Comprehensive notes, with a summary, and definitions list for first year Financial Accounting at UCT. The notes are on the conceptual framework (chapter 4 in the textbook "Financial Accounting an Introduction"). These notes are more than sufficient to do well. They include a compilation of lecture ...
Regulations
o Authority prescribes how businesses may do something
GAAP (Generally Accepted Accounting Practise)
o Regulations that applies to the preparation of financial statements
IFRS (International Financial Reporting Standards)
o Standards used by SA’s biggest businesses
IASB (International Accounting Standards Board)
o They set the standards used by SA’s companies
Extra
International harmonization: the process of making accounting standards globally
applicable
Objectives of financial reporting
To provide financial info that is useful to users in making decisions relating to
providing resources to the entity
To provide financial info about assets, liabilities, equity, income & expenses
o That is useful in assessing the prospects of future net cash inflows and
management stewardship of the entity’s resources
Qualitative characteristics of useful financial information
1. Fundamental characteristics
Relevance
o Predictive value: Information can be used to make predictions (ie: it has a
predictive value)
, o Confirmatory value: Information provides feedback about previous
evaluations
o Information is capable of making a difference to the user’s decision
Faithful representation
o Complete (all necessary information is included)
o Neutral (Information has no bias; it is neutral)
o Free from error (accurate)
o Reveals the substance, rather than merely the legal form
Relevance
o Capable of making a difference to user’s decisions
Predictive value: can be used to predict future outcomes
Confirmatory value: provides feedback about previous evaluations
Materiality: information is material if omitting/mis-formatting it could influence a user’s
decision (threshold is entity specific)
Faithful representation
, COMPLETE
FAITHFUL
REPRESENTATIO NEUTRAL
N
FREE FROM
ERROR
Faithful representation: reveals the substance, rather than merely the legal form of the
economic phenomenon
o Complete: includes all information necessary for understanding
o Neutral: without bias; not weighted, manipulated, emphasized or de-
emphasized etc
o Free from error: description and process are without error, not necessarily
perfectly accurate
Prudence: concept that says assets and income must not be overstated, and liabilities and
expenses must not be understated
Supports neutrality
Enhancing Characteristics
Comparability
o Across time for one entity & across different entities
o Not uniformly
o Consistency helps
Verifiability
o Different, knowledgeable, independent observers would reach the consensus
(the same decision)
o Can be direct or indirect
Timeliness
o Info provided in time to influence decisions
Understandability
o Present information clearly and concisely
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