Framework

Chapter Outline

The basic understandings Framework for the Preparation and

Presentation of Financial Statements (IASB)

Comparison of different frameworks

1. The basic understandings

What is a framework?– Statements of Financial Accounting Concepts

(FASB)– The Statement of Principles for Financial

Reporting (ASB)– The Framework for Preparation and Presentation

of Financial Statements (IASB)

Definition from FASB The conceptual framework is a coherent system of interrelated

objectives and fundamentals that is expected to lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and reporting. The objectives identify the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting—concepts that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties. Concepts of that type are fundamental in the sense that other concepts flow from them and repeated reference to them will be necessary in establishing, interpreting, and applying accounting and reporting standards. .------SFAC 5

PURPOSE from ASB 1 This Statement of Principles for Financial Reporting sets

out the principles that the Accounting Standards Board believes should underlie the preparation and presentation of general purpose financial statements.

2 The primary purpose of articulating such principles is to provide a coherent frame of reference to be used by the Board in the development and review of accounting standards and by others who interact with the Board during the standard-setting process.

3 Such a frame of reference should clarify the conceptual underpinnings of proposed accounting standards and should enable standards to be developed on a consistent basis by reducing the need to debate fundamental issues each time a standard is developed or revised.

1. The basic understandings (Con.)

What is the role of a framework– To the regulators– To the users (preparers, auditors and users)

What is the nature and status of framework? – Is it an accounting standard? Or is it a theory?– Does it equal to accounting theory?

The Framework for Preparation and Presentation of Financial

Statements

IASC, 1989

Accepted by IASB

Learning Objectives What is the purpose of framework? What is its scope? What should be included in a complete set of financial

statements according to the requirements of IFRS? Who are defined as financial information users in this

framework? What are their information needs? What are the objectives of financial statements? Which accounting principles should be considered in

compiling financial statements according to IFRS? What kind of accounting items should be recognized

in Balance sheet and Income Statement, what kind of principles should be followed in measuring them?

Introduction

1. Purpose(a) assist the Board of IASC in the development of

future International Accounting Standards and in its review of existing International Accounting Standards;

(b) assist the Board of IASC in promoting harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards;

(c) assist national standard-setting bodies in developing national standards;

Purpose (d) assist preparers of financial statements in applying

International Accounting Standards and in dealing with topics that have yet to form the subject of an International Accounting Standard;

(e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;

(f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting Standards; and

(g) provide those who are interested in the work of IASC with information about its approach to the formulation of International Accounting Standards.

Status 2. This Framework is not an International

Accounting Standard hence does not define standards for any particular measurement or disclosure issue. Nothing in this Framework overrides any specific International Accounting Standard.

3. there may be a conflict between the Framework and an International Accounting Standard.

In those cases where there is a conflict, the requirements of the International Accounting Standard prevail over those of the Framework.

Example “89. An asset is recognised in the balance she

et when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.”---- <Framework>

63. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.-----<IAS 38 intangible assets>

5. Scope

(a) the objective of financial statements;

(b) the qualitative characteristics that determine the usefulness of information in financial statements;

(c) the definition, recognition and measurement of the elements from which financial statements are constructed; and

(d) concepts of capital and capital maintenance.

Scope 6. The Framework is concerned with general purpose

financial statements including consolidated financial statements.

7. A complete set of financial statements normally includes a balance sheet, an income statement, a statement of changes in financial position and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements. Such schedules and supplementary information may deal, for example, with financial information about industrial and geographical segments and disclosures about the effects of changing prices.

9. Users and Their Information Needs

Investors--concerned with the risk inherent in, and return provided by, their investments.

Employees---information about the stability and profitability of their employers.

Lenders--information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.

Suppliers and other trade creditors--information that enables them to determine whether amounts owing to them will be paid when due.

Customers--information about the continuance of an entity Governments and their agencies--the allocation of resources

and, therefore, the activities of entities. Public.

Users and Their Information Needs

10. While all of the information needs of these users cannot be met by financial statements, there are needs which are common to all users. As investors are providers of risk capital to the entity, the provision of financial statements that meet their needs will also meet most of the needs of other users that financial statements can satisfy.

The Objective of Financial Statements

The Objective of Financial Statements

12. The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

14. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it.

Underlying Assumptions

Underlying Assumptions

22. Accrual Basis– Under this basis, the effects of transactions and othe

r events are recognized when they occur and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

23. Going Concern– The financial statements are normally prepared on

the assumption that an entity is a going concern and will continue in operation for the foreseeable future.

Qualitative Characteristics of Financial Statements

Qualitative Characteristics of Financial Statements

25. Understandability 26-28. Relevance 31-32. Reliability 39-42. Comparability

Understandability

25. An essential quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.

Relevance

26. To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.

Materiality

29. The relevance of information is affected by its nature and materiality.

30.Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

Reliability 31. To be useful, information must also be

reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.

To be reliable, information should be

33. Faithful Representation 35. Substance Over Form 36. Neutrality 37. Prudence 38. Completeness

Comparability

39. Users must be able to compare the financial statements of an entity through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities in order to evaluate their relative financial position, performance and changes in financial position.

Constraints on Relevant and Reliable Information

43. Timeliness 44. Balance between Benefit and Cost 45. Balance between Qualitative

Characteristics

46. True and Fair View/Fair Presentation

IASB’s concepts Note: *Although the IASB’s documents show all the concepts listed on this page, they show a more

complicated relationship than on the left of this figure for the three concepts shown here under relevance

The Elements of Financial Statements

Financial Position49. An asset is a resource controlled by the entity as a

result of past events and from which future economic benefits are expected to flow to the entity.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

50.The definitions of an asset and a liability identify their essential features but do not attempt to specify the criteria that need to be met before they are recognised in the balance sheet.

51.In assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form.

52.Balance sheets drawn up in accordance with current International Accounting Standards may include items that do not satisfy the definitions of an asset or liability and are not shown as part of equity.

Liabilities

61. A distinction needs to be drawn between a present obligation and a future commitment.

62. The settlement of a present obligation usually involves the entity giving up resources embodying economic benefits in order to satisfy the claim of the other party

64. Some liabilities can be measured only by using a substantial degree of estimation. Some entities describe these liabilities as provisions.

Equity

65. Although equity is defined in paragraph 49 as a residual, it may be sub-classified in the balance sheet. For example, in a corporate entity, funds contributed by shareholders, retained earnings, reserves representing appropriations of retained earnings and reserves representing capital maintenance adjustments may be shown separately.

Performance70. Income is 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.

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Income 74. The definition of income encompasses both reven

ue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent.

75. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity……

76. Gains include, for example, those arising on the disposal of non-current assets. The definition of income also includes unrealised gains; for example, those arising on the revaluation of marketable securities and those resulting from increases in the carrying amount of long-term assets.

Expenses 78. The definition of expenses encompasses losses as well as th

ose expenses that arise in the course of the ordinary activities of the entity. Expenses that arise in the course of the ordinary activities of the entity include, for example, cost of sales, wages and depreciation. …

79. Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the entity….

80. Losses include, for example, those resulting from disasters such as fire and flood, as well as those arising on the disposal of non-current assets. The definition of expenses also includes unrealised losses, for example, those arising from the effects of increases in the rate of exchange for a foreign currency in respect of the borrowings of an entity in that currency.

Categories of income and expenses

Income and Expenses that affect income statement= Net Profit or Loss for the Period

Other income and expenses that do not affect income statement

Revenue/expenses Gains/Losses

Income/Expenses

Changes of Equity (other than contribution from or distribution to equity participants)

Recognition of the Elements of Financial Statements(82-98)

83. An item that meets the definition of an element should be recognised if:

(a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and

(b) the item has a cost or value that can be measured with reliability.

The Probability of Future Economic Benefit

85. The concept of probability is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. The concept is in keeping with the uncertainty that characterises the environment in which an entity operates. Assessments of the degree of uncertainty attaching to the flow of future economic benefits are made on the basis of the evidence available when the financial statements are prepared. For example, when it is probable that a receivable owed to an entity will be paid, it is then justifiable, in the absence of any evidence to the contrary, to recognise the receivable as an asset. For a large population of receivables, however, some degree of non-payment is normally considered probable; hence an expense

Reliability of Measurement 86. The second criterion for the recognition of an item is that it

possesses a cost or value that can be measured with reliability as discussed in paragraphs 31 to 38 of this Framework. In many cases, cost or value must be estimated; the use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. When, however, a reasonable estimate cannot be made the item is not recognised in the balance sheet or income statement. For example, the expected proceeds from a lawsuit may meet the definitions of both an asset and income as well as the probability criterion for recognition; however, if it is not possible for the claim to be measured reliably, it should not be recognised as an asset or as income; the existence of the claim, however, would be disclosed in the notes, explanatory material or supplementary schedules.

Measurement of the Elements of Financial Statements

100.(a) Historical cost.. (b) Current cost. (c) Realizable (settlement) value.(d) Present value. 101. The measurement basis most commonly

adopted by entities in preparing their financial statements is historical cost. This is usually combined with other measurement bases.

Concepts of Capital and Capital Maintenance

104. (a) Financial capital maintenance. Under this

concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period

Comparison of different Frameworks

IASCFASB (U.S.)ASB (U.K)

MOF (China)

General Introductions The United States

– Problems with CAP and APB– Research of Wheat Committee and Trueblood Committee– FASB 1978 :Statements of Financial Accounting Concepts ， SFACs

No. 1 The United Kingdom

– The Corporate Report (ASSC)– ASB 1999, The Statement of Principles for Financial Reporting ( SPF

R) IASC

– 1989, The Framework for Preparation and Presentation of Financial Statements (Framework)

China– 1992– 2006

Statement of Financial Accounting Concepts (U.S)

SFAC No.1 Objectives of Financial Reporting by Business Enterprises

November 1978

SFAC No. 2 Qualitative Characteristics of Accounting Information May 1980

SFAC No. 3 Elements of Financial Statements of Business Enterprises

December 1980

SFAC No. 4 Objectives of Financial Reporting by Nonbusiness Organizations

December 1980

SFAC No. 5 Recognition and Measurement in Financial Statements of Business Enterprises

December 1984

SFAC No. 6 Elements of Financial Statements replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2)

December 1985

SFAC No. 7 Using Cash Flow Information and Present Valuein Accounting Measurements

February 2000

The Statement of Principles for Financial Reporting (U.K.)

Introduction

Chapters

1 The objective of financial statements

2 The reporting entity

3 The qualitative characteristics of financial information

4 The elements of financial statements

5 Recognition in financial statements

6 Measurement in financial statements

7 Presentation of financial information

8 Accounting for interests in other entities

Appendices

企业会计准则——基本准则第一章 总则第二章 会计信息质量要求第三章 资产第四章 负债第五章 所有者权益第六章 收入第七章 费用第八章 利润第九章 会计计量第十章 财务会计报告第十一章 附则

Compare1: ContentsContents IFRS US UK China

• The Objective of Financial Statements• Underlying Assumptions• Reporting Entity• Qualitative Characteristics of Financial Statements• The Elements of Financial Statements• Recognition of the Elements of Financial

Statements• Measurement of the Elements of Financial

Statements• Concepts of Capital and Capital Maintenance• Presentation of financial information• Accounting for interests in other entities• Using Cash Flow information and Present Value

in Accounting Measurements

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Compare2: Objectives

FASB: Financial reporting is not an end in itself but is intended to provide information that is useful in making business and economic decisions.

ASB: The objective of financial statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions.

企业会计准则—基本准则 第四条 企业应当编制财务会计报告。财务会计报告的目标是向财务会计报告使用者提供于企业财务状况、经营成果和现金流量等有关的会计信息，反映企业管理层受托责任履行情况，有助于财务会计报告使用者做出经济决策。

Compare 3 Qualitative Characteristics of Financial

Statements

Compare3 Qualitative Characteristics U.S.

ASB :The Statement of Principles for Financial Reporting

U.K.

Qualities IASC FASB ASB China

RelevanceReliabilityComparability (consistency)UnderstandabilityMaterialityPredictive valueConfirmatory value (feedback value)VerifiabilityNeutralityFaithful RepresentationFree from material errorCompletePrudenceSubstance Over FormTimelinessDisclosure

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Compare 4 Elements of Financial Statements

FASB: Assets\Liabilities \Equity or Net Assets\Investments by and Distributions to Owners\Comprehensive Income of Business Enterprises\Revenues\Expenses \Gains and Losses

ASB: assets \liabilities\ownership interest\gains\losses\contributions from owners\distributions to owners.

中国：资产、负债、所有者权益、收入、费用、利润

Compare5 Recognition of the Elements

FASB: Four criteria are: Definitions\Measurability.\Relevance\Reliability. subject to a cost-benefit constraint and a materiality threshold.

ASB:(a) sufficient evidence exists that the new asset or liability has been created or that there has been an addition to an existing asset or liability; and

(b) the new asset or liability or the addition to the existing asset or liability can be measured at a monetary amount with sufficient reliability.

Compare 6 Measurement of the Elements

FASB: 67. Historical cost (historical proceeds)\Current

cost\ Current market value\Net realizable (settlement) value\Present (or discounted) value of future cash flows. (SFAC 5)

7. In recent years, the Board has identified fair value as the objective for most measurements at initial recognition and fresh-start measurements in subsequent periods. (SFAC 7)

Measurement of the Elements

ASB: In drawing up financial statements, a measurement basis—either historical cost or current value—needs to be selected for each category of assets or liabilities.

China: 历史成本、重置成本、可变现净值、现值和公允价值

Conceptual Framework—Joint Project of the IASB and FASB

Topic and agendasProject Phases, Status, and Timing Next Document

Phase Topic Current Status 2006 2007 and beyond

A Objectives and qualitative characteristics

Board redeliberations PV issued July 6, 2006

ED-Q1 2008 (estimated)

B Elements and recognition Board deliberations   PV-2H 2008 (estimated)

C Measurement Planning and staff research   TBD

D Reporting entity Board deliberations   PV-Q4 2007 (estimated)

E Presentation and disclosure, including financial reporting boundaries

Inactive (research by others on management commentary and disclosure)

  TBD

F Framework purpose and status in GAAP hierarchy

Planning and staff research   TBD

G Applicability to the not-for-profit sector

Inactive (last discussed by FASB on May 2, 2007)

  TBD

H Remaining Issues –   TBD

Chapter 1: The Objective of Financial Reporting

Chapter 1 sets out to establish the overall objective of general purpose external financial reporting by business entities. According to the discussion paper, that overall objective is to provide information that is useful to present and potential investors, and creditors and others, in making investment, credit and similar resource allocation decisions.

Chapter 2: Qualitative Characteristics of Decision-Useful

Financial Reporting Information

Chapter 2 considers the qualitative characteristics of decision-useful financial reporting information: relevance, faithful representation, comparability (including consistency) and understandability.

Question Time