Acca f3 Financial Accounting (int) Study Text

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3: Accounting conventions   Part B  The qualitative characteristics of financial information and the fundamental bases of accounting 

If every detail of a transaction is known, it may be too late to publish the information because it has 

become irrelevant. The overriding consideration is how best to satisfy the economic decision-making 

needs of the users. 

3.15.2 Balance between benefits and cost 

This is a pervasive constraint, not a qualitative characteristic. When information is provided, its benefits must 

exceed the costs of obtaining and presenting it. This is a 

subjective area and there are other difficulties: others 

than the intended users may gain a benefit; also the cost may be paid by someone other than the users. It is 

therefore difficult to apply a cost-benefit analysis, but preparers and users should be aware of the constraint. 

3.15.3 Balance between qualitative characteristics 

A

trade off between qualitative characteristics of often necessary, the aim being to achieve an 

appropriate balance to meet the objective of financial statements. It is a matter for professional judgement 

as to the relative importance of these characteristics in each case. We will look at this in Section 4 of this 

chapter.

We have now covered those parts of the IASB's Framework which you need to understand in detail. 

A summary of the rest of the document is given below. 

3.16 The elements of financial statements 

This section defines the important items which make up the financial statements and looks at their

sub-classification.

(a)

Financial position

(i) Assets 

An

asset is a resource  controlled by the entity as a result of past events and from which future 

economic benefits are expected to flow to the entity. 

Framework

(ii) Liabilities 

A

liability is a present obligation of the entity arising from past events, the settlement of which is 

expected to result in a outflow from the entity of resource embodying economic benefits.

Framework

(iii) Equity 

Equity is the residual interest in the assets of the entity after deducting all its liabilities. 

Framework

(b)

Performance

(i) Income 

Income is increases in economic benefits during the accounting period in the form of inflows or 

enhancement of assets or decrease of liabilities that result in increases in equity, other than those 

relating to contributions from equity participants. 

Framework

(ii) Expenses 

Expenses are decreases in economic benefits during the accounting period in the form of outflows 

or depletions of assets or incurrences of liabilities that result in decreases in equity, other than 

those relating to distributions to equity participants. 

Framework

Point to note 

Key term 

Key term 

Key term 

Key term 

Key term 

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Part B  The qualitative characteristics of financial information and the fundamental bases of accounting

  3:  Accounting conventions

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(iii) 

Capital maintenance adjustments 

We have looked at most of these items in detail in 

Chapter 1

. We will look at capital maintenance later in 

this section. 

You do need to know the Framework definitions of assets, liabilities, equity, revenue and expenses. 

3.17 Recognition of the elements of financial statements 

Having defined the elements, the Framework then lays out the criteria for when items should be 

recognised (ie included in the financial statements). The section looks at the recognition of assets, 

liabilities, income and expenditure in turn, based on the concept of outflows and inflows of future 

economic benefit. 

3.18 Measurement of the element of financial statements 

This brief section simply mentions some of the different measurement bases available, including

historical cost and current cost. 

3.19 Concepts of capital and capital maintenance 

The different concepts are examined briefly, the main two concepts are: 

(a)

financial capital maintenance; and

(b) 

physical (or operating) capital maintenance. 

Capital maintenance is an idea that capital must be preserved before any payments can be made to 

shareholders. In times of high inflation, a company may appear to have made a profit. However, if the 

inflation factor is applied to the capital, there may well have been a loss. 

For example, a company may have capital of $100,000 and make profits of $10,000. However, inflation is 

running at 10%. Therefore capital maintenance requires that the $10,000 is needed to maintain capital 

(10%  $100,000) and so no dividend is paid to the shareholders. 

Question

Revision of concepts 

See if you can write a short sentence explaining each of the following concepts. 

(a) Relevance 

(b) Reliability 

(c) Faithful 

representation 

(d) Neutrality 

(e) Completeness 

(f) Comparability 

(g) Understandability 

Answer

(a)

Relevance. The information provided satisfies the needs of users. 

(b)

Reliability. The information is free from material error or bias. 

(c)

Faithful representation. The information gives full details of its effects on the financial statements 

and is only recognised if its financial effects are certain. 

(d)

Neutrality. The information is free from bias. 

(e)

Completeness. The information must present a rounded picture of its economic activities. 

(f)

Comparability. The information should be produced on a consistent basis so that valid 

comparisons can be made with previous periods and with other entities. 

Exam focus 

point

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