(R23 p3)Qualitative Characteristics of Financial Reports

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Section 1

Question Answer
RelevanceInformation is relevant if it would potentially affect or make a difference in users’ decisions. The information can have predictive value (useful in making forecasts), confirmatory value (useful to evaluate past decisions or forecasts), or both
MaterialityInformation is considered to be material if omission or misstatement of the information could influence users’ decisions. Materiality is a function of the nature and/or magnitude of the information.
Faithful representation:Information that faithfully represents an economic phenomenon that it purports to represent is ideally complete, neutral, and free from error.
Comparabilityto identify and understand similarities and differences of items.
VerifiabilityVerifiability means that different knowledgeable and independent observers would agree that the information presented faithfully represents the economic phenomena it purports to represent.
TimelinessTimely information is available to decision makers prior to their making a decision
UnderstandabilityClear and concise presentation of information enhances understandability.
Constraints on Financial ReportsA pervasive constraint on useful financial reporting is the cost of providing and using this information; Financial statements, by necessity, omit information that is non-quantifiable

Section 2

Question Answer
The Elements of Financial Statementsassets, liabilities, and equity
assetsResources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Assets are what a company owns
liabilitiesPresent obligations of an enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Liabilities are what a company owes
Equity Assets less liabilities. Equity is the residual interest in the assets after subtracting the liabilities.
elements of financial statements directly related to the measurement of performanceincome and expenses
incomeIncreases in economic benefits in the form of inflows or enhancements of assets, or decreases of liabilities that result in an increase in equity (other than increases resulting from contributions by owners). Income includes both revenues and gains. Revenues represent income from the ordinary activities of the enterprise (e.g., the sale of products). Gains may result from ordinary activities or other activities (the sale of surplus equipment).
expensesDecreases in economic benefits in the form of outflows or depletions of assets, or increases in liabilities that result in decreases in equity (other than decreases because of distributions to owners). Expenses include losses, as well as those items normally thought of as expenses, such as the cost of goods sold or wages.
Two important assumptions underlie financial statements accrual accounting and going concern
accrual accountingassumes that financial statements should reflect transactions in the period when they actually occur, not necessarily when cash movements occur
Going concernassumption that the company will continue in business for the foreseeable future

Section 3

Question Answer
Measurement of Financial Statement ElementsMeasurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement.
Historical simply the amount of cash or cash equivalents paid to purchase an asset, including any costs of acquisition and/or preparation. If the asset was not bought for cash, historical cost is the fair value of whatever was given in order to buy the asset. When referring to liabilities, the historical cost basis of measurement means the amount of proceeds received in exchange for the obligation.
Amortised costHistorical cost adjusted for amortisation, depreciation, or depletion and/or impairment.
Currentreference to assets, current cost is the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today. In reference to liabilities, the current cost basis of measurement means the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.
Realizable (settlement) valuereference to assets, realizable value is the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. For liabilities, the equivalent to realizable value is called “settlement value”—that is, settlement value is the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.
Present value (PV)For assets, present value is the present discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business. For liabilities, present value is the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.
Fair valuemeasure of value mentioned but not specifically defined in the Conceptual Framework (2010). Fair value is defined in IFRS and US GAAP as an exit price, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This may involve either market measures or present value measures depending on the availability of information.