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IFRS Conceptual Framework

The document provides an overview of the Conceptual Framework by the International Financial Reporting Standards Foundation (IFRS Framework). It discusses the role and scope of the conceptual framework, including setting out concepts that underlie IFRS financial statements. It also covers the objective of financial reporting, qualitative characteristics of useful financial information, elements of financial statements such as assets, liabilities and equity, and concepts of recognition, measurement, and accounting assumptions.

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Sheikh Sahil Mobin
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411 views16 pages

IFRS Conceptual Framework

The document provides an overview of the Conceptual Framework by the International Financial Reporting Standards Foundation (IFRS Framework). It discusses the role and scope of the conceptual framework, including setting out concepts that underlie IFRS financial statements. It also covers the objective of financial reporting, qualitative characteristics of useful financial information, elements of financial statements such as assets, liabilities and equity, and concepts of recognition, measurement, and accounting assumptions.

Uploaded by

Sheikh Sahil Mobin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Conceptual Framework by

International Financial Reporting


Standards Foundation (IFRS
Framework)
ACCT 202 – Theory and Concepts of
Accounting – Islamic Perspective
Introduction - Role of the Conceptual Framework
• It sets out the concepts that underlie IFRS financial statements;
• It assist the IASB in the development of future IFRSs and in its review of existing
IFRSs;
• It sets out agreed concepts that underlie financial reporting objectives, qualitative
characteristics, element and definitions;
• IASB uses Conceptual Framework to set standards that
 enhances consistency across standards
 enhances consistency over time as Board members change
 provides benchmark for judgments
• Preparers use Conceptual Framework to develop accounting policies in the absence
of specific standard or interpretation
Introduction – Scope of the Conceptual Framework
The Conceptual Framework deals with:

the objective of financial reporting;

the qualitative characteristics of useful financial information;

the definition, recognition and measurement of the elements from which


financial statements are constructed; and

concepts of capital and capital maintenance.


Introduction – Objective of Financial
Reporting
• 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.
• Investors’, lenders’ and other creditors’ expectations about returns depend on their assessment
of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the
entity.
• To assess an entity’s prospects for future net cash inflows, existing and potential investors,
lenders and other creditors need information about:
• the resources of the entity;
• claims against the entity; and
• how efficiently and effectively the entity's management and governing board have discharged their
responsibilities to use the entity's resources.

Example protecting the entity's resources from unfavourable effects of


economic factors such as price and technological changes
The Reporting Entity

• Reporting entity as a circumscribed area of a business activity of interest to present and


potential equity investors, lenders and other creditors who cannot directly obtain the
information they need in making decisions about providing resources to the entity and in
assessing whether management and governing board of the entity have made efficient and
effective use of the resources provided.

Examples of reporting entity includes a sole trader, corporation, trust,


partnership, association and group.

• Even a portion of an entity can qualify as a reporting entity if economic activities of that
portion can be distinguished objectively from the rest of the entity and financial information
about that portion of the entity has the potential to be useful in making decisions about
providing resources to that portion of the entity. (Example include SILO)
Qualitative Characteristics of Accounting
Information
Relevance Faithful representation
capable of making a difference in users’ decisions faithfully represents the phenomena it purports to
• predictive value represent
• confirmatory value • completeness (depiction including numbers
• materiality (entity-specific) and words)
• neutrality (unbiased)
• free from error (ideally).
If financial information is to be useful, it must be relevant and faithfully represent what it purports to
represent (ie fundamental qualities).
Financial information without both relevance and faithful representation is not useful, and it cannot
be made useful by being more comparable, verifiable, timely or understandable.
The usefulness of financial information is enhanced if it is comparable, verifiable, timely and
understandable (i.e. enhancing qualities—less critical but still highly desirable)
Financial information that is relevant and faithfully represented may still be useful even if it does not
have any of the enhancing qualitative characteristics.
Qualitative Characteristics of Accounting
Information
Comparability: Verifiability:
like things look alike; different things look knowledgeable and independent observers could
different reach consensus, but not necessarily complete
agreement, that a depiction is a faithful
representation

Timeliness Understandability:
having information available to decision-makers Classify, characterize, and present information
in time to be capable of influencing their clearly and concisely.
decisions
Pervasive Constraints of financial information
• Reporting financial information imposes costs, and it is important that those costs are
justified by the benefits of reporting that information.
• Benefits include more efficient functioning of capital markets and a lower cost of capital
for the economy.
• Costs include collecting, processing, verifying and disseminating financial information and
the costs of analysing and interpreting the information provided.
• In applying the cost constraint, the IASB assesses whether the benefits of reporting
particular information are likely to justify the costs incurred to provide and use that
information. Those assessments are usually based on a combination of quantitative and
qualitative information

Information

Cost Benefit
Elements of Financial Statements

ASSETS LIABILITIE EQUITY INCOME EXPENSES


S
Elements of Financial Statements
Asset
Resource controlled as a result of past events and from which future economic benefits are expected
to flow.
Liability
Present obligation arising from past events, the settlement of which is expected to result in outflow
of resources embodying economic benefits.
Equity
The residual interest in the assets of the entity after deducting all its liabilities (i.e Assets minus
liabilities).
Income (expense)
Increases (decreases) in economic benefits during period from inflows or enhancements (outflows or
depletions) of assets (liabilities) or decreases (incurrences) of liabilities from in increases (decreases)
in equity, other than contributions from (distributions to) equity.
Accounting Assumptions or Underlying
Concepts
• Going Concern
• It is assumed that the entity has neither the intention nor the need to liquidate or curtail
materially the scale of its operations;
• If such an intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed.

• Substance Over Form


• Attention needs to be given to its underlying substance and economic reality and not
merely its legal form.
Components of Financial Statements
1. Statement of Financial Position

2. Statement of Financial Performance

3. Statement of Cash Flows

4. Statement of Changes in Equity

5. Notes to the Accounts


Financial Accounting Process, Recognition,
Measurement Concepts and Accounting
Assumptions

RECOGNITION MEASUREMENT PRESENTATION REPORTING


Recognition
Accrual basis of accounting
recognise element (e.g. asset) when satisfy definition and recognition criteria

Recognise item that meets element definition when


• probable that benefits will flow to/from the entity
• has cost or value that can measured reliably

What does probable mean?


The meaning of probable is determined at the standards level. Therefore, inconsistent use
across IFRSs

What does measure reliably mean?


To a large extent, financial reports are based on estimates, judgements and models rather
than exact depictions.
Measurement
• Measurement is the process of determining monetary amounts at which elements are
recognised and carried.

• To a large extent, financial reports are based on estimates, judgements and models
rather than exact depictions. The Framework establishes the concepts that underlie
those estimates, judgements and models

• IASB guided by objective and qualitative characteristics when specifying


measurements.
Measurement
Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in
some circumstances (for example, income taxes), at the amounts of cash or cash equivalents
expected to be paid to satisfy the liability in the normal course of business.

Current cost Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same
or an equivalent asset was acquired currently.

Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.

Realisable Assets are carried at the amount of cash or cash equivalents that could currently be obtained by
selling the asset in an orderly disposal.
(settlement)
value Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash
equivalents expected to be paid to satisfy the liabilities in the normal course of business.

Present value Assets are carried at the present discounted value of the future net cash inflows that the item is
expected to generate in the normal course of business.

Liabilities are carried at the present discounted value of the future net cash outflows that are
expected to be required to settle the liabilities in the normal course of business.

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