Page 132 - CAPE Financial Services Syllabus Macmillan_Neat

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FINANCIAL SERVICES STUDIES
UNIT 1 - PAPER 02

KEY AND MARK SCHEME

3. (a) Importance of a conceptual framework in the preparation and
presentation of financial statements

- A conceptual framework must consider the theoretical and
conceptual issues surrounding financial reporting and form
a coherent and consistent foundation that will underpin the
development of accounting standards.

- Conceptual frameworks can apply to many disciplines, but
when specifically related to financial reporting, a
conceptual framework can be seen as a statement of
generally accepted accounting principles (GAAP) that form a
frame of reference for the evaluation of existing practices
and the development of new ones.

- As the purpose of financial reporting is to provide useful
information as a basis for economic decision making, a
conceptual framework will form a theoretical basis for
determining how transactions should be measured (historical
value or current value) and reported – ie how they are
presented or communicated to users.
The Framework is also of value to auditors, and the users
of financial statements, and more generally help interested
parties to understand the IASB’s/ US GAAP approach to the
formulation of an accounting standard.

(b) Meaning of terms

a. Materiality

Information is material if its omission or misstatement
could influence the economic decisions of users taken on the
basis of the financial statements (IASB Framework). (1)
Materiality therefore relates to the significance of
transactions, balances and errors contained in the financial
statements. (1) Materiality defines the threshold or cutoff
point after which financial information becomes relevant to
the decision making needs of the users. (1) Information
contained in the financial statements must therefore be
complete in all material respects in order for them to
present a true and fair view of the affairs of the entity.
(1) Materiality is relative to the size and particular
circumstances of individual companies. (1)