c) The development of the IASB Conceptual Framework for Financial Reporting over the years has led to the IASB producing a body of accounting standards that have the advantages for those companies that adopt them. The Framework is also of value to auditors, and the users of financial statements, and more generally help interested parties to understand the IASB’s approach to the formulation of an accounting standard.
Required:
Summarize the contents (scope) of the IASB’s Conceptual Framework for Financial Reporting. (4 marks)
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The Framework addresses:
- the objective of general purpose financial reporting.
- qualitative characteristics of useful financial information.
- financial statements and the reporting entity.
- the elements of financial statements.
- recognition and derecognition.
- measurement.
- presentation and disclosure.
- concepts of capital and capital maintenance. (Any 4)
d) Explain how Tatale Ltd should account for the following items, justifying your answer by reference to the definitions and recognition criteria in the IASB Conceptual Framework for Financial Reporting.
i) Photographs of the company’s founders, which are of great sentimental and historical value.
ii) Donation of GH¢10,000 received from a philanthropist.
iii) Obsolete plant now retired from use. (6 marks)
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i) Photographs of the company’s founders, which are of great sentimental value.
The asset definition is failed as the photographs do not represent future economic benefits (para. 49(a)). Future economic benefits constitute the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to an entity (para. 53).
Recognition criteria are thus irrelevant, as there is no asset to recognise.
ii) Donation of GH¢10,000.
The asset definition (para. 49(a)) is met as all 3 characteristics are present. –
- Past event: The receipt of the donation.
- Flow of future economic benefits: The donation represents an inflow of GH¢10, 000 cash into Tatale Ltd.
- Control over the future economic benefits: Tatale Ltd will benefit from this GH¢10, 000 cash inflow and can deny or regulate the access of others to this cash inflow
Therefore, an asset of GH¢10 000 must be recognised.
The income definition (para. 70(a)) is met as all 3 characteristics are present.
- Increase in economic benefits during the period:
- In the form of an asset increase: Tatale Ltd now has additional cash of GH¢10 000.
- Results in an increase in equity: If assets increase and liabilities remain unchanged, equity increases.
Therefore, income of GH¢10,000 must also be recognised. Note that in this case the recognition of an asset has resulted in the simultaneous recognition of income (para. 84 and 92).
iii) Obsolete plant now retired from use
The asset definition is failed as the plant no longer represents future economic benefits (para. 49(a)).
The plant must now be written off from the accounts.
Recognition criteria are thus irrelevant, as there is no asset to recognise.