Question

One of the main purposes of the Conceptual Framework for financial reporting is “to assist users of financial statements in interpreting the information contained in financial statements prepared in accordance with international standards”.

Required:

Explain how the conceptual framework for financial reporting could help the users to achieve this objective.       (10 Marks, Word Limit 300-600)

Answer 1

Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under conditions of uncertainty. Prudence does not allow for overstatement or understatement of assets, liabilities, income or expenses. Measurement uncertainty does not prevent information from being useful. However, in some cases the most relevant information may have such a high
level of measurement uncertainty that the most useful information is information that is slightly less relevant but is subject to lowermeasurement uncertainty.An executory contract is a contract that is equally unperformed. It establishes a single asset or liability for the inseparable combined right and obligation to exchange economic resources. Recognising assets, liabilities, equity, income and expenses depicts an entity’s financial position and financial performance in structured summaries
(the statements of financial position and financial performance). The amounts recognised in a statement are included in the totals and, if applicable, subtotals, in the statement. The statements are linked because income and expenses are linked to changes in assets
and liabilities.