The financial reporting

Framework
 Overview
The financial reporting
framework

The conceptual framework IAS 1 Presentation of FSs

for FR

Purpose of conceptual
8 chapters
framework
 Conceptual Framework
• A conceptual framework is a statement of
generally accepted theoretical principles which
form the frame of reference for financial reporting.
• Theoretical principles;
1. Basis for developing new accounting standards
2. Evaluate of those already in existence
• A conceptual framework form the theoretical basis
for determining which events should be accounted
for, how they should be measured and how they
should be communicated to the user.
 Purposes of the Framework
• Assist IASB to develop IFRSs that are based on
consistent concepts

• Assist preparers of accounts to develop

accounting policies
 where there is no IFRS applicable to a
particular transaction or
 where there is a choice accounting policy

• Assist all parties to understand and interpret

IFRSs
Contents of conceptual framework
Deals with 8 chapters:

• Chapter 1: The objective of general purpose FR

• Chapter 2: Qualitative characteristics of useful financial
information
• Chapter 3: Financial statements & the reporting entity
• Chapter 4: The elements of FSs
• Chapter 5: Recognition & de-recognition
• Chapter 6: Measurement
• Chapter 7: Presentation & Disclosure
• Chapter 8: Concepts of capital & capital maintenance
 Conceptual Framework for Financial
Reporting
Chapter 1:
The objective of general purpose financial reporting
• 'The objective of general purpose financial reporting is
to provide financial information about the reporting
entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about
providing resources to the entity.
• Decisions:
 Economic resources of the entity
 Claims against the entity
 changes in those resources and claims
• Management’s stewardship
 Relevant to users
• Accrual accounting: Transactions & events are
recognized when they occur & are recorded in
the accounting records & reported in the FS of
the periods to which they relate.
• It shows
Past transactions involving cash
Changes in those resources and claims not
resulting from financial performance
Chapter 2: Qualitative characteristics of Financial statement
Financial statement

Enhancing
Qualitative The cost constraint
Qualitative
characteristics on useful financial
characteristics reporting

relevance comparability

Faithful
verifiability
representation

timeliness

understandability
 The 1st Fundamental Qualitative
characteristics:
1)Relevance
a)Can influence economic decision making
• Information has predictive value, confirmatory
value or both
• What is expected to happen in the future
• Materiality
• Affected by its nature and significance
• Omitting or misstating can influence decisions
 The 2nd Fundamental Qualitative
characteristics:
2)Faithful representation
Information must be: Transactions & events are to
be reported as to the commercial/economic reality
& not strictly according to legal form.
• Complete
• Neutral- free from bias by exercise of prudence
• Free from error
 Enhancing Qualitative characteristics
• Comparability- Users must be able to compare an entity’s FS:

(a) Through time to identify trends.

(b) With other entities’ statements, to evaluate their relative financial position, performance and
changes in financial position.

 Not the same as consistency and uniformity

 Disclosure of accounting policies is important- Users must be able to distinguish between different
accounting policies in order to be able to make a valid comparison of similar items in the accounts
of different entities.
 Changes in accounting policy; change is applied retrospectively
 Accounting policies should be changed, to make the information reliable and relevant

• Verifiability- assure user that information faithfully represents the economic phenomena it
purports to represent.

• Timeliness- Information may become irrelevant if there is a delay in reporting it. There is a balance
between timeliness and provision of reliable information.

• Balance between benefit & cost

When information is provided, its benefits must exceed the costs of obtaining and presenting it.
 Understandability
• Users must be able to understand FS. They are
assumed to have some business, economic and
accounting knowledge and to be able to apply
themselves to study the information properly.
• They can review and analyse the information
diligently
• Classifying, characterizing and presenting
information clearly and concisely
• Complex matters should not be left out of FS
simply due to its difficulty if it is relevant
information. (Cannot Omit)
Chapter 3: Financial statements & the reporting
entity

Reporting entity: single

Financial statements or a portion or more
than 1 entity

The objective of
Prepared Presented Going concern
Financial statements

A period of time On the assumption that

From the perspective of the entity will continue
Same as Chapter 1 Comparative information
the entity as a whole to be in operation for the
After reporting date foreseeable future.
Chapter 4: The elements of FSs

Elements of FS

Assets
Income
Liabilities
Expenses
Equity
 Assets
• Assets:
• Present economic resource controlled by the
entity as a result of past events
• Economic resource: a right has the potential
to produce future economic benefits
• Economic benefits :
• Cash flows
• exchange of goods, by trading, selling goods,
provision of services
• Reduction or avoidance of liabilities
 Liabilities
Liability
• Present obligation of the entity to transfer an economic resource as a result of past
events

• The essential element is that there is a an obligation. A duty or unavoidable

responsibility

• The obligation may be settled by:

•
• (i) Payment of cash;
•
• (ii) Transfer of other assets;
•
• (iii) Provision of services;
•
• (iv) Replacement of obligation with other obligation; or
•
• (v) Conversion of the obligation to equity.
 Equity, Income & expenses
Equity
• Residual interest in the assets of the enterprise after
deducting all its liabilities.
Income
• Increases in assets or decreases in liabilities
that result in increases in equity, other than those
relating to contributions from holders of equity
claims
Expenses
• Decreases in assets or increases in liabilities
that result in decreases in equity, other than those
relating to distributions to holders of equity
claims
Chapter 5:Recognition & de-recognition
Inclusion in the FSs

1.Definition 1.Definition
2.Measurement of 2.Measurement of
financial position performance

Statement of profit or
In statement of loss and other
financial position comprehensive
income

Assets
Income
Liabilities
Equity expenses
 De-recognition
When no longer meets the definitions of an
element
• Asset: control is lost
• Liability : no present obligation
Must be faithfully represented after de-
recognition
• Assets & liabilities still retained
• The changes in the Assets & liabilities
 Chapter 6 : Measurement
2 main measurement bases:
(1) Historical cost
(2) Current value ( FV, VIU, fulfillment value & Current cost)
Historical cost
• Asset
• Cost incurred when the asset was acquired/created
• Liabilities
• Value of consideration received when the liability was
incurred.
Historical cost updated
• When asset is consumed
• Liability settled
• Impairment loss; CA of the HC asset is adjusted
 MEASUREMENTS
Fair value
• Asset
• The price that would be received to sell an asset
• Liabilities
• Paid to transfer a liability.
Value in Use
• Asset
• Present value of the cash flows, or other economic benefits that an entity expects to
derive from the use of an asset and from its ultimate disposal
Fulfilment value
• Present value of the cash flows, or other economic resources that an entity expects to
be obliged to transfer as it fulfils a liability
Current cost
• Asset: The cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date + transaction costs that
would be incurred at the that date
• Liability: the consideration that would be received for an equivalent liability at the
measurement date - transaction costs that would be incurred at the that date
 Measurement basis
Factors to consider
in selecting

Nature of Usefulness of
Other factors
information information

In statement of Relevance Faithful

Cost constraints
financial position representation

How the asset/ Enhancing

In the statement Measurement
liability contributes qualitative
inconsistency
of profit or loss to future cash flows chracteristics

The characteristics Measurement

of the asset /liability uncertainty
 Chapter 7: Presentation & Disclosure

Effective presentation & disclosure requires

Focus on objectives Classifying Aggregating

& principles rather information information
than rules effectively appropriately
 Chapter 8: Concepts of capital &
capital maintenance
• Capital = Net assets / Capital contributed + Increase in NA
Capital maintenance
• Measure income by comparing the net assets at 2 points in time.

Financial capital
• Profit (money term) = NA at the end of a period – Na at the
beginning of a period
• excluding contribution to / contribution from holders of
equity claims during the period
Physical/Operating capital
• Profit = physical productive capacity /Operating capability End
of period > Beginning period.
• excluding distributions to / distributions from holders of equity
claims during the period