FINANCIAL REPORTING - FRAMEWORK
Regulatory Framework:
Regulation of accounting information is aimed at ensuring that users of financial
statements receive a minimum amount of information that will enable them to make
meaningful decisions regarding their interest in a reporting entity
Principles-based and rules-based framework
Principles-based Rules-based
based upon a conceptual framework Cookbook’ approach
such as the IASB
accounting standards are created using Relies on a series of detailed rules or
the conceptual framework as a basis accounting requirements that prescribe
how financial statements should be
prepared.
There are 4 organisations involved in the development of IFRS
1. IFRS Foundation: Responsible for governance of the standard-setting
process. It oversees, funds, appoints, and monitors the operational
effectiveness of:
➢ IASB, IFRS IC, and IFRS AC
Objectives: To develop a set of global accounting standards and to promote the
use and application of these standards. Also, to bring about the convergence of
national and international accounting standards
2. IASB
• Responsible for Issuing, modifying, and deleting standards. Also helps
other accounting bodies in implementing IFRS.
3. IFRS IC
• They interpret the application of new accounting standards and Identify
issues that are not particularly addressed by the standards and report
about it to IASB
4. IFRS AC: Provide advice to IASB on:
• their agenda and work prioritization
• the impact of proposed standards
• Provides strategic advice
Steps in the standard-setting process
1. Identification of subject for new or revision of standards
2. Establishment of advisory committee by IASB
3. Development and publication of discussion paper and keeping it for public
comment
4. Issuing exposure draft based on public comment
5. Holding public hearing and considering comments
6. Seeking approval on the two documents
AISWARYA BOSE 1
FINANCIAL REPORTING - FRAMEWORK
7. The publication of an IFRS Standard, exposure draft, or IFRIC
Interpretation requires the votes of at least eight of the 15 Board members
Conceptual framework
The IFRS Framework describes the basic concepts and principles that underlie the
preparation and presentation of financial statements for external users.
It serves as a medium of reference and contains the following chapters:
1. The objective of financial reporting - The Framework says that the objective
of financial reporting is to provide information to existing and potential
investors for them to make decisions
2. The reporting entity- Yet to be published
3. Qualitative characteristics of useful financial information
4. Remaining text from the old framework
Qualitative characteristics:
➔ Fundamental qualitative characteristics
• Relevance: the ability to influence economic decisions
o Materiality has a direct impact on the relevance of the
information
• Faithful representation: financial statements be produced that
accurately reflect the condition of a business
Characteristics:
• Completeness
• Neutrality: free from bias
• Free from error
• Substance over form: the economic substance of transactions and
events must be recorded in the financial statements rather than just
their legal form to present a true and fair view of the affairs of the
entity
• Prudence
➔ Enhancing qualitative characteristics
• Comparability:
o FS must be in the form for easy comparison
o For that, there must be consistency and disclosure
• Verifiability: direct or indirect
o Direct – through direct observation. Ex: counting cash
o Indirect – checking the inputs to a model
• Timeliness: available at time
• Understandability: depends upon the capabilities of users and
presentation style
AISWARYA BOSE 2
FINANCIAL REPORTING - FRAMEWORK
Underlying assumption
Going concern and accruals
Advantages and disadvantages of the framework:
Advantages Disadvantages
Financial statements are more consistent A single conceptual framework cannot
with each other be devised which will suit all users
Avoids firefighting of approach and has Need for a variety of standards for
a proactive approach in determining the different purposes
best policy
Less open to criticism of Preparing and implementing standards
political/external pressure may still be difficult with a framework
Has a principles-based approach The purpose of financial reporting is to
provide useful information as a basis for
economic decision making.
Some standards may concentrate on the
effect on the statement of financial
position; others on statement of profit
or loss
Measurement Bases
• Historical cost – The actual amount of cash paid or consideration given for
the item
• Current cost – The cash that would be paid to replace the asset at current
values
• Realisable value (fair value) – The amount the item could be disposed of in
an ordinary transaction, at arm's length
• Present value (value in use)– The discounted value of future cash flows
Historic cost accounting
The application of historical cost accounting means that assets are recorded at the
amount they originally cost, and liabilities are recorded at the proceeds received in
exchange for the obligation.
Advantages Disadvantages
Simple to understand No account is taken of inflation
Figures are objective, reliable, and Financial capital is maintained but not
verifiable physical capital
Historical cost financial statements do The carrying value of assets is often
not record gains until they are realised substantially different from the market
value
Ratios like Return on capital employed
are distorted
AISWARYA BOSE 3
FINANCIAL REPORTING - FRAMEWORK
➔ Outdated information is a drawback of historical cost accounting. Current value
accounting has arisen as an alternative.
This largely takes two forms:
1. Constant purchasing power(CPP)
• Financial statements are adjusted to show all figures in terms of money with
the same purchasing power.
• A general price index is used for this, applying a general level of inflation.
• Figures in the statement of profit or loss and statement of financial position
are adjusted by the CPP factor.
• CPP factor = (Index at the reporting date/Index at the date of initial
recognition)
2. Current cost accounting (CCA)
• It is based on deprival values (replacement cost) or value to the business.
• Inventory and non-current assets are valued at deprival value.
• Monetary assets (cash, receivables, payables, loans) are not adjusted.
• An additional charge to the statement of profit or loss reflects the deprival
value of inventory within the cost of sales.
• An additional charge in the statement of profit or loss reflects the deprival
value of non-current assets (depreciation)
Value in use
Recoverable
Higher of
amount
Deprival Lower of NRV
value Net
replacement
cost
Financial and physical capital maintenance
The IASB Conceptual Framework identifies two concepts of capital:
1. Financial capital maintenance (FCM)
AISWARYA BOSE 4
FINANCIAL REPORTING - FRAMEWORK
A financial concept of capital is whereby the capital of the entity is linked to the net
assets, which is the equity of the entity.
FCM sets aside profits to preserve the value of shareholders’ funds in either
monetary terms (money financial capital) or constant purchasing power (real
financial capital).
Assets – Liabilities = Equity
Opening equity (net assets) + Profit – Distributions = Closing equity (net assets)
2. Physical capital maintenance
A physical concept of capital is one where the capital of an entity is regarded as its
production capacity, which could be based on its units of output.
When a physical concept of capital is used, a profit is earned only if the physical
production capacity (or operating capability) of the entity at the end of the period is
greater than the production capacity at the beginning of the period, adjusted for any
distributions paid to the owners during the period, or any equity capital raised.
AISWARYA BOSE 5
