The Conceptual
Framework
Chapter 7
Learning outcomes
By the end of this session you should be able to:
• Explain the key principles contained within the IASB's Conceptual Framework for
Financial Reporting
• Define the fundamental and enhancing qualitative characteristics of financial
information
• Define and explain the elements of financial statements prepared in accordance with
IFRS
• Define the reporting entity
• Understand and apply the recognition (and derecognition) criteria within the financial
statements.
• Understand and explain the appropriate measurement bases to a given scenario
Purpose and status of The Framework
The purpose of The Framework is to:
• assist the International Accounting Standards Board (Board) to develop IFRS
Standards (Standards) that are based on consistent concepts
• assist preparers to develop consistent accounting policies when no Standard applies to
a particular transaction or other event, or when a Standard allows a choice of
accounting policy
• assist all parties to understand and interpret the Standards.
The Framework is not an accounting standard and does not override the requirements of
any IFRS Standards.
Objectives of financial reporting
The objective of financial reporting is to provide information about the reporting
entity that is useful to users in making decisions relating to providing resources to
the entity.
Users ’ consist of
• existing and potential investors
• lenders
• other creditors.
Decisions relating to providing resources’ consist of whether or not to:
• buy , sell or hold equity and debt instruments
• provide or settle loans and other forms of credit
• exercise the rights to vote on management’s actions that affect the use of the
entity’s economic resources.
Qualitative characteristics
Fundamental qualitative characteristics ( the MUST HAVES):
Relevance
Relevance Faithful representation
Enhancing qualitative characteristics (the NICE TO HAVES):
Comparability Verifiability
Timeliness Understandability
Qualitative characteristics
Relevance
Information is relevant when it influences the economic decisions of users by helping
them evaluate past, present or future events or confirming or correcting their past
evaluations.
For information to be relevant, consideration must be made of both its:
• Nature , and
• Materiality
Qualitative characteristics
Faithful representation
Information within the financial statements must show a faithful representation
of the substance of any transactions.
To be a faithful representation, financial information would possess the following
characteristics:
• Completeness information must be complete
• Neutrality free from bias and prudent
• Free from error Free from error does not mean perfectly accurate in all
respects. Information is free from material error and, when judgement or
estimates are used, can include measurement uncertainty
Qualitative characteristics
Comparability
Users must be able to compare financial statements of different
entities and over a period of time in order to identify trends in
financial position and performance.
Accounting policies should be applied consistently to improve comparability.
Qualitative characteristics
Verifiability
Verifiability is when information can be independently confirmed or verified by
knowledgeable third parties.
Verification can be direct or indirect.
Direct verification means verifying an amount through direct observation e.g.
counting cash.
Indirect verification means checking a model, formula or other technique and
recalculating using the same methodology e.g. recalculating inventory using
assumptions such as first in, first out method.
Qualitative characteristics
Timeliness
Timeliness means having information available to decision makers in
time to be capable of influencing their decisions.
The older the information is the less useful it becomes.
Qualitative characteristics
Understandability
Information needs to be readily understandable by users. It is
assumed that users:
• have a reasonable knowledge of business and economic activities; and
• are willing to study the information provided with reasonable diligence.
Objectives of financial statements
According to The Framework , the objective of financial statements is to
provide financial information that is useful to users of financial statements in
assessing the prospects for future net cash inflows to the reporting entity and
in assessing management’s stewardship of the entity’s economic resources.
Financial Statement
Pg 81 -93
Going concern assumption
The Framework states ‘financial statements are normally prepared on the
assumption that the reporting entity is a going concern and will continue in
operation for the foreseeable future’ (Conceptual Framework, para 3.9)
Foreseeable future not strictly defined but typically considered as a
period of greater than 12 months.
Elements in the financial statements
The Framework defines an asset as 'a present economic resource
controlled by the entity as a result of past events An economic
Assets
resource is a right that has the potential to produce economic
benefits’ (Conceptual Framework, para 4.2
The Framework defines a liability as 'a present obligation of the
Liabilities entity to transfer an economic resource as a result of past
events’ (Conceptual Framework, para 4.2
Elements in the financial statements
Equity is the ‘ residual interest in the assets of the enterprise
Equity after deducting all its liabilities. liabilities.’ (Conceptual
Framework, para 4.2
Elements in the financial statements
The Framework defines income as 'increases in assets or
decreases in liabilities that result in increases in equity, other
Income than those relating to contributions from equity participants'
(Conceptual Framework, para 4.2
The Framework defines expenses as 'decreases in assets or
increases in liabilities that result in decreases in equity, other
Expenses than those relating to distributions to equity participants'
(Conceptual Framework, para
Recognition and Measurement
In order to recognise items in the statement of financial position or income statement,
the following criteria should be satisfied.
It meets the definition of an element of the
financial statements
Provides relevant information regarding the
particular element of the financial statements
Provides a faithful representation of the particular
element
Measurement
Measurement is the process of determining the monetary amounts at which the elements of financial
statements are to be recognised and carried in the balance sheet and income statement.
There are 2 ways of measuring the elements. They are:
• Historical cost – the price paid at acquisition
• Current value – shows the value at the measurement date.
Examples include:
• Fair values – the price in an orderly transaction between market participants
• Value in use – the present value of future cash flows
• Current cost – the cost of an equivalent asset on the measurement date
INTRODUCTION TO SINGLE
ENTITY ACCOUNTS
CHAPTER 8
Learning outcomes
By the end of this session you should be able to:
• produce financial statements in a form suitable for publication from trial balance in
accordance with IAS 1 Presentation of Financial Statements
• produce the statement of financial position
• produce the statement of profit or loss and other comprehensive income
• produce the statement of changes in equity
• identify concepts affecting financial statements
Objectives of financial statements
The IASB Conceptual Framework introduces the general concepts that are used when
producing the financial statements.
IAS 1 Presentation of financial statements sets out how these principles are
specifically applied when preparing and presenting the financial statements.
IAS 1 states that the objective of financial statements is to provide information about
the financial position, performance and cash flows of an enterprise that is useful in
making economic decisions.
The financial statements also show how effectively management have looked after the
resources of the entity.
CONCEPTS AND OTHER CONSIDERATION
AFFECTING FINANCIAL STATEMENTS
Fair presentation
IAS 1 Presentation of Financial Statements states that
‘Financial statements shall present fairly the financial position, financial performance and cash
flows of an entity’ (IAS 1, para 15).
Entities that comply with all relevant IAS's will virtually always achieve this objective.
If an entity feels that compliance with an IFRS Standard would be misleading and does not
follow the IFRSs in order to show a fair presentation, the entity must make disclosures
regarding matter such as which IFRS was not applied, why the entity didn’t follow the IFRS
rules and what financial effects the departure from IFRS has caused.
CONCEPTS AND OTHER CONSIDERATION
AFFECTING FINANCIAL STATEMENTS
Going concern
According to IAS 1 Presentation of Financial Statements, financial statements should be
prepared on the going concern basis unless management intend to liquidate the business or to
cease trading.
This means that the entity is considered to be able to continue to trade for the foreseeable
future.
CONCEPTS AND OTHER CONSIDERATION
AFFECTING FINANCIAL STATEMENTS
Accruals basis
IAS 1 requires entities to prepare their financial statements using the accruals basis of
accounting.
This means that transactions are recorded in the accounting period in which they were incurred
regardless of whether cash has been paid or received
Consistency
Presentation and classification of items should be consistent from one period to the next.
CONCEPTS AND OTHER CONSIDERATION
AFFECTING FINANCIAL STATEMENTS
Materiality and
aggregation
Omissions or misstatements of items are material if they could influence the economic decisions
of users.
Each material class of similar items should be presented separately in the financial statements.
Immaterial amounts should be aggregated with amounts of a similar nature and need not be
disclosed separately.
Comparable
information
Comparative information should be disclosed in respect of the previous period for all amounts
reported in the financial statements unless an IFRS requires or allows otherwise.
QUESTIONS
