2 conceptual framework

7/23/2019 2 Conceptual Framework

http://slidepdf.com/reader/full/2-conceptual-framework 1/29

CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING

IFRS Edition



Conceptual

Framework

Conceptual

Framework

NeedDevelopment

First Level:

Basic Objectives

First Level:

Basic Objectives

Second Level:

Fundamental

Concepts

Second Level:

Fundamental

Concepts

Third Level:

eco!nition and

"easurement

Third Level:

eco!nition and

"easurement

Basicassumptions

Basic

principles

Constraints

#ualitativecharacteristics

Basic elements

Conceptual Framework


A conceptual framework ! "a co#erent !$!tem of nterrelate%

o&'ect(e! an% fun%amental! t#at can lea% to con!!tent!tan%ar%! an% t#at pre!cr&e! t#e nature) functon) an% lmt!

of fnancal accountn* an% fnancal !tatement+



Nee% for a Conceptual Framework

ule$makin! should build on and relate to an established

bod% o& concepts'

(nables )*SB to issue more use&ul and consistent

pronouncements over time'


Conceptual Framework establishes the conceptsthat underlie &inancial reportin!'



,e(elopment of a Conceptual Framework

)*SB and F*SB are workin! on a joint project to

develop a common conceptual &ramework

Framework will build on e+istin! )*SB and F*SB

&rameworks'

,roject has identi&ied the objective o& &inancial

reportin! and the -ualitative characteristics o&

decision$use&ul &inancial reportin! in&ormation'




T#ree le(el!-

Fr!t Le(el . Basic objective.econ% Le(el . #ualitative characteristics and

elements o& &inancial statements

T#r% Le(el . eco!nition/ measurement/ and

disclosure concepts


O(er(ew of t#e Conceptual Framework



A..UMPTION.

0' (conomic entit%

1' 2oin! concern

3' "onetar% unit

4' ,eriodicit%

5' *ccrual

PRINCIPLE.

0' "easurement

1' evenue reco!nition

3' (+pense reco!nition

4' Full disclosure

CON.TRAINT.

0' Cost

1' "aterialit%

O/0ECTI1E

Pro(%e nformaton a&out t#e

reportn* entt$ t#at ! u!eful

to pre!ent an% potentale2ut$ n(e!tor!) len%er!) an%

ot#er cre%tor! n t#er

capact$ a! captal

Pro(%er!+

ELEMENT.

0' *ssets

1' Liabilities

3' (-uit%4' )ncome

5' (+pensesIllu!traton 345

Framework &or Financial

eportin!

Fr!t le(el

.econ% le(el

T#r%

le(el

6UALITATI1E

C7ARACTERI.TIC.

0' Fundamental

-ualities

1' (nhancin!-ualities



“To provide fnancial inormation about the

reporting entity that is useul to present and

potential equity investors, lenders, and othercreditors in making decisions in their capacity

as capital providers.

First !evel" #asic $b%ective

O/0ECTI1E

,rovided b% issuin! !eneral$purpose &inancial statements'

*ssumption is that users have reasonable knowled!e o& business

and &inancial accountin! matters to understand the in&ormation'



)*SB identi&ied the 6ualtat(e C#aracter!tc! o&

accountin! in&ormation that distin!uish better 6more use&ul7

in&ormation &rom in&erior 6less use&ul7 in&ormation &or

decision$makin! purposes'

&econd !evel" Fundamental Concepts

6ualtat(e C#aracter!tc! of Accountn*Informaton



Illu!traton- 8ierarch%

o& *ccountin! #ualities




Fun%amental 6ualt$ 4 Rele(anceelevance is one o& the two &undamental -ualities that make

accountin! in&ormation use&ul &or decision$makin!'




Fun%amental 6ualt$ 8 Fat#ful Repre!entatonFaith&ul representation means that the numbers and descriptions

match what reall% e+isted or happened'




En#ancn* 6ualte!

Distin!uish more$use&ul in&ormation &rom less$use&ul in&ormation'




A..UMPTION.

0' (conomic entit%

1' 2oin! concern

3' "onetar% unit

4' ,eriodicit%

5' *ccrual

PRINCIPLE.

0' "easurement



4' Full disclosure

CON.TRAINT.

0' Cost

1' "aterialit%

O/0ECTI1E

,rovide in&ormation about

the reportin! entit% that is

use&ul to present andpotential e-uit% investors/

lenders/ and other

creditors in their

capacit% as capital

,roviders'

ELEMENT.

0' *ssets

1' Liabilities

3' (-uit%

4' )ncome

5' (+pensesIllu!traton 345

Framework &or Financial

eportin!

Fr!t le(el

.econ% le(el

T#r%

le(el

6UALITATI1E

C7ARACTERI.TIC.

0' Fundamental

-ualities

1' (nhancin!-ualities

Basic ElementsBasic Elements



&econd !evel" #asic 'lements




E9erc!e 34:- )denti&% the -ualitative characteristic6s7 to be used !iven

the in&ormation provided'

6a7 #ualitative characteristic bein! emplo%ed

when companies in the same industr% are

usin! the same accountin! principles'

6b7 #ualit% o& in&ormation that con&irms users9earlier e+pectations'

6c7 )mperative &or providin! comparisons o& a

compan% &rom period to period'

6d7 )!nores the economic conse-uences o& a

standard or rule'

LO 5

C#aracter!tc!

elevance

Faith&ul representation

,redictive value

Con&irmator% valueNeutralit%

Completeness

Timeliness

eri&iabilit%;nderstandabilit%

Comparabilit%






6e7 e-uires a hi!h de!ree o&

consensus amon! individuals on

a !iven measurement'

6&7 ,redictive value is an in!redient

o& this &undamental -ualit% o&

in&ormation'

6!7 #ualitative characteristics that

enhance both relevance and

&aith&ul representation'

LO 5

C#aracter!tc!

elevance


,redictive value


Completeness

Timeliness


Comparabilit%






6h7 Neutralit% and completeness are

in!redients o& this &undamental

-ualit% o& accountin! in&ormation'

6i7 Two &undamental -ualities that make

accountin! in&ormation use&ul &or

decision$makin! purposes'

6j7 )ssuance o& interim reports is an

e+ample o& what enhancin!

in!redient<

LO 5

C#aracter!tc!

elevance


,redictive value


Completeness

Timeliness


Comparabilit%



Third !evel" (ecognition, )easurement,and *isclosure Concepts

These concepts e+plain how companies should reco!ni=e/

measure/ and report &inancial elements and events'

A..UMPTION.0' (conomic entit%

1' 2oin! concern

3' "onetar% unit

4' ,eriodicit%

5' *ccrual

PRINCIPLE.0' "easurement



4' Full disclosure

CON.TRAINT.0' Cost

1' "aterialit%

Reco*nton) Mea!urement) an% ,!clo!ure Concept!

Illu!traton 345

Framework for

Fnancal Reportn*



Economc Entt$ > compan% keeps its activit% separate &rom its

owners and other business unit'

Gon* Concern $ compan% to last lon! enou!h to &ul&ill objectives

and commitments'Monetar$ Unt $ mone% is the common denominator'

Pero%ct$ $ compan% can divide its economic activities into time

periods'

Accrual /a!! of Accountn* > transactions are recorded in theperiods in which the events occur'

Third !evel" +ssumptions

/a!c A!!umpton!



Third !evel" +ssumptions

E34;- )denti&% which &a!c a!!umpton o& accountin! is best

described in each item below'

6a7 The economic activities o& Fed(+ Corporation 6;S*7

are divided into 01$month periods &or the purpose o&

issuin! annual reports'

6b7 Total S'*' 6F*7 does not adjust amounts in its&inancial statements &or the e&&ects o& in&lation'

6c7 Barcla%s 62B7 reports current and non$current

classi&ications in its statement o& &inancial position'

6d7 The economic activities o& Tokai ubber )ndustries

6?,N7 and its subsidiaries are mer!ed &or accountin!and reportin! purposes'

Pero%ct$

Gon* Concern

Monetar$Unt

Economc

Entt$



Mea!urement

Co!t is !enerall% thou!ht to be a &aith&ul representation

o& the amount paid &or a !iven item'

Far (alue is @the amount &or which an asset could bee+chan!ed/ a liabilit% settled/ or an e-uit% instrument

!ranted could be e+chan!ed/ between knowled!eable/

willin! parties in an arm9s len!th transaction'A

)*SB has taken the step o& !ivin! companies the optionto use &air value as the basis &or measurement o&

&inancial assets and &inancial liabilities'

Third !evel" rinciples

Prncple!



Re(enue Reco*nton $ revenue is to be reco!ni=ed when it is

pro&a&le that &uture economic bene&its will &low to the compan% and

rela&le mea!urement o& the amount o& revenue is possible'


Illu!traton -

Tmn* of Re(enue Reco*nton



E9pen!e Reco*nton $ out&lows or @usin! upA o& assets or

incurrin! o& liabilities 6or a combination o& both7 durin! a period as a

result o& deliverin! or producin! !oods andor renderin! services'


Illu!traton 34:

E9pen!e Reco*nton

@Let the e+pense &ollow the revenues'A



Full ,!clo!ure > providin! in&ormation that is o& su&&icient

importance to in&luence the jud!ment and decisions o& an in&ormed

user'

,rovided throu!h:

Financial Statements

Notes to the Financial Statements

Supplementar% in&ormation





/E34<- )denti&% which &a!c prncple o& accountin! is best

described in each item below'

6a7 Parmalat 6)T*7 reports revenue in its income statement

when it is earned instead o& when the cash is collected'

6b7 Goo*le 6;S*7 reco!ni=es depreciation e+pense &or a

machine over the 1$%ear period durin! which thatmachine helps the compan% earn revenue'

6c7 KC Corp+ 6;S*7 reports in&ormation about pendin!

lawsuits in the notes to its &inancial statements'

6d7 Fu' Flm 6?,N7 reports land on its balance sheet at the

amount paid to ac-uire it/ even thou!h the estimated &airmarket value is !reater'

Re(enue

Reco*nton

E9pen!eReco*nton

Full

,!clo!ure

Mea!urement



Co!t > the cost o& providin! the in&ormation must be wei!hed

a!ainst the bene&its that can be derived &rom usin! it'

Materalt$ $ an item is material i& its inclusion or omission would

in&luence or chan!e the jud!ment o& a reasonable person'

Third !evel" Constraints

Con!trant!



E34==- hat accountin! constraints are illustrated b% the items

below<

6a7 illis Compan% does not disclose an% in&ormation

in the notes to the &inancial statements unless the

value o& the in&ormation to users e+ceeds the

e+pense o& !atherin! it'

6b7 Beckham Corporation e+penses the cost o&

wastebaskets in the %ear the% are ac-uired'

Co!t

Third !evel" Constraints

Materalt$



.ummar$ oft#e .tructure



The e+istin! conceptual &rameworks underl%in! ;'S' 2**, and )FS

are ver% similar'

The conver!ed &ramework should be a sin!le document/ unlike the two

conceptual &rameworks that presentl% e+ist'

Both the )*SB and F*SB have similar measurement principles/ based

on historical cost and &air value' 8owever/ ;'S' 2**, has a concept

statement to !uide estimation o& &air values when market$related data

is not available 6Statement o& Financial *ccountin! Concepts No' /@;sin! Cash Flow )n&ormation and ,resent alue in *ccountin!A7' The

)*SB is considerin! a proposal to provide e+panded !uidance on

estimatin! &air values'

2 conceptual framework

Documents