Professional Documents
Culture Documents
Provide financial information about the reporting entity that is useful to existing & potential
investors, lenders and other creditors in making decisions about providing resources to the
entity.
Qualitative characteristics
Fundamental QC Enhancing QC
Relevance Timeliness closely related to relevance
Predictive value Example: Historical cost, definitely not
Confirmatory value timely and hence may not be relevant
Materiality
Faithful representation Verifiability closely related to faithful
Complete representation
Neutral
Free from error
Understandability (to people who are
financially literate)
Comparability
Same entity over time
Across different entities
Recognition:
Means incorporating an item in SFP or SPL.
In total, 5 criteria have to be met
1. Meet definition of element (usually 3 criteria in this, e.g. assets control, future ec
benefit, past event)
2. Probable inflow/outflow of future economic benefits
3. Cost can be measured reliably
Specific recognition principles are found in their specific FRSs, and only apply to certain
items as stated by that FRS. They may not be fully consistent with general recognition
principles.
Disclosure:
Presentation > Disclosure
Presentation requires you to present it in some format, e.g. a table for FV level 1,2,3.
Presentation helps to improve understandability.
Notes:
Case 1 provides the first-order quality of measurement.
Case 4 is not always the worst case scenario. In the example above, Case 4 is
better than Case 3 since adjustments are made.
Other examples:
o Using historical cost of car adjusted for A/D as measure of fair value of car:
Substitute attribute of a relevant phenomenon.
P: share price
B: A L = E (net assets)
Why?
o Intangible assets: usually not recognized in books since do not meet definition
criteria or other asset recognition criteria. However, the market recognizes these
assets.
o Valuation problem: market uses fair value, but accounting does not always use fair
value.