Introduction

The Framework is not a Standard yet it is the foundation of just about all of the standards that the IASB publishes: see paragraph 2 of the Framework, which also says clearly:

Nothing in this Framework overrides any specific International Accounting Standard.

Moreover, in paragraph 3, the Framework advises us that

The Board of IASC recognises that in a limited number of cases there may be a conflict between the Framework and an International Accounting Standard … the requirements of the International Accounting Standard prevail over those of the Framework … the number of cases of conflict between the Framework and International Accounting Standards will diminish through time.

Despite these two crucial points, the Framework looks and reads exactly like a Standard in style and content.

The Purpose and Status of the Framework is set out in detail in paragraph 1, part of which follows:

1 This Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The purpose of the Framework is to:

a. assist the Board of IASC in the development of future International Accounting Standards and in its review of existing International Accounting Standards;
b. assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements …
c. assist national standard-setting bodies in developing national standards;
d. assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form the subject of an International Accounting Standard;
e. assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;
f. assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting Standards; and
g. provide those who are interested in the work of IASC with information about its approach to the formulation of International Accounting Standards.

The Scope of the Framework is also comprehensively set out, this time in paragraphs 5 to 8. In brief, the scope of the framework is to deal with

5 …
the objective of financial statements;
the qualitative characteristics that determine the usefulness of information in financial statements;
the definition, recognition and measurement of the elements from which financial statements are constructed; and
concepts of capital and capital maintenance.
6 The Framework is concerned with general purpose financial statements (hereafter referred to as "financial statements") including consolidated financial statements. Such financial statements are prepared and presented at least annually and are directed toward the common information needs of a wide range of users. ... Special purpose financial reports, for example, prospectuses and computations prepared for taxation purposes, are outside the scope of this Framework. Nevertheless, the Framework may be applied in the preparation of such special purpose reports where their requirements permit.
7 Financial statements form part of the process of financial reporting. A complete set of financial statements normally includes a balance sheet, an income statement, a statement of changes in financial position (which may be presented in a variety of ways, for example, as a statement of cash flows or a statement of funds flow), and those notes and other statements and explanatory material that are an integral part of the financial statements …Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report.
8 The Framework applies to the financial statements of all commercial, industrial and business reporting enterprises, whether in the public or the private sectors. A reporting enterprise is an enterprise for which there are users who rely on the financial statements as their major source of financial information about the enterprise.

The solutions to the questions on this page are available to anyone who asks: just email me and I'll send them by return ... don't forget to tell me what you want!! Whilst I have prepared all of the solutions to these questions, I have used IAS materials for some of them and I can't put them here because to do so could infringe the IASB's copyrights.

The layout of this page is that I have worked my way through the Framework from start to finish exploring the most important paragraphs as I go. It will be most useful if you have the Standard in front of you as you work your way through this page.

Questions

1 A complete set of financial statements normally includes …

Complete this sentence, taken from the Framework.

2 The Framework names 7 users or groups of users of financial statements who "use financial statements in order to satisfy some of their different needs for information"

a who are these users?
b what information do the users generally need?
c There are more users of financial statements than those given in the list provided by the Framework:
i name four more users of financial statements?
ii state the information your additional users might need from the financial statements

3 What, according to the Framework, are the objectives of financial statements?

4 Why does the Framework say that "financial statements do not provide all the information that users may need to make economic decisions"?

5 What does paragraph 14 mean by the phrase "the stewardship of management"?

6 "Information about financial position is primarily provided in a balance sheet. Information about performance is primarily provided in an income statement". So says paragraph 19 of the Framework.

Paragraph 19 is to be found in the section of the Framework entitled Financial Position, Performance and Changes in Financial Position: in this context discuss

a how information about financial structure is useful in predicting the future borrowing needs of an organisation
b how information about liquidity and solvency is useful in predicting the ability of the enterprise to meet its financial commitments
c how information about profitability is useful in predicting the economic resources that the organisation is likely to control in the future
d how information concerning changes in the financial position of an organisation is useful in predicting its investing, financing and operating activities
e how the component parts of the financial statements interrelate

Illustrate your answers with examples of your own, as appropriate.

7 The Framework is not a Standard yet it is the foundation of just about all of the standards that the IASB publishes: state and explain the underlying assumptions of financial statements given by the Framework.

8 The following listing of qualitative characteristics of financial statements comes from the Framework. Take each group and discuss the main implications for accountants of these characteristics.

1 understandability
2 relevant

a) materiality

3 reliability

a) faithful representation
b) substance over form
c) neutrality
d) prudence
e) completeness

4 comparability
5 constraints on relevant and reliable information

a) timeliness
b) balance between benefit and cost
c) balance between qualitative characteristics

6 true and fair view/fair presentation

9 provide the definition of the accounting term asset as to be found in the Framework

10 provide the definition of the accounting term liability as to be found in the Framework

11 provide the definition of the accounting term equity as to be found in the Framework

12 Fill in the gaps in this extract from the Framework

The future ______ ______ embodied in an asset is the _______ to contribute, directly or indirectly, to the flow of _______ and _______ _______ to the enterprise. The potential may be a _______ one that is part of the _______ activities of the enterprise. It may also take the form of convertibility into _______ or _______ _______ or a capability to reduce cash _______, such as when an alternative manufacturing process lowers the costs of production.

13 Give examples of assets that have a "physical form" and assets that have an alternative form.

14 In the definitions of asset and liability, we used the phrase "result from past events". Explain what is meant by the phrase "result from past events".

15 What is the "essential characteristic of a liability" according to the Framework?

16 State six ways in which the settlement of a present obligation may occur.

17 State some of the ways in which equity might be sub classified in a balance sheet.

18 Give the definition of income to be found in the Framework

19 Give the definition of expenses to be found in the Framework

20 Income includes both revenues and gains. Give different names that may be used in financial statements to denote revenue.

21 How are gains distinguishable from revenues?

22 Expenses encompass both expenses and losses: distinguish between these two terms.

23 Define and give examples to demonstrate your understanding of the term recognition in the context of financial statements.

24 When, according to the Framework, should an item be recognised in the financial statements?

25 Fill in the gaps in the following extract from the Framework.

An asset is _____ recognised in the balance sheet when expenditure has been incurred for which it is considered _______ that economic benefits will flow to the enterprise beyond the current accounting period. Instead such a transaction results in the recognition of an _______ in the income statement.

26 What is the general rule to be gleaned from the Framework vis a vis the recognition of assets, liabilities, income and expenses?

27 What is the definition of measurement to be found in the Framework?

28 What are the four measurement bases given in the Framework that are used in financial statements?

29 Distinguish between the financial and physical concepts of capital given in the Framework.

30 (a) Under what conditions would an organisation use the financial concept of capital?
(b) Under what conditions would an organisation use the physical concept of capital?

31 What does paragraph 104 of the Framework say about the financial and physical maintenance of capital?

Questions devised and prepared by
Duncan Williamson
6 August 2002

© Duncan Williamson
11 August 2002