1. Explain the purpose of the IASB Conceptual Framework. 2.

2. Discuss the objectives of financial statements and the underlying assumptions used when
Answer: preparing financial statements.
The conceptual framework for financial reporting (conceptual framework) describes the Answer:
objectives of, and the concepts of, general purpose financial reporting. The purpose of the The objective of financial statements is to provide a wide range of users about the financial
conceptual framework is to: position, financial performance, and charges in the financial position of a business to make
(a) Assist the International Accounting Standard Board (MASB) to develop MFRS Standards economic decisions. This requires the evaluation of the ability, the timing and certainly of an
that are based on consistent concepts. entity to generate cash.
(b) Assist preparers to develop consistent accounting policies when no Standard applies to a From the Conceptual Framework: The objective of general-purpose financial reporting is to
particular transaction or other event, or when a Standard allows a choice of accounting policy. provide financial information about the reporting entity
(c) Assist all parties to understand and interpret the accounting standards.
Underlying Assumptions
Going Concern
‘The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
entity has neither the intention nor the need to enter into liquidation or to cease trading. If such
an intention or need exists, the financial statements may have to be prepared on a different basis.
If so, the financial statements describe the basis used.’ (Conceptual Framework for Financial
Reporting 2018, para. 3.9)
Main significance of going concern concept – assets should not be valued at their ‘break-up’
value (the amount they would sell for if they were sold off piecemeal and the business were
broken up).
Accrual Basis
‘The effects of transactions and other events are recognized when they occur, and they are
recorded in the accounting records and reported in the financial statements of the periods to
which they relate.’
The accrual basis is not an underlying assumption but para. 1.17 of the Framework makes clear
that financial statements should be prepared on an accrual basis.
According to the accrual’s assumption, in computing profit, revenue earned must be matched
against the expenditure incurred in earning it – the matching principle.
3. Describe the fundamental qualitative characteristics in the Conceptual Framework that represented when it is complete, neutral and free from error. Faithful representation is affected
underpins the international financial reporting standards. by the level of measurement uncertainty.
Answer: ● Complete: All information that a user needs in order to form a clear picture of the
Qualitative characteristics identify the types of information that are likely to be most useful to results, financial position, and cash flows of a business are included in the financial
the existing and potential investors, lenders and other creditors for making decisions about the statements. This means that no information is omitted that might have led a user to have a
reporting entity on the basis of information in its financial reports. different opinion of the business.
● Error free: The financial statements should contain no material errors, so that the
Fundamental Qualitative Characteristics information contained within them presents a fair view of the organization.
Relevance: Financial information is relevant when it is capable of making a difference in the ● Neutral: The financial statements represent the actual state of an organization, without
users’ decisions. The financial information is relevant when it has predictive value, trying to amplify its results unnecessarily or make them look worse than they really are.
confirmatory value, or both. The principle of neutrality is supported by prudence, which is the exercise of caution
when making judgements under conditions of uncertainty.
Materiality is closely related to relevance. Relevant financial information must be material.
Information is material if omitting it or misstating it could influence decisions that the primary
users of general purpose financial reports (existing and potential investors, lenders and other
creditors) make on the basis of those reports, which provide financial information about a
specific reporting entity. In other words, materiality is an entity-specific aspect of relevance
based on the nature or magnitude, or both, of the items to which the information relates in the
context of an individual entity's financial report.

Cost is a pervasive constraint on the information that can be provided by financial reporting.
Reporting financial information imposes costs, and it is important that those costs are justified by
the benefits of reporting that information. It is not possible for general purpose financial reports
to provide all the information that every user finds relevant. Preparers of financial reports will
have exercise judgment to assesses whether the benefits of reporting particular information are
likely to justify the costs incurred to provide and use that information.

Faithful representation: Information must faithfully represent the substance of what it purports
to represent. Le., information in the financial statements should accurately reflect the actual
financial performance and financial position of the business. The information is faithfully
***4. The Conceptual Framework identifies the fundamental characteristics and the **6. The Conceptual Framework for Financial Reporting (The Conceptual Framework) sets
enhancing qualitative characteristics of financial statements. What are the four enhancing out the concepts and principles that underline the preparation and presentation of financial
qualitative characteristics identified in the Conceptual Framework? statements for external users.
Answer: (a) Briefly explain the recognition criteria for assets and liabilities.
Comparability, verifiably, timeliness and understandability are qualitative characteristics that Answer:
enhance the usefulness of information that both is relevant and provides a faithful representation Recognition of an asset
of what it purports to represent. An asset is recognized in the statement of financial position when it uses probable that its future
economic benefits will flow to the entity and the assist has a cost or value that can be measured
Comparability - Information should be comparable between different entities or time periods reliably.
Verifiably - Independent and knowledgeable observers are able to verify the information Recognition of a liability
Timeliness - Information is available in time to influence the division of users A liability is recognized in the statement of financial position when it is probable that an outflow
Understandability - Information shall be e classified, presented clearly and concisely of resources embodying economic benefits will settle the present obligation and the amount can
be measured reliably
Enhancing qualitative characteristics should be maximized to the extent possible. However, the
enhancing qualitative characteristics, either individually or as a group, cannot make information (b) List the bases for measurement of assets and liabilities in the financial statements as
useful if that information is irrelevant or does not provide a faithful representation of what it stated in The Conceptual Framework.
purports to represent. Answer:
Measurement is the process of determining the monetary amounts for specific items to be
***5. Describe the five main elements in financial statements. recognised, and carried, on the statement of financial position and the statement of profit or loss.
Answer: In order to determine the monetary amounts of the item, the basis of measurement must be
An asset is a present economic resource controlled by the entity as a result of past events. An selected.
economic resource is a right that has the potential to produce economic benefits.
The conceptual framework acknowledges that a number of different bases of measurement are
A liability is a present obligation of the entity to transfer an economic resource as a result of past used to different degrees, and in varying combination, in the financial statements.
events.
Methods of measurement outlined in the conceptual framework are:
Equity is the residual interest in the assets of an entity after deducting all its liabilities. (a) Historical cost
(b) Current cost
Income is increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims. The definition of income (c) Realisable value
encompasses both revenue and gains.
(d) Present value
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.
7. Hebat Enterprise’s financial year end is on 30 November. (b) Explain how the above rental paid should be presented in the financial statements of
On 2 November 2018, Hebat Enterprise paid the rental for its premises amounting to Hebat Enterprise for the year ended 30 November 2018.
RM120,000 for the period from 1 November 2018 to 31 January 2019. The above Answer:
transaction was recorded as follows: Rent paid on 2 November 2018 is expenses for three months (November 2018, December 2018

Debit Credit and January 2019) ended 31 January 2019.

The amount paid for December 2018 and January 2019 amounted to RM80,000 are to be
2018 RM RM
recognized as prepaid rent under current assets in the statement of financial position as at 30
Nov 2 Dr Rent 120,000
November 2018.
Cr Bank 120,000
Amount to be recognized as expenses in the statement of profit or loss = RM40,000 that is
(Rent paid) incurred (accrual concept) for the year ended 30 November 2018.
No further entries were made pertaining to the above transaction for the year ended 30
November 2018.
Required:
(a) Prepare the relevant journal entries to show how the above transaction should be
accounted for in the financial statements for the year ended 30 November 2018.
Answer:
Date Particular Debit Credit
2018 RM RM
Nov 2 Rent 120,000
Bank 120,000
(Rent Paid)
Nov 30 Rent Prepaid (120,000 x ⅔) 80,000
Rent 80,000
(Year end adjustment on prepaid rent)
Nov 30 SPL (120,000 x ⅓) 40,000
Rent 40,000
(Posting of rent account)
8. The company invests RM750,000 in a 6-months fixed deposit at a commercial bank on 1
September 2021. Interest rate stated at 4% per annum. The following entry was made on 1
September 2021:

2021 RM RM

Sept 1 Dr Investment 750,000

Cr Cash 750,000
No further entries were made in the company’s books in 2020 since no interest was received
in cash during that year.
Required:
(a) When the fixed deposit mature on 1 March 2022, how much should the company
receive?
Answer:
Interest receivable on 1 Mach 2022 = [(750,000 x 4%) x ½] = RM15,000

(b) Show the journal and ledger entries to adjust the cash basis accounts to an accrual basis
and the closing of the interest received account for the year ended 30 September 2021.
Answer:
Date Particular Debit Credit
2021 RM RM
Sept 30 Interest receivable [(750,000 x 4%) x 1/12] 2,500
Interest received 2,500
(750,000 x 4% x 1/12 for September 2021 only)
Sept 30 Interest received 2,500
SPL 2,500
(Interest income recognised in SPL)

Interest Received Account

2021 RM 2021 RM
Sept 30 SPL 15,000 Sept 30 Investment receivable 15,000