Conceptual Framework: Objective of Financial Reporting - PROBLEMS

• The Conceptual Framework for Financial Reporting is a complete, comprehensive and single document promulgated by the international Accounting Standard Board.
• The Conceptual Framework is a summary of the terms and concepts that underlie the preparation and presentation of financial statements for external users.

  In other words, the Conceptual Framework describes the concepts for general purpose financial reporting.

  ,

  The Conceptual Framework is an attempt to provide an overall theoretical foundation for accounting.
• The Conceptual Framework is intended to guide standard setters, preparers and users of financial information in the preparation and presentation of statements.

  The Conceptual Frmework is the underlying theory for the development of accounting standards and revision of previously issued accounting standards.
• The Conceptual Framework will be used in future standard setting decision but no changes are made to the current IFS.
• Conceptual Framework provides the foundation for Standards that:

  • Contribute to transparency
  • Strengthen accountability
  • contribute economic effiency
• Purposes of Revised Conceptual Framework:

  • To assist the International Accounting Standards Board to develop IRS Standards based on consistent concepts.
  • To assist preparers of financial statements to develop consistent accounting policy when no Standard applies to a particular transaction or other event or where an issue is not yet addressed by an IFS.
  • To assist preparers of financial statements to develop accounting policy when a Standard allows a choice of an accounting policy.
  • To assist all parties to understand and interpret the IRS Standards.
• Authoritative status of Conceptual Framework:

  If there is a standard or an interpretation that specifically applies to a transaction, the standard or interpretation overrides the Conceptual Framework.
• Authoritative status of Conceptual Framework:

  In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in developing and applying an accounting policy that results in information that is relevant and reliable.

  However, it is to be stated that the Conceptual Framework is not an International Financial Reporting Standard
• Authoritative status of Conceptual Framework:

  Nothing in the Conceptual Framework overrides any specific

  International Financial Reporting Standard.

  In case where there is a conflict, the requirements of the International Financial Reporting Standards shall prevail over the Conceptual Framework.
• Under the Conceptual Framework for Financial Reporting the users of financial information may be classified into two namely:

  Primary users

  Other users
• The primary users include the existing and potential investors, lenders and other creditors.

  The other users include the employees, customers, governments and their agencies, and the public.
• Existing and potential investors

  Existing and potential investors are concerned with the risk inherent in and return provided by their investments, The investors need information to help them determine whether they should buy, hoid or sell.

  Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends.
• lenders and other creditors- are interested in information which enables them to determine whether their loans, interest thereon and other amounts owing to them will be paid when due.
• Other Users:

  • Employees are interested in information about the stability and profitability of the entity.
  • The employees are interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities.
• Other Users:

  Customers have an interest in information about the continuance of an entity especially when they have a long-term involvement with or are dependent on the entity.
• Public- Entities affect members of the public in a variety of ways.

  • Financial statements may assist the public by providing information about the trend and the range of its activities.
• Financial reports also include nonfinancial information such

  as description of major products and a listing of corporate officers and directors.
• Specific objectives of financial reporting:

  The Conceptual Framework places more emphasis on the importance of providing information needed to assess the management stewardship of the entity's economic resources.
• • Decisions by existing and potential investors about buying, financ selling or holding equity instruments depend on the returns that they expect from an investment, for example, dividends.
  • Similarly, decisions by existing and potential lenders and

  other creditors about providing or settling loans and other the forms of credit depend on the principal and interest payments or other returns that they expect.

  • Consequently, financial reporting should provide information useful in assessing the amount, timing and uncertainty of prospects for future net cash inflows to the entity.
• Liquidity is the quailability of cash in the near future to cover currently maturing obligations.

  Solvency is the availability of cash over a long term to meet financial commitments when they fall due.
• The financial performance of an entity comprises revenue, expenses and net income or loss for a period of time.
• The financial performance of an entity is also known as results of operations and is portrayed in the income statement and statement of comprehensive income.
• The financial performance of the entity must be measured using the accrul basis of accounting.
• Accrual accounting depicts the effects of transactions and other events and circumstances on an entity's economic

  resources and claims in the periods in which those effects occur even if the resulting cash receipts and payments cur in a different period.
• accrual basis, the effects of transactions and other events are recognized when they occur and not as cash is received or paid.
• accrual accounting means that income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid.
• Which statement is true about the Conceptual Framework for Financial Reporting?a. The Conceptual Framework is not a Standard. b. The Conceptual Framework describes the concepts for general purpose financial reporting. c. In case of conflict, the requirements of the IFRS prevail over the Conceptual Framework. d. All of these statements are true about the Conceptual Framework.

  d
• The scope of the Revised Conceptual Framework comprises how many chapters? a. Five b. Six c. Seven d. Eight

  d
• The Conceptual Framework provides the foundation for Standards that a. Contribute to transparency by enhancing international comparability and quality of financial information. b. Strengthen accountability of management. c. Contribute to economic efficiency by helping investors ,to identify opportunities and risks. d. All of these are the result of Standards developed based on consistent concepts.

  d
• In the Conceptual Framework for Financial Reporting, what provides the "why" of accounting? a. Measurement and recognition concept b. Qualitative characteristic of accounting information c. Element of financial statement d. Objective of financial reporting

  d
• Which group is not among the external users for whom financial statements are prepared? a. Customers b. Suppliers c. Employees d. All of these are external users of financial statements

  c
• These users require information on risk and return provided by their investment. a. Investors b. Employees c. Lenders d. Customers

  a
• These users are interested in information about the profitability and stability of the entity in order to assess the ability of entity to provide remuneration, retirement benefits and employment opportunities. a. Customers b. The public c. Governments and their agencies d. Employees

  d
• These users are interested in information that enables them to assess whether their loans, the related interest thereon, and other amounts owing to them will be paid when due. a. Lenders and other creditors b. Borrowers c. Trade creditors d. Owners

  a
• These users are interested in information about continuance of an entity, especially when they have long-term involvement with or are dependent on entity. a. Customers b. Employees c. Trade unions d. Suppliers

  a
• These users are interested in information in order to regulate the activities of an entity, determine taxation policies and provide a basis for national statistics. a. Governments and their agencies b. Major organization of usersc. Bureau of Internal Revenued. Department of Finance

  a
• These users need information on trends and recent developments where an entity makes a substantial contribution to the local economy providing employment and using local suppliers. a. The public b. Governments and their agencies c. Finance entities d. Private entities

  a
• The overall objective of financial reporting is to provia information a. That is useful for decision making. b. About assets, liabilities and equity of an entity. c. About financial performance during a period. d. That allows owners to assess management performance.

  a
• The primary focus of financial reporting has been meeting the needs of which of the following groups? a. Managementb. Existing and potential investors, lenders and other creditors c. National taxing authorities d. Independent CPAs

  b
• The primary objective of financial reporting is to provide useful information to a. Management b. Capital providers c. Regulatory body d. Government

  b