Chapter 2 - Solutions to Gripping IFRS Graded Questions The...

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Solutions to Gripping IFRS: Graded Questions The framework Kolitz and Sowden-Service, 2009 Chapter 2: Page 1 Solution 2.1 In order for financial statements to be reliable, they should: not include material error or bias; be a faithful representation; show the substance rather than the legal form of the transaction; be neutral; be prudent (but not to the extent that reserves become hidden); and be complete (within the confines of materiality and cost).
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Solutions to Gripping IFRS: Graded Questions The framework Kolitz and Sowden-Service, 2009 Chapter 2: Page 2 Solution 2.2 The framework is not an International Financial Reporting Standard [paragraph 2 of framework]. Faithful representation forms part of the discussion of reliable information (qualitative characteristic) of useful information as addressed in the framework. IAS 1 p13 states that fair presentation requires faithful representation of transactions and elements as defined in the framework. As a result, IAS 1, p13, therefore requires a user to incorporate the principles set out in the framework (although it is not an IFRS) as well as the definitions of the elements, so as to achieve fair presentation.
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Solutions to Gripping IFRS: Graded Questions The framework Kolitz and Sowden-Service, 2009 Chapter 2: Page 3 Solution 2.3 The qualitative characteristics are: Understandability; Comparability. Reliability; and Relevance; Understandability Since entities are allowed to use a variety of measurement models to report their financial information, understandability is impaired. For example, IAS 16 (Property, plant and equipment) allows the cost model or the revaluation model to be used for different classes of assets: users may not understand how different classes of property, plant and equipment can be measured using different measurement models. Conversely, IAS 39 (Financial instruments) allows the fair value model to be used for both ‘financial assets at fair value through profit and loss’ and ‘financial assets available for sale’: users may not necessarily understand how financial assets that are classified differently are measured in the same way. Comparability Comparability amongst similar entities is impaired by permitting choice between measurement models and further detracts from their understandability. For example, two similar entities may choose different models (i.e. one may choose to measure their non- current assets at cost less accumulated depreciation (cost model) and another entity may choose to measure them at fair value less accumulated depreciation (revaluation model)). Reliability With regard to IAS 16 (Property, plant and equipment), for example, the cost model may be argued to be more reliable than the revaluation model. On the other hand, it is unlikely to provide relevant values for the statement of financial position as the depreciated cost is unlikely to have any relevance to its true value.
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Chapter 2 - Solutions to Gripping IFRS Graded Questions The...

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