ACCA FA CH3 - QUALITATIVE CHARACTERISTICS OF FINANCIAL INFO

• - Main assumption in financial statements that assumes business will continue to exist for the foreseeable future (at least next 12 months).
• - Key assumption of conceptual framework
• - Assumes entity has neither intention nor need to enter into liquidation or cease trading (if this is the case, the statements are prepared on a different basis)
• - Assets should not be valued at break-up value under going concern basis.

• - Set of principles that underpin the foundations of financial reporting. 
• - Basis on which IFRSs are formulated
• - NOT an accounting standard
• - Apply principles for new standards & any item where no standard exists.

- Amount assets would sell for if sold off piecemeal to break up business.

• 1. Must disclose basis of preparation
• 2. Must disclose reasons business is not a going concern.

• - Transactions are recognised when they occur (not when cash is received or paid)
• - Prepare financials on basis of when revenue/expenses are earned or incurred.
• - Transactions recorded in the period they relate to.
• - Financials should be on accrual basis per conceptual framework.

Revenue must be matched against the expense incurred in earning it when calculating profit (accrual basis)

Likely eventual sales price minus any expenses incurred to make the item(s) saleable - i.e. basis for reporting the value of damaged goods on statement of financial position (versus valuing them at cost).

• - Exercise of caution when making judgements under conditions of uncertainty.
• - Ensures assets/income not overstated and liabilities/expenses not understated
• - In practice - revenues only recognised when certain, not probable/projected. Expenses recorded when there is a likelihood (provision)
• - Supports neutrality concept of 'Faithful Representation' principle

- Attributes that make the information provided in financial statements useful to users.

Fundamental: Relevance & Faithful Representation

Enhancing: Comparability, Verifiability, Timeliness, Understandability

• - Information that is capable of making a difference to decisions made by users. 
• - It is capable if it has predictive value, confirmatory value, or both.
• - Relevance is affected by its nature and materiality.

- The manner of showing information will enhance the ability to make predictions i.e. by highlighting unusual items.

Information on financial position / performance is often used to predict future prospects i.e. likely dividend to be paid, wage rises, etc.

- Information is material if omitting or misstating it could influence decisions that users make on the basis of that information.

- Dependent on value & context i.e. a $20k error on a $2m line item is not material but a $20k error on a $30k line item is. 

- Incorrect presentation can also be material i.e. $50k loan at bank and $55k bank deposit is not the same as reporting $5k 'cash at bank or in hand'

- Economic phenomena on financial reports must be both relevant and should faithfully represent the substance of what it is supposed to represent.

- MUST BE COMPLETE, NEUTRAL, FREE FROM ERROR

- Includes all necessary info for a user to understand the phenomena depicted including all necessary descriptions and explanations.

• - Without bias in selection or presentation of data
• - Supported by the prudence principle.

• - No errors or omissions in the description of the phenomena.
• - Process used to produce the information has been selected and applied with no errors in the process.
• - Does not necessarily mean that all information presented is perfectly accurate.

• - Enables users to understand similarities and differences among items (across time periods or across entities)
• - Include disclosures of accounting policies to allow users to make valid comparisons among entities.

• - Helps assure users that information faithfully represents what it purports to represent.
• - Allows independent observers to reach a consensus that a depiction is a faithful representation. 
• - Can be direct verifiability (i.e. counting cash) or indirect (i.e. checking inputs, re-calculating outputs)

• - Info is available to decision makers in time to influence their decisions.
• - The older, the less useful (typically)
• - Need to balance timeliness w/ ability to provide reliable information. - Key is how best to satisfy decision-making needs of users.

• - Classify, characterise, present info clearly & concisely
• - Assume users have reasonable knowledge i.e. items should not be left off financial reports simply because they are complex - w/out certain items, information could be incomplete/misleading

• 1. Significant change has occurred to operation of business or a review indicates a more appropriate presentation
• 2. Change in presentation is required by IFRS

• Asset
• Liability
• Capital/Equity
• Income
• Expenses

Fair presentation - shows likely recoverability of receivables.