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Importance of a conceptual framework.
A conceptual framework may be considered as an attempt to assemble a body of accounting theory (or interrelated concepts) as a guide to standard setting so the standards are (as far as possible) formulated on a consistent basis and not in an ad hock manner. On another level, a conceptual framework may be thought of as a device confers legitimacy and authority on a private sector standard settler that lacks the legal authority of a public body. The IASB, as a private sector standard setter, shares these reasons for developing a conceptual framework
Key issues to be addressed by the framework
1. Objectives- of financial statements (currently they are three relating to financial performance, financial position and changes in cash position).
2. Quantities of useful financial information such as understand ability, reliability, relevance and comparability.
3. The elements of financial statements i.e. assets, liabilities, capital, incomes and expenses
4. Measurement of the elements using different values such as historical cost, value, present value and replacement value
5. Purpose and status of the framework such' as providing guidance on standard setting and does not override the requirements of a standard.
6. Recognition of elements in financial statements i.e. whether changes in future of economic resources will be affected.
7. Concepts of profit and capital maintenance like financial and physical
marto answered the question on February 13, 2019 at 08:19
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Amos Tiriki Headline Electronics (ATHE) develops and manufactures innovative computer peripherals. It sells its products to variety of vendors in its home country and the vendors sell in turn to corporate and individual customers.
The company is in the process of finalizing its draft financial statements for the year ended 31 December 2007. The finance director is locked in a major debate with a partner in charge of external audit. During the year the company spent a material amount on attending a major tradefair in Cheptulu Town. This was the first time that the company had attended the event. The trade fair is the biggest opportunity for the companies such as ATHE to talk to potential customers from all over the world. All major multinational electronics companies are represented at this annual event. The fair lasted for five days in June 2007. It is now January 2008 and not a single order has been generated from new customers who might have seen ATHE’s presentation at the trade fair.
The partner in charge of the external audit feels very strongly that the cost of attending the fair should be written off as an expense. ATHE’s finance director feels equally strongly that the cost should be capitalized as an asset. He argues that the contacts made at the trade fair are likely to take years to generate new business and that the investment in attending should be carried forward until those orders start to come in. He argues further that the cost should be capitalized on the grounds that they meet the definition of an asset, as laid down by the IASB’s Frame work for the preparation and presentation of financial statements (Framework)
Required:
a) Discuss the finance director assertion that the money spent on attending the fair should be treated as an asset.
b) Explain the importance of the Framework to the reporting of corporate performance and whether it takes into account the business and legal constraints placed.
c) Discuss the assertion that the external auditor might be the primary beneficiary of having a clear and unequivocal Framework that sets out the basis for financial reporting
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Date posted: February 13, 2019. Answers (1)