CHAPTER 2
1. What are IFRS and how do they relate to IAS?
2. What is the objective of financial statements and what assumption underlies
them?
The objective of financial statements is to provide information about the reporting
entity s economic resources, claims against the reporting entity, and the effects of
3. Why are the qualitative characteristics important to users of financial
statements?
Qualitative characteristics are the attributes that make the financial information
4. What is the difference between relevance and faithful representation?
Financial information has the quality of relevance when it is capable of making a
difference in the decisions made by users. In other words, relevant information
5. What are the three underlying concepts of relevance and what is their nature?
Predictive value: Financial information has predictive value if users can use it to
predict future outcomes. Financial information need not be a prediction or forecast to
6. What are the three underlying concepts of faithful representation and what is
their nature?
Completeness: Financial information is complete if it contains all information
necessary for a user to understand what is being depicted, including all necessary
descriptions and explanations.
7. What is the difference between fundamental and enhancing qualitative
characteristics?
Qualitative characteristics are the attributes that make the financial information
8. Why is comparability important to users of financial statements?
Comparability is the qualitative characteristic that enables users to identify and
understand similarities in, and differences among, items. Unlike the other qualitative
9. Is verifiability the same as accuracy?
Verifiability means that different knowledgeable and independent observers could
10. What are the characteristics of understandability?
Information has the quality of understandability if users readily comprehend it.
11. What constraint can limit the application of qualitative characteristics to
accounting information and how can this constraint be overcome?
Underlying all aspects of financial reporting is the cost constraint, which recognized
12. What are assets, liabilities, and equity? Define each.
Asset: An economic resource of a company that is expected to benefit the
13. How does the IFRS balance sheet equation differ from the one used in the United
States?
14. What are revenues and expenses? Define each.
Income: The increases in economic benefits during the accounting period in the
15. What are recognition, derecognition, and measurement? Define each and
explain how they relate to each other.
Recognition is the process of incorporating in the balance sheet or income statement
an item that meets the definition of an element and satisfies the following criteria: It
16. List the three sections that all proposed financial statements should contain.
All statements will be divided into three categories as follows:
17. How does the balance sheet under proposed IFRS differ from U.S. GAAP?
18. What is the proposed new name for the income statement and why does it have
this name?
19. How does the proposed IFRS statement of cash flows differ from the way most
of these statements are prepared in the United States?
20. Class or group discussion: Is historical cost or fair value more in line with the
qualitative characteristics of the conceptual framework? Why?
Fair value underlies the measurement of all items under IFRS. Fair value is the
amount for which an asset could be exchanged, or a liability settled, between
21. Class or group discussion: Define the concept of cost constraint under U.S.
GAAP. Does it have any role under IFRS? Give an example of how IFRS might
differ in their application.
Cost constraint recognizes that reporting financial information imposes costs. It is
22. Exercise: Match the selected sections of IASB-proposed financial statements
(letters) with their respective components (numbers):
23. Exercise: Match the selected sections of IASB-proposed statement of
comprehensive income statement (letters) with their respective components
(numbers).
24. Exercise: Match the selected sections of IASB-proposed statement of financial
position (letters) with their respective components (numbers).
25. Case: Assume you work for a company that has used the U.S. GAAP practice of
valuing Buildings at historical cost less accumulated depreciation. Your company is
considering revaluing the building annually based on fair value. Based on the
concepts underlying the IFRS framework, how does fair value differ from historical
cost? (Use the example of fair value presented in the text as a starting point.)
Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable parti
former member of the IASB, fair values
Are relevant
Have predictive value