The Conceptual Framework and

Reporting Environment in Malaysia

ACN3112 – Intermediate FAR 1
Content
Conceptual Framework
The objectives
The contents
Economic resources and claims
Contractual rights and obligations
Assumption and concepts
Recognition and measurements
Qualitative characteristics
 The Conceptual Framework
General objectives of financial reporting

Qualitative characteristics of useful information

Underlying assumption

Elements of financial statements

Recognition of elements of Measurement of elements of

financial statements financial statements

Concepts of capital maintenance

Purpose of the Conceptual Framework
Standard Preparers Auditors Users Interested
setters parties in
C the work of
O IASB /
IASB-IFRS, Current M MASB
MASB- standards P
MFRS, and issues L
FASB-ASC not I Financial Development
(USGAAP), tapped by A information of standards
standards N
C
E
DEVELOP
& FORM
REVIEW APPLYING OPINION INTERPRET APPROACH
 The Conceptual Framework

Sets out concepts underlying
the preparation and presentation of
general purpose financial statements

Explains in general sense how

financial statements should be prepared

Financial Statements – a financial report produce at every end of financial year

Financial Reporting – overall disclosure of financial results/performance to public
  Reports about an economic entity’s  Intended for external users
financial performance, (investors, lenders, creditors,
which can be used by a wide range employees, government agencies
of users and the general public)

Financial Statements
FINANCIAL REPORTING
Statement of Profit and Loss and Other Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flow
Notes to the Accounts

Financial Statements – a financial report produce at every end of financial year

Financial Reporting – overall disclosure of financial results/performance to public
 to • Provide loans
existing and • Provide capital
potential • Discontinue operations
To provide
investors,
FINANCIAL REPORTING
financial
information
lenders and
other creditors
about the about
reportingFinancial Statements
in making
decisions
providing
entity that is resources to
useful the entity
objective
Statement of Profit and Loss and Other Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flow
Notes to the Accounts
Qualitative Characteristics of Useful
Information
Reporting entity & reporting period
Reporting entity
 an entity that is required, or chooses, to prepare general
purpose financial statements

Reporting period
 specific period in which information about assets,
liabilities and equities of reporting entity is provided
 help users of financial statements to identify and assess
changes and trends ~ comparative information for at
least one preceding reporting period.
Economic resources and claims
Economic resources – a right that has the potential to
produce economic benefits (assets … )

Rights that has potential to produce economic benefits

 …to receive cash
 …to receive goods/services
 …to exchange economic resource on favaourable terms
 …to benefit from other’s obligation to transfer economic
resources in the future (contingencies)
 …over physical object (PPE, leased PPE)
 …to use intellectual property
Economic resources and claims
Economic resources – a right that has the potential to
produce economic benefits (assets … )

Control – to whom does the economic resources

belongs to.
 Ability to direct the use and obtain the economic benefits
 Ability to prevent others from directing the use and
obtaining the economic benefit
 Legal form
 Other means to be able to direct the use and obtain
economic benefits
Economic resources and claims
Economic resources – a right that has the potential to
produce economic benefits (assets … )
Claims – from debts, equity

 Information on these help users :

 to identify the reporting entity’s financial strengths and
weaknesses (liquidity and solvency, needs for financing)
 to assess management’s stewardship of the entity’s
economic resources
 to predict how future cash flows will be distributed among
those with a claim against the reporting entity (priorities and
payment requirements of existing claims)
Economic resources and claims & its changes
Resources – changes due to financial performance, changes in assets
Claims – changes due to transactions related to debts, equity

 To properly assess both the prospects for future net cash inflows to
the reporting entity and management’s stewardship of the entity’s
economic resources
 Financial performance ~ understand the return on its economic
resources
 Return on its economic resources ~ understand stewardship of
economic resources
 Variability and components of return ~ understand uncertainty of
future cash flows

 Past financial performance and stewardship ~ helpful in predicting the

entity’s future returns on its economic resources.
Qualitative Characteristics of Useful
Information
 Fundamental QC – Relevance
Relevance Predictive
Can be use to predict future
outcomes
Information that is
relevant is capable
of changing the Confirmatory
Provide feedbacks about
decision made by previous evaluation
users

Material
Omission or misstatement
affect users’ decision
 Fundamental QC – Faithful
Representation
Complete
Faithful Includes all information
representation necessary for users to
understand the business
standing
Information should
represent the Neutral
actual situation of a Information is not slanted,
weighted, emphasised, de-
business or entity emphasised or manipulated

Free from error

No errors or omission of
information
Enhancing Qualitative Characteristics
• Enables users to understand the similarities and differences
Comparability • Comparable between periods, companies, industries and
countries

• Different knowledgeable and independent observers could

Verifiability
reach consensus, although not a complete agreement.

• Information should be made available in time to influence

Timeliness decision-making.
• The older the information, the less useful it is.

• Classifying, characterising and presenting information clearly

and concisely to make it understandable.
Understandability
• The users of financial information are assumed to be
knowledgeable users.
 Elements of Financial Statements
ASSETS LIABILITIES EQUITY

INCOME
5 ELEMENTS
EXPENSE

ACCOUNTING EQUATION:
 Elements of Financial Statements
• Present economic resources …
Assets • controlled by the entity …
• result of past events

Examples: cash, receivables, building, plant and machinery

• Present obligation …
• to transfer an economic resource …
Liabilities • result of past events

Examples: trade payables, note payables, loans, advances and bonds

• Residual interest in the assets of the entity after deducting all its
liabilities
• Referred to as the net asset value (assets – liabilities) of the entity
Equity • Examples: ordinary shares, retained earnings and revaluation reserve
Contractual rights and contractual obligation
Contract
 Substance over form
 Redeemable preference shares – equity (form), liability
(substance)
 Ordinary shareholding – non-voting rights
 Leased asset – rights to use, no legal control

 Units of account
 Individual right / obligation
 Group of rights / obligation
 Elements of Financial Statements
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

Revenue Gains
Arises in the course of the Other items that meet the definition
ordinary activities of an entity of income which may or may not
arise in the course of the ordinary
Examples: revenue from sales of activities of an entity
goods, revenue from rendering of Examples: gains from disposal of
services, fees, interest, dividends, machinery; gains from revaluation of
royalties and rents marketable securities and non-
current assets
 Elements of Financial Statements
Expenses
Decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to
distribution to equity participants

Expenses Losses
Arise in the course of the Other items that meet the definition of expenses
ordinary activities of the and may or may not arise in the course of the
entity ordinary activities of the entity
Examples: losses from flood, losses from
Examples: cost of sales, disposal of vehicles and losses from decreases
salaries, wages, utilities and in market value of investment in shares
depreciation
 Elements of Financial Statements
EQUITY = CAPITAL – WITHDRAWAL + (INCOME – EXPENSE)

ACCOUNTING EQUATION:

CAPITAL

INCOME WITHDRAWAL
Generated or
incurred in EXPENSE
business
activities of Transactions
the between
enterprise owner and
his/her
enterprise
 Recognition
 Recognised = included in the statement of financial position or
statement of profit or loss and other comprehensive income.
 To be recognised, it must
 meet the definition of the element (assets, liabilities, equity, income or
expenses); and
 fulfil the recognition criteria.

 Recognition criteria
1. It is probable that the future economic benefit associated with an item will
flow to or from the entity; and
2. The item has a cost or value that can be measured reliably.
 Recognition

Example: To recognise a purchase of a building as an asset

Does the building meet the definition of an asset?

YES

It is probable that the future economic benefit associated with

the building will flow to the entity? YES

The building has a cost or value that can be measured reliably?

YES

Recognise the building as an asset

Dr. Building Cr. Cash
 Measurement
 Measurement is the process of determining the monetary
amounts for specific items to be recognised, and carried, on the
statement of financial position and the statement of profit or
loss and other comprehensive income.

 A number of different bases of measurement are used to

different degrees, and in varying combination, in the financial
statements.
 Measurement
○ Historical cost
○ amount of cash or cash equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition

○ Current cost
○ the amount of cash or cash equivalents that would have to be paid if the
same or an equivalent asset was acquired currently

○ Realisable (settlement) value

○ the amount of cash or cash equivalents that could currently be obtained by
selling the asset

○ Present value
○ the present discounted value of the future net cash inflows that the item is
expected to generate
 Measurement
On 1 June 2018, Syarikat Wawasan paid cash amounting to
RM60,000 to acquire a van.
On 1 June 2019, the market value of the van is RM55,000.
To sell the van, a cost equivalent to 2% of the market price is
expected to be incurred.
 Historical cost of the van = RM60,000.
 Current value of the van = RM55,000.
 Realisable value of the van = RM53,900 [RM55k – 2% cost to sell].

Assume: Syarikat Wawasan acquire a van with equal installment payment of

RM10,000 over 7 years, with interest of 10%. [RM70,000]
Present value (2018) = RM48,684
 RM10,000 x [PV factor of 10%, 7 years (4.8684)]
 ASSETS – LIABILITIES = CAPITAL + (INCOME – EXPENSE)

Capital Maintenance Concept

 The concept of capital maintenance states that income is only
recognised after capital has been maintained or when there has
been a full recovery of costs.

 Capital maintenance has been reached if the amount of net assets

(assets – liabilities) at the end of a period is unchanged from the net
assets (assets – liabilities) at the beginning of the period, with any
excess amount treated as profit.

 Two concepts of capital maintenance are the financial capital

maintenance and the physical capital maintenance.

 The Conceptual Framework does not prescribe a particular model of

capital maintenance.
 Underlying Assumption: Going Concern
 The entity is expected to continue to operate for the
foreseeable future with no intention or the need to liquidate
or reduce significantly the size of its operations.

 This enables the historical cost to be used as a basis of

measurement.