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Review questions

The text book adopts the definition of Gaynor et al. (2016) who define higher accounting quality as ‘more complete, neutral and free from error and provides more useful predictive or confirmatory information about the firm’s underlying economic position and performance’.

Because accounting should have unbiased best estimates, and facts and circumstances differ between different firms. No accounting flexibility (e.g. 10 year straight line depreciation for all machines) would be misleading.

Most estimates are examples of accounting flexibility (useful life, impairment, write down for bad debt/obsolete inventory etc). Or capitalising versus expensing development costs.

The idea behind the conceptual framework is to have some general definitions and principles that ensure consistent concepts in the various detailed accounting standards.  

Key accounting issues include

  • the scope of the standard
  • definitions
  • what the recognition criteria are and when an event should be recognised
  • how accounting items should be measured
  • how accounting items should be presented (classification)
  • information that must be disclosed.

An asset is ‘a present economic resource controlled by the entity as a result of past events’.

A liability is ‘a present obligation of the entity to transfer an economic resource as a result of past events’.

See the five examples 13.4–13.8;  internally developed intangibles, assymetrical recognition, non-accraul of levies, measurement of fixed interest rate loans.

See Figure 13.2 and related text.

See text related to Figure 13.2.

See text on pages 475 and 476; e.g. undiscounted deferred tax versus other discounted liabilities.