ACCM4200 T2 2020 Workshop 02 Students

ACCM4200
Advanced
Financial Accounting
Workshop 2
Conceptual framework and the
principles underlying financial
reporting
Document classification: Internal

COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
Material adopted from Financial reporting in Australia / Janice Loftus, Ken Leo,
Sorin Daniliuc, Noel Boys, Belinda Luke, Hong Ang, Karyn Byrnes. Second edition.
John Wiley & Sons Australia, Ltd
This material has been reproduced and communicated to you by or on behalf of

Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under the Act. Any
further reproduction or communication of this material by you may be the subject of
copyright protection under the Act.
Do not remove this notice.

Learning objectives
After studying this topic, you should be able to:
1. Determine the key components of the
conceptual framework
2. Determine the qualitative characteristics that
make information in financial statements useful
3. Decide the basic elements in financial
statements
4. Decide the concepts and principles (GAPP)
underlying financial statements

Learning objectives
statements

A conceptual framework
A conceptual framework provide a coherent set of
principles:
– assists with standard consistency
– assists preparers deal with issues not addressed by a

standard
– assists auditors in forming an opinion on compliance
– assists users to interpret statements.

A conceptual framework
 CFs prescribe the nature, function and limits of
financial accounting and reporting
 The central goal in establishing a CF is consensus on the:
scope and objectives of financial reporting
qualitative characteristics that useful financial
information should possess
elements of financial reporting—how they should be
defined and when they should be recognised
measurement of the elements of financial reporting
disclosure and presentation principles

Conceptual framework at a
glance
7 chapters of the 2. the
Conceptual qualitative
framework sets characteristics
of useful 3. a
out:
financial description of
1. the objective of the reporting
financial information
entity and its
reporting 7. concepts boundary
and guidance
on
presentation 4. definitions of
and disclosure an asset, a
6. measurement liability, equity,
bases and income and
guidance on 5. criteria for
expenses
when to use recognition
them and
derecognition

Benefits of Conceptual framework
 Accounting standards would be more consistent and logical because
they are developed from a clearly developed set of concepts
 Increased international comparability of financial information
 Should result in the Boards (e.g. IASB, FASB, AASB) being more
accountable for their standard-setting decisions
 Enhanced process of communication between the Boards and
constituents
 More economical accounting standard development
 It just makes sense to have a well designed CF before we start
developing more specific accounting standards

The components of the
The Australian conceptual framework is

necessary:
• for the Preparation & Presentation of Financial
Statements
• The conceptual framework is reserved for the

reporting entity.

The components of the
The objective of financial reporting:
– is to provide financial information about the reporting

entity that is required by investors, lenders and other
creditors in making decisions about providing resources
to the entity.
– Those decisions may involve buying, selling or holding

equity and debt instruments, and providing or settling
loans and other forms of credit.

Conceptual framework - Users
Main users of general purpose financial
Existing Potential
Lenders
investors investors
Other
creditors General
purpose
FS

Conceptual framework - Users
 As we saw on the last slide, the primary users of General purpose
financial statements are identified in the Conceptual Framework as
investors, potential investors, lenders and other creditors
 Is this too narrow?
 What about accountability to other stakeholders?
 The Conceptual Framework has also embraced the assumption that

users are believed to have a reasonable knowledge of business and
economic activities and accounting and a willingness to study the
information with reasonable diligence

Workshop Activity 1
Applying the conceptual framework is

subjective and requires judgement.
Would the IASB be better off to cancel the

conceptual framework entirely and instead rely on a
interpretations committee that develops guidance in
response to requests from stakeholders?

Learning objectives
statements

Qualitative characteristics of
financial statements:
– Relevance:
• Capable of making a difference in the decisions made by
decision makers.
• Predictive value refers to the fact that quality financial

information can be used to base predictions and forecasts on.
– Faithful representation:
• This means that the financial statements accurately reflect the
condition of a business. E.g., if the entity reports in its balance
sheet that it had $100,000 of trade creditors as of 30th June,
then that amount should indeed have been present on that
date. It also means that financial statements are complete, free
from material error and unbiased.

• Materiality
Information is material if omitting, misstating
or obscuring it could reasonably be
expected to influence decisions that the
primary users of general purpose financial
reports make on the basis of those reports,
which provide financial information about a
specific reporting entity

Enhancing qualitative characteristics:
– Comparability:
• A company’s financial reporting information that
enables users to identify similarities in and
differences when comparing to another entity’s
financial reporting information.
– Verifiability:
• A company's accounting results are verifiable when
they're reproducible. That is, given the same data
and assumptions, an independent accountant can
produce the same result the company did.

financial statements
Enhancing qualitative characteristics:
– Timeliness
• Having financial reporting information available to
decision makers before it loses its capacity to
influence decisions.
– Understandability
• It is the idea that financial reporting information
should be presented so that the reader can easily
understand it.

Cost constraint on useful financial reporting:
– Provision of information incurs costs.
– Benefits of supplying information should always
be greater than the costs.

Workshop Activity 2
A financial analyst said:
I advise my clients to invest for the long term. Buy good
shares and hang onto them. Therefore, I am interested in a
company’s long-term earning power. Accounting standards
that result in earnings volatility obscure long-term earning
power. Accounting should report earning power by deferring
and amortising costs and revenues.
Is this analyst’s view consistent with the fundamental

characteristics of financial information established in the
conceptual framework?

Learning objectives
statements

Definitions of the elements of
Assets:
•A present economic resource
controlled by the entity as a result of
past events
• An economic resource is a right that
has the potential to produce
economic benefits
‘

Liabilities:
• A present obligation of the entity to
transfer an economic resource as a
result of past events
• An obligation is a duty or
responsibility that the entity has no
practical ability to avoid*

Liabilities: No practical ability to avoid
The revised Conceptual Framework discusses how the
‘no practical ability to avoid’ criterion is applied in the
following circumstances:
a) if a duty or responsibility arises from the entity’s
customary practices, published policies or specific
statements—the entity has an obligation if it has no
practical ability to act in a manner inconsistent with
those practices, policies or statements.
b) if a duty or responsibility is conditional on a particular
future action that the entity itself may take—the entity
has an obligation if it has no practical ability to avoid
taking that action.
Equity:
– The remaining interest in the assets of the entity
after deducting all its liabilities.
– Equity is a residual:
Equity = Assets – Liabilities
– Increases as a result of profitable operations.
– Decreases as a result of losses from operations
– Influenced by the measurement system adopted
for Assets & Liabilities and the concepts of capital
and capital maintenance.

Income:
– Increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets.
– Or decreases of liabilities that result in increases

in equity, other than those relating to contributions
from equity participants.
– Income can also exist through a reduction in

liabilities that increase the entity’s equity.

Expenses:
– decreases in economic benefits
– in the form of outflows or depletions of assets or

incurrences of liabilities
– result in decreases in equity
– decreases in addition to those relating to

distributions to equity participants.

Recognition of the elements of

Recognition of the elements of
 The process of capturing for inclusion in the
statement of financial position or the statement(s)
of financial performance an item that meets the
definition of an asset, a liability, equity, income or
expenses
 Recognition is appropriate if it results in both

relevant information about assets, liabilities,
equity, income and expenses and a faithful
representation of those items, because the aim is
to provide information that is useful to investors,
lenders and other creditors

Workshop Activity 3
Explain how Q Ltd should account for the following items/situations, justifying
your answer by reference to the conceptual framework’s definitions and
recognition criteria:
1. Receipt of artwork of sentimental value only.
2. Q Ltd is the guarantor for an employee’s bank loan:

I. You have no reason to believe the employee will default on the loan.
II. As the employee is in serious financial difficulties, you think it likely
that he will default on the loan.
3. Q Ltd receives 1000 shares in X Ltd, trading at $4 each, as a gift from a

grateful client.
4. The panoramic view of the coast from Q Ltd’s café windows, which you
are convinced attracts customers to the café.

Learning objectives
statements

Concepts and principles underlying the
preparation of financial statements
• Monetary principle: requires that the items

included in the accounting records must be able to be
expressed in monetary terms
• Cost Principle : The cost principle states that all
assets are initially recorded in the accounts at their
purchase price or cost. This is applied not only at the
time the asset is purchased, but also over the time the
asset is held

• Accounting Entity Assumption: Personal transactions
of the owner must remain separate from the
transactions of the entity. At an accounting level, the
transactions of business entity A are to stay separate
from those of business entity B even though both
business entities have the same owner.
• Accounting period assumption: The life of the

business is broken up into equal periods for the
purposes of financial reporting.

Going concern assumption

– Financial statements are prepared under the
assumption that the entity will continue to
operate for the foreseeable future.
– Implications in accounting:
• justification for use of historical costs
• systematic allocation of depreciation
• supports the use of prepaid expenses (an asset).

Full disclosure principle:

Some important financial information is not easily reported
on the face of the statements. For example, an entity might
be sued by one of its customers. Investors and creditors
might not know about this lawsuit. The full disclosure
principle requires that all circumstances and events that
could make a difference to the decisions financial
statement users might make be disclosed. If an important
item cannot reasonably be reported directly in the financial
statements, then it should be discussed in notes that
accompany the statements

Workshop Activity 4
In relation to the following multiple choice
questions, discuss your choice of correct answer:
(1) Which of the following statements about the conceptual framework
is incorrect?
I. The conceptual framework considers timeliness and materiality
to be constraints on relevant and reliable information.
II. The conceptual framework states that the elements directly
related to the measurement of financial position are assets,
liabilities and equity.
III. The conceptual framework applies to the financial statements
of all commercial, industrial and business reporting entities.
IV. In accordance with the conceptual framework, income is
recognised when an increase in future economic benefits
related to an increase in an asset or a decrease in a liability
has arisen that can be measured reliably.

Workshop Activity 4 (Contd.)
2. The conceptual framework’s enhancing qualitative characteristics
include:
I. Understandability, timeliness, verifiability and comparability.
II. Faithful representation, relevance, understandability and verifiability.
III. Comparability and reliability.
IV. Substance over form and relevance.
3. Which of the following statements about the conceptual framework’s

definition of expenses is correct?
I. Expenses include distributions to owners.
II. Expenses are always in the form of outflows or depletions of assets.
III. Expenses exclude losses.
IV. Expenses are always decreases in economic benefits.

Workshop Activity 4 (Contd.)
4. In accordance with the conceptual framework, a lender should recognise
the forgiveness of its $20 000 interest-free loan as:
I. An increase in income and a decrease in a liability.
II. An increase in an expense and a decrease in an asset.
III. An increase in an asset and an increase in income.
IV. An increase in an expense and a decrease in a liability.

Summary
• Conceptual; framework and its components
• Definition and recognition of elements underlying the
 Assets
 Liability
 Equity
 Income
 Expenses
• Concepts and principles (GAAP) underlying the preparation
of financial statements

Additional Readings and Resources
Australian Accounting Standards Board [AASB] 2021, Conceptual Framework for Financial
Reporting, retrieved 13 April
2022,<https://aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-
19_COMPdec21_01-22.pdf>
IPSASB (2022), “Proposed updated to conceptual framework”

(https://www.ipsasb.org/publications/exposure-draft-ed-81-proposed-update-conceptual-
framework)
Introduction to GAAP, YouTube, retrieved 13 April 2022,

<https://www.youtube.com/watch?v=nqkk9omr3sc>
Leo, K., Knapp, J., McGowan, S. and Sweeting, J. (2020) Company Accounting Chapter 1,
11th edition, John Wiley & Sons Australia, Ltd, Queensland.

End of the Workshop

ACCM4200 T2 2020 Workshop 02 Students

Uploaded by

Copyright:

Available Formats

ACCM4200 T2 2020 Workshop 02 Students

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACCM4200 T2 2020 Workshop 02 Students

Uploaded by

Copyright:

Available Formats

ACCM4200

Document classification: Internal

This material has been reproduced and communicated to you by or on behalf of

Do not remove this notice.

Document classification: Internal

Document classification: Internal

Document classification: Internal

– assists preparers deal with issues not addressed by a

– assists auditors in forming an opinion on compliance

– assists users to interpret statements.

Document classification: Internal

Document classification: Internal

Document classification: Internal

Document classification: Internal

The Australian conceptual framework is

• The conceptual framework is reserved for the

Document classification: Internal

– is to provide financial information about the reporting

– Those decisions may involve buying, selling or holding

Document classification: Internal

Document classification: Internal

 The Conceptual Framework has also embraced the assumption that

Document classification: Internal

Applying the conceptual framework is

Would the IASB be better off to cancel the

Document classification: Internal

Document classification: Internal

• Predictive value refers to the fact that quality financial

Document classification: Internal

Document classification: Internal

Document classification: Internal

Document classification: Internal

Document classification: Internal

Is this analyst’s view consistent with the fundamental

Document classification: Internal

Document classification: Internal

Document classification: Internal

Document classification: Internal

Document classification: Internal

– Or decreases of liabilities that result in increases

– Income can also exist through a reduction in

Document classification: Internal

– in the form of outflows or depletions of assets or

– result in decreases in equity

– decreases in addition to those relating to

Document classification: Internal

Document classification: Internal

 Recognition is appropriate if it results in both

Document classification: Internal

1. Receipt of artwork of sentimental value only.

2. Q Ltd is the guarantor for an employee’s bank loan:

3. Q Ltd receives 1000 shares in X Ltd, trading at $4 each, as a gift from a

Document classification: Internal

Document classification: Internal

• Monetary principle: requires that the items

Document classification: Internal

• Accounting period assumption: The life of the

Document classification: Internal

Going concern assumption