Professional Documents
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Question 1
This Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users.
This Conceptual Framework is not an FRS and hence does not define standards for
any particular measurement or disclosure issue. Nothing in this Conceptual
Framework overrides any specific FRS.
The Conceptual Framework deals with:
(a) the objective of financial reporting;
(b) the qualitative characteristics of useful financial information;
(c) the definition, recognition and measurement of the elements from which
financial statements are constructed;
and (d) concepts of capital and capital maintenance.
(a) The objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about
providing resources to the entity. Those decisions involve buying, selling
or holding equity and debt instruments, and providing or settling loans
and other forms of credit.
To a large extent, financial reports are based on estimates, judgements
and models rather than exact depictions. The Conceptual Framework
establishes the concepts that underlie those estimates, judgements and
models.
(b) The qualitative characteristics of useful financial information discussed in
this chapter identify the types of information that are likely to be most
useful to the existing and potential investors, lenders and other creditors
for making decisions about the reporting entity on the basis of information
in its financial report (financial information).
The fundamental qualitative characteristics are relevance and faithful
representation.
Relevance
Financial information is capable of making a difference in decisions if it
has predictive value, confirmatory value or both.
Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes. Financial
information need not be a prediction or forecast to have predictive value.
Financial information with predictive value is employed by users in making
their own predictions.
Question 2
a) Relevance
Reporting about the buildings current value is relevant information to
investors and has predictive value (ppl can use the info to determine if value
of property will go up or down) & confirmatory value (cfms past evaluations).
b) Faithful Representation
- Comparability
Financial information becomes more useful as users now can better
compare the 2 companies as the company has switched their inventory
method to be the same as their competitor.
c) Faithful Representation
- Understandability
While removal of the extra information would ensure that the report
remains easy to understand, even to the less sophisticated financial report
users, however, the report would be incomplete and therefore potentially
misleading.
The financial reports are meant for users who have a reasonable
knowledge of business and economic activities and who review and
analyse the information diligently. At times, even well informed and
diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.
Question 3
Benefits
- Development of concepts in orderly sets that make financial accounting and
reporting consistent and logical
- Increased compatibility of standards internationally enabled through such
consistency
- Economical development of accounting
- Overall enhanced communication
Limitations
- too general in nature
- principles with its huge reliance on various assumptions. It may, therefore, be of
little help when actually producing financial statements and can lead to the
development of accounting standards which are very academic, theoretical and
prone to fraud.
- These standards may also, in practice, make provision of financial information
quite complex for both the preparers and the users of the financial reports (Sterling
1982).
- Concepts might be pure and refined but with the complexity and difficulty in
understanding, the usefulness of financial statements can be watered down
From
http://www.academia.edu/5992232/EVALUATION_OF_CONCEPTUAL_FRAMEWORKS_O
F_ACCOUNTING
Part 2