Business

BUS310 ACCOUNTING THEORY AND ACCOUNTABILITY

TJA 2016 KAPLAN

WORKSHOP 2 SOLUTIONS

TOPIC 2: The Conceptual Framework for Financial Reporting

1. What is a conceptual framework?

A conceptual framework is defined in the text as a set of broad principles that provide the basis for guiding actions or decisions. An accounting conceptual framework can be described as: a coherent system of concepts that underlie financial reporting. As the Conceptual Framework (page 26) states ‘This Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users.’

5. What is the objective of financial reports according to the Conceptual Framework?

Historically, external financial reports were prepared (and required) to ensure minimum information was given to investors to make informed judgements about the performance of management and the security of investments. The need to protect the rights of external users of information, who are not involved in the operations of the company, is the primary justification for the need for external financial reporting. Such reports are used as a source of information for those parties who are planning to transfer resources to an organisation.

The Conceptual Framework outlines the purposes of financial reports:

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. (OB2)

Hence should note:

 Objective is to provide information for decision making

 Identifies specific decision makers and types of decisions and limits to these.

The revised Conceptual Framework:

 Restricts users and...