Faithful representation

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Faithful representation – Financial information that faithfully represents the phenomena that it purports to represent. A faithful representation provides information about the substance of an economic phenomenon instead of merely providing information about its legal form. A perfectly faithful representation would be complete, neutral and free from error. Providing a faithful representation is one of the two fundamental characteristics of useful financial information (see diagram).

Neither a faithful representation of an irrelevant phenomenon, nor an unfaithful representation of a relevant phenomenon helps users make good decisions (Framework QC17).

Reliability is not specifically mentioned in the Conceptual Framework IASB has explained that this characteristic is included in faithful representation [IASB 2010 BC 3 24].

Completeness refers to … Read more

Executory contract

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Executory contract – A contract that is equally unperformed: neither party has fulfilled any of its obligations, or both parties have fulfilled their obligations partially and to an equal extent.

An executory contract is a contract that has been signed but not yet executed. Such a contract, for example an agreement to buy a car that will be delivered in three months’ time, will appear in the income statement when the transaction is performed and the goods or services are passed to the client. A forward contract to buy currency is another form of executory contract. Contract modifications Contract modifications Contract modifications

The Conceptual Framework provides the following guidance [Conceptual Framework 4.57 – 4.58]:

An executory contract establishes a combined right … Read more

Enhancing qualitative characteristic

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Enhancing qualitative characteristic – A qualitative characteristic that makes financial information more useful if the information both is relevant and provides a faithful representation.

Comparability, verifiability, timeliness and understand-ability are qualitative characteristics that enhance the usefulness of information that both is relevant and provides a faithful representation of what it purports to represent. The enhancing qualitative characteristics may also help determine which of two ways should be used to depict a phenomenon if both are considered to provide equally relevant information and an equally faithful representation of that phenomenon.

Comparability

An enhancing qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Enhancing qualitative characteristic Enhancing qualitative characteristic

The Conceptual Framework provides the following guidance … Read more

Economic resource

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An economic resource is a right by the reporting entity that has the potential to produce economic benefits.

An economic resource in general has the form of an asset. This information is provided in the financial position.

Potential to produce economic benefits – Within an economic resource, a feature that already exists and will produce economic benefits in at least one circumstance.

Factors of production

Land, labor, capital, and entrepreneurial ability which are used in the production of goods and services. They are economic resources because they are scarce (limited in supply and desired). Also called the factors of production.

What Is Scarcity?

Scarcity refers to the basic economic problem, the gap between limited –

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Comparability

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Comparability – An enhancing qualitative characteristic that enables users to identify and understand similarities in, and differences among, items.

The Conceptual Framework provides the following guidance [Conceptual Framework 2.24 – 2.29]:

Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability

Comparing Financial Statements between companies is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does … Read more

Combined financial statements

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Combined financial statements: represents the combination of two or more legal entities or businesses that may or may not be part of the same group, but do not by themselves meet the definition of a group under IFRS 10 Consolidated Financial Statements – i.e. a parent and all of its subsidiaries. At a simplistic level, preparing combined financial statements involves adding together two or more legal entities and eliminating any inter-company transactions – e.g. intercompany profits, revenue and expenses, receivables and payables and equity (e.g. unrealised gains and losses).

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These activities are typically under common control, BUT do not comprise an existing legal entity or group and are presented as a single reporting entity.

For … Read more

Identified asset

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Identified asset, a term from IFRS 16 Leases. Let’s see what it is all about….

An asset is identifiable if it either:

  1. Is separable, i.e., is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
  2. Arises from binding arrangements (including rights from contracts or other legal rights), regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Note: Even though the definition given requires an intangible asset to be identifiable to distinguish it from goodwill, any goodwill recognised in an … Read more

Leases

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Leases explained along defined terms to obtain a quick overview. An overview is provided here.

Definitions from IFRS 16 Leases are:

IFRS 16 Leases: A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

Lease payments – Payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term, comprising the following: Lease

  1. fixed payments (including in-substance fixed payments), less any lease incentives;
  2. variable lease payments that depend on an index or a rate;
  3. the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
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IFRS 16 Assets of low value

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IFRS 16 Leases introduced the term ‘Assets of low value’. IFRS 16 does not provide much guidance to assess what ‘low value’ means. There is no definition. The value referred to as ‘low value’ is the value of the asset when it was new, regardless of the age of the asset at inception of the lease.

The Basis for Conclusions of IFRS 16 provided the following guidance: Assets of low value

‘The IASB intended the exemption to apply to leases for which the underlying asset, when new, is of low-value (such as leases of tables and personal computers, small items of office furniture and telephones). At the time of reaching decisions about the exemption in 2015, the Read more