been discussed, illustrating how useful a conceptual Framework can be. We can use these points together with the IASB’s objectives of the Framework to evaluate its relationship to the standard-setting process.
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Question 1
The IASB’s Framework includes reliability as one of the characteristics that make fi nancial information useful.
(i) Complete (ii) Predictive value (iii) Confi rmatory value (iv) Neutrality
(v) Faithful representation.
Which of the characteristics above are listed in the Framework as making fi nancial infor- mation reliable?
(A) (i), (iv) and (v) (B) (ii), (iii) and (iv) (C) (ii) and (iii)
(D) (ii) and (v) (2 marks)
Question 2
The Framework for the Preparation and Presentation of Financial Statements has a number of purposes, including:
● assisting the Board in the development of future IFRSs and in its review of existing
IFRSs;
● assisting the Board in promoting harmonisation of regulations, accounting standards
and procedures relating to the presentation of fi nancial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs;
● assisting preparers of fi nancial statements in applying IFRSs and in dealing with topics
that are yet to be covered in an IFRS.
Requirement
Discuss how a conceptual Framework could help IASB achieve these objectives.
(5 marks)
Revision Questions
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Question 3
The IASB’s Framework for the Preparation and Presentation of Financial Statements
(Framework) lists the qualitative characteristics of fi nancial statements. (i) Comparability, (ii) Relevance, (iii) Prudence, (iv) Reliability, (v) Understandability, (vi) Matching, (vii) Consistency.
Which THREE of the above are NOT included in the principal qualitative characteris- tics listed by the Framework?
(A) (i), (iii) and (vii) (B) (i), (ii) and (v) (C) (iii), (vi) and (vii)
(D) (iii), (iv) and (vi) (2 marks)
Question 4
Relevance and reliability are two of the four main qualitative characteristics of fi nancial information, as set out in the Framework.
Requirements
(a) Briefl y discuss what is meant by these terms. (5 marks)
(b) Give an example of when these two attributes could come into confl ict and what the
outcome is likely to be. (5 marks)
(Total marks 10)
Question 5
The Framework includes the following defi nition:
‘ an asset is a resource controlled by the entity as a result of past events and from which future economic ben- efi ts are expected to fl ow to the entity. ’
Requirement
Explain this defi nition, using the example of a trade receivable. (5 marks)
Question 6
The IASB Framework for the Preparation and Presentation of Financial Statements (Framework) provides defi nitions of the elements of fi nancial statement. One of the elements defi ned by the framework is ‘ expenses ’ .
Requirement
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Question 7
The IASB’s Framework for the preparation and presentation of fi nancial statements (Framework) identifi es four principal qualitative characteristics of fi nancial information.
Requirement
Identify and explain EACH of the FOUR principal qualitative characteristics of fi nancial
information listed in the IASB’s Framework. (5 marks)
Question 8
The International Accounting Standards Board’s (IASB) Framework for the Preparation and Presentation of Financial Statements (Framework), sets out four qualitative character- istics of fi nancial information.
Two of the characteristics are relevance and comparability. List the other TWO
characteristics. (2 marks)
Question 9
According to the International Accounting Standards Board’s Framework for the Preparation and Presentation of Financial Statements, what is the objective of fi nancial statements?
Write your answer in no more than 35 words. (2 marks)
Question 10
The Framework for the Preparation and Presentation of Financial Statements (Framework) was fi rst published in 1989 and was adopted by The International Accounting Standards Board (IASB).
Requirement
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Solution 1
The correct answer is (A).
Items (ii) and (iii) are included in the Framework as characteristics of relevance, see Section 8.3.3.
Solution 2
A conceptual Framework provides guidance on the broad principles of fi nancial reporting. It highlights how items should be recorded, on how they should be measured and pre- sented. The setting of broad principles could assist in the development of accounting standards, ensuring that the principles are followed consistently as standards and rules are developed.
A conceptual Framework can provide guidance on how similar items are treated. By providing defi nitions and criteria that can be used in deciding the recognition and meas- urement of items, conceptual Frameworks can act as a point of reference for those setting standards, those preparing and those using fi nancial information.
The existence of a conceptual Framework can remove the need to address the underlying issues over and over again. Where underlying principles have been established and the accounting standards are based on these principles, there is no need to deal with them fully in each of the standards. This will save the standard-setters time in developing standards and will again ensure consistent treatment of items.
Where a technical issue is raised but is not specifi cally addressed in an accounting standard, a conceptual Framework can help provide guidance on how such items should be treated. Where a short-term technical solution is provided by the standard-setters, the existence of a conceptual Framework will ensure that the treatment is consistent with the broad set of agreed principles, see Section 8.2.1.
Solution 3
The correct answer is (C), see Section 8.3.3.
Solution 4
(a) Information is relevant when it infl uences the economic decisions of users by help- ing them to evaluate past, present or future economic events, or confi rming/correcting their past evaluations.
Solutions to
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Although fi nancial statements do not normally contain information about future activities, any information that helps users assess the future performance and fi nancial position of an entity is likely to be relevant. An item is likely to be relevant by virtue of its nature and materiality. Information is material if its omission or misstatement could infl uence the decision-making of users.
Information can also be relevant because of its unusual nature, irrespective of mate- riality. The directors would have to judge, in this case, if the nature of the information was such that its omission could infl uence the economic decision-making of users. Information should be released on a timely basis to be relevant to users.
Information is reliable when it is free from material error and bias and can be con- sidered by users to be a faithful representation of the underlying transactions and events. To show a faithful representation, the transactions must be accounted for and presented on the basis of their commercial reality rather than their legal form.
In addition, the information must be neutral (free from bias) and complete. An omission can cause information to be false or misleading, as can the overstating of accounting estimates like provisions and valuations.
(b) An example of where relevance and reliability could come into confl ict could be the existence of a contingent liability.
If the directors of an entity believe with reasonable certainty that a future liability has been identifi ed they must fi rst consider whether details on it should be included. If they consider that knowledge of it could affect the decision-making of users, then it should be included. However, given it is based on a future event, it cannot be meas- ured with certainty and they may not have suffi cient information to make a fi nancial estimate with reasonable certainty. It may be questionable then if the information they could provide would be reliable.
In this case relevance and reliability must be traded off. It is likely that if omission of information on the potential liability would affect users ’ decision-making then, details should be included even if the fi nancial amount cannot be stated with reasonable cer- tainty. Relevance would override reliability in this case, see Sections 8.3.3.2 and 8.3.3.3.
Solution 5
In the case of a trade receivable, the past event is the making of a credit sale. The goods are transferred and the amount receivable is included in the fi nancial records of the entity making the sale. That entity now has a receivable that is expected to turn into cash on receipt of the payment. The entity can be reasonably certain of payment where the trans- action is complete, there is no dispute with the receivables and the receivables is not con- sidered to be a credit risk. In this case, the entity can be reasonably certain that the future economic benefi t (cash) will fl ow to them at the end of the granted credit period and can recognise the receivable as an asset within the fi nancial statements, see Section 8.3.4.
Solution 6
Expenses are decreases in economic benefi ts during the accounting period in the form of outfl ows or depletions of assets that result in decreases in equity, other than those relating to distributions to equity participants, see Section 8.3.4.
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Solution 7
Understandability
An essential quality of fi nancial information is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and eco- nomic activities and accounting and a willingness to study the information with reasonable dili gence. Information on complex issues should be included if relevant and should not be excluded on the ground that it is too diffi cult for the average user to understand.
Relevance
Information is relevant when it infl uences the economic decisions of users by helping them to evaluate past, present or future economic events, or confi rming/correcting their past evaluations.
An item can be relevant by virtue of its nature or materiality. Information is material if its omission or misstatement could infl uence the decision-making of users.
Information should be released on a timely basis to be relevant to users.
Reliability
Information is reliable when it is free from material error and bias and can be considered by users to be a faithful representation of the underlying transactions and events.
To be reliable the information must:
● faithfully represent the transactions it is intended to represent;
● be accounted for and presented on the basis of its commercial reality rather than its legal
form – substance over form;
● be neutral, free from bias.
Comparability
The ability to identify trends in performance and fi nancial position and compare those both from year to year and against other entities assists users in their assessments and decision-making. To achieve comparability, users must be able to identify where an entity has changed its policy from one year to the next, and where other entities have used differ- ent accounting policies for similar transactions, see Section 8.3.3.
Solution 8
Reliability and understandability
See Section 8.3.3.
Solution 9
The objective of fi nancial statements is to provide information about the fi nancial pos- ition, performance, and changes in that position, of an entity that is useful to a wide range of users in making economic decisions.
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Solution 10
According to the Framework , its purposes are to:
● assist the Board in the development of future IFRSs and in its review of existing IFRSs;
● assist the Board in promoting harmonisation of regulations, accounting standards and
procedures relating to the presentation of fi nancial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs;
● assist national standard-setting bodies in developing national standards;
● assist preparers of fi nancial statements in applying IFRSs and in dealing with topics that
have yet to be covered in an IFRS;
● assist auditors in forming an opinion as to whether fi nancial statements conform with
IFRSs;
● assist users of fi nancial statements that are prepared using IFRSs;
● provide information about how the IASB has formulated its approach to the develop-
ment of IFRSs. See Section 8.2.1.