ACCA Applied Skills · Financial Reporting

The need for a conceptual framework and the characteristics of useful information: formula sheet

Full chapter guide

Key formulas

Purpose of the framework: Framework = principles underlying standards, not a standard itself; If a specific IFRS conflicts with the framework, the IFRS prevails.
Main benefits: Consistency + guidance for new issues + less political influence + better understanding + comparability; Use these as a checklist when asked to discuss advantages.
Problems without a framework: Fire-fighting + inconsistency + gaps + bias + lower comparability; Standards are developed piecemeal and may contradict each other.
Rules vs principles: Rules-based: certainty but loopholes. Principles-based: flexibility but judgement.; Be ready to give one point for each side.
Objective of general purpose financial reporting: Useful information about the reporting entity → for existing and potential investors, lenders and other creditors → to help decisions on providing resources to the entity; Use this wording in written answers. Name all three user groups.
Primary users: Primary users = existing and potential investors + lenders + other creditors; They cannot require the entity to supply information directly, so they depend on general purpose reports.
What users assess: (1) Prospects for future net cash inflows to the entity; (2) management's stewardship of the entity's economic resources; These are the two assessments that the information must support.
Information provided: Economic resources and claims (financial position) + changes in them (financial performance and other events); Performance is reported on an accrual basis and is supported by information on cash flows.
Fundamental characteristics: Relevance + Faithful representation; Both must be present for information to be useful.
Components of relevance: Relevance = predictive value and/or confirmatory value (includes materiality); Materiality is an entity-specific aspect of relevance, not a separate characteristic.
Faithful representation: Complete + Neutral + Free from error; Free from error does not mean exact. Estimates can be faithful if clearly explained.
Enhancing characteristics: Comparability, Verifiability, Timeliness, Understandability; They improve useful information. They cannot make irrelevant or unfaithful information useful.
Cost constraint: Benefits of reporting information should justify its costs; A pervasive constraint on all financial reporting.
Going concern assumption: Entity continues in operation for the foreseeable future, with no intention or need to liquidate or curtail operations materially; If not appropriate, prepare on another basis (e.g. break-up) and disclose that basis and why.
Going concern assessment period: Look at least 12 months from the end of the reporting period; IAS 1 says at least, not exactly. Material uncertainties must be disclosed.
Accruals basis: Profit = revenue earned in the period − expenses incurred in the period; Regardless of when cash moves. IAS 1 applies it to all statements except cash flow information.
Accrual adjustment: Expense charged = cash paid + accrued at end − prepaid at end (adjusting for opening balances where relevant); Use it to move from cash paid to the expense for the period.

Quick revision

The framework is not a standard, and a standard overrides it if they conflict.
It helps standard setters, preparers and users, and guides treatment where no standard applies.
The objective is information useful to existing and potential investors, lenders and other creditors.
Fundamental characteristics: relevance and faithful representation.
Enhancing characteristics: comparability, verifiability, timeliness and understandability.
Relevant information can make a difference to decisions, through predictive value, confirmatory value or both.
Materiality is an entity-specific aspect of relevance, based on whether omission or misstatement could influence decisions.
Faithful representation means complete, neutral and free from error.
Free from error does not mean perfectly accurate, and estimates can still be faithful if described properly.
Cost is a pervasive constraint on useful reporting.
Going concern assumes the entity will continue operating for the foreseeable future.
If going concern no longer applies, statements are prepared on a different basis and this must be disclosed.

Common mistakes

Saying the framework overrides IFRS standards. Fix: State that it is not a standard. A specific IFRS prevails if there is a conflict.
Listing benefits without explaining them. Fix: Write the point, the reason and the effect, for example: no framework leads to fire-fighting, so standards conflict.
Listing employees, customers, government and the public as primary users. Fix: Remember there are only three primary users: investors, lenders and other creditors. Others may use the reports but are not the target.
Saying the objective is to show the value of the entity. Fix: Say the reports help users estimate value. They do not show it. The objective is useful information for resource decisions.
Listing materiality as a separate fundamental characteristic. Fix: Treat materiality as an entity-specific aspect of relevance.
Saying reliability is a fundamental characteristic. Fix: Use faithful representation. Mention substance over form as part of it.
Saying going concern means the entity is guaranteed to survive. Fix: It is an assumption made by management for preparation purposes. It can be wrong, and the notes must flag significant doubt.
Writing that doubt about going concern means statements must use break-up values. Fix: Material uncertainty means normal basis plus disclosure. Break-up basis applies only when the assumption is not appropriate.

Exam tips

Always say the framework is not a standard and does not override IFRS standards. Examiners test this directly.
For 'discuss' questions, give at least one point on each side, such as principles-based flexibility versus the need for judgement.
Use the term fire-fighting precisely: standards produced in response to a crisis without underlying principles.
In objective questions, watch for options that overstate, such as 'always' or 'prevents'.
Link points to users: comparability and understandability are what the framework ultimately protects.
Write the objective with all three user groups and the purpose, which is decisions about providing resources. Examiners look for these exact elements.
In scenario questions, name the user in the scenario and say which decision they make before you list information needs.
If an option says reports are for all stakeholders, show the entity's value or meet every need, treat it as likely wrong.