iasb framework

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IASB conceptual FRAMEWORK IASB conceptual FRAMEWORK

IASB conceptual FRAMEWORK IASB conceptual FRAMEWORK

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1. Describe the usefulness of a conceptual framework.

2. Understand the objectives of financial reporting.

3. Identify the qualitative characteristics of accounting

information.

4. Define the basic elements of financial statements.

5. Describe the basic assumptions of accounting.

6. Explain the application of the basic principles of

accounting.

7. Describe the impact that constraints have on reporting

accounting information.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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Conceptual Framework

First Level: Basic Objectives

Second Level: Fundamental

Concepts

Third Level: Recognition and

Measurement

Need

Development

Overview

Qualitative characteristics

Basic elements

Basic assumptions

Basic principles

Constraints

Summary of the structure

Conceptual Framework For Conceptual Framework For Financial AccountingFinancial Accounting

Conceptual Framework For Conceptual Framework For Financial AccountingFinancial Accounting

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The Need for a Conceptual Framework

To develop a coherent set of standards

and rules.

To solve new and emerging practical

problems.

The evaluation of existing ones.

Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework

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It is defined as:

A constitution, a coherent system of interrelated

objectives and fundamentals.

A conceptual framework underlying financial accounting

is important because it can lead to consistent standards

and it prescribes the nature, function, and limits of

financial accounting and financial statements.


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A conceptual framework underlying financial

accounting is necessary because future

accounting practice problems can be solved by

reference to the conceptual framework.


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Advantages and DisadvantagesAdvantages and DisadvantagesAdvantages and DisadvantagesAdvantages and Disadvantages

AdvantagesAdvantages A consistent conceptual base.A consistent conceptual base. A consistent approach for financial A consistent approach for financial

statements.statements. Avoids fire-fighting approach to setting Avoids fire-fighting approach to setting

standards.standards.

DisadvantagesDisadvantages Different users have different needs.Different users have different needs. Different users may require different Different users may require different

conceptual bases.conceptual bases. It may hamper the development for It may hamper the development for

preparation of standards.preparation of standards.

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The framework is broken down into seven sections as follows.

Development of Conceptual FrameworkDevelopment of Conceptual FrameworkDevelopment of Conceptual FrameworkDevelopment of Conceptual Framework

No.1 - Objectives of Financial Reporting.

No.2 - Qualitative Characteristics of Accounting Information.

No.3 - Elements of Financial Statements.

No.4- Underlying Assumptions.

No.5 - Recognition of the elements of Financial Statements.

No.6 - Measurements of the elements of Financial Statements.

No.7 - Concepts of Capital and Capital Maintenance.

.

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First Level = Basic Objectives

Second Level = Qualitative

Characteristics and Elements

Third Level = Recognition,

Measurement, and Disclosure

Concepts.


Overview of the Conceptual Framework

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Illustration 2-7 Conceptual Framework for Financial Reporting

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What are the Statements of Financial Accounting Concepts intended to

establish?

a. Generally accepted accounting principles in financial reporting

by business enterprises.

b. The meaning of “Present fairly in accordance with generally

accepted accounting principles.”

c. The objectives and concepts for use in developing standards of

financial accounting and reporting.

d. The hierarchy of sources of generally accepted accounting

principles.


Review

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First Level: Basic Objective of Financial First Level: Basic Objective of Financial StatementsStatements

First Level: Basic Objective of Financial First Level: Basic Objective of Financial StatementsStatements

Objective of general-purpose financial

reporting is:

To provide financial information about the

reporting entity that is useful to present and

potential equity investors, lenders, and other

creditors in making decisions about

providing resources to the entity.

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According to the IASB conceptual framework, the objectives

of financial reporting for business enterprises are based on?

a. Generally accepted accounting principles

b. Reporting on management’s stewardship.

c. The need for conservatism.

d. The needs of the users of the information.

First Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic Objectives

Review

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“The IASB identified the Qualitative Characteristics of

accounting information that distinguish better (more useful)

information from inferior (less useful) information for

decision-making purposes.”

Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts

Qualitative Characteristics

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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics

Illustration 2-2 Hierarchy of Accounting Qualities

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RelevanceRelevanceRelevanceRelevance

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Fundamental Quality—Relevance

To be relevant, accounting information must be capable of

making a difference in a decision.

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Financial information has predictive value if it has value as an

input to predictive processes used by investors to form their own

expectations about the future.

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Relevant information also helps users confirm or correct prior

expectations.

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Information is material if omitting it or misstating it could

influence decisions that users make on the basis of the reported

financial information.

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Faithful RepresentationFaithful RepresentationFaithful RepresentationFaithful Representation

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Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and

descriptions match what really existed or happened.

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Completeness means that all the information that is necessary

for faithful representation is provided.

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Neutrality means that a company cannot select information to

favor one set of interested parties over another.

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An information item that is free from error will be a more

accurate (faithful) representation of a financial item.

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Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.

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Enhancing Qualities

Verifiability occurs when independent measurers, using the

same methods, obtain similar results.

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Enhancing Qualities

Timeliness means having information available to decision-

makers before it loses its capacity to influence decisions.

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Enhancing Qualities

Understandability is the quality of information that lets

reasonably informed users see its significance.

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Basic ElementsBasic ElementsBasic ElementsBasic Elements

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Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements


Financial statements portray the financial effects of

transactions and other events by grouping them into broad

classes according to their economic characteristics. These

broad classes are termed the elements of financial

statements.

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The elements directly related to financial position (balance

sheet) are:

Assets

Liabilities

Equity

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The IASB elements and their definitions are as follows.

Assets. 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.

Liabilities. 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. Liabilities may be legally

enforceable via a contract or law, but need not be, i.e., they can arise due

to normal business practice or customs

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

liabilities.

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The elements directly related to performance (income

statement) are:

Income

Expenses

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Income. Increases in economic benefits that result in

increases in equity (other than those related to

contributions from shareholders). Income includes both

revenues (resulting from ordinary activities) and gains.

Expenses. Decreases in economic benefits that result in

decreases in equity (other than those related to

distributions to shareholders). Expenses includes losses

that are not the result of ordinary activities

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Review:

Second Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic Elements

According to the IASB conceptual framework, an entity’s

revenue may result from

a. A decrease in an asset from primary operations.

b. An increase in an asset from incidental transactions.

c. An increase in a liability from incidental transactions.

d. A decrease in a liability from primary operations.

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Third Level: Recognition and MeasurementThird Level: Recognition and MeasurementThird Level: Recognition and MeasurementThird Level: Recognition and Measurement

The FASB sets forth most of these concepts in its Statement of

Financial Accounting Concepts No. 5, “Recognition and

Measurement in Financial Statements of Business Enterprises.”

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Economic Entity – company keeps its activity separate from

its owners and other businesses.

Going Concern - company to last long enough to fulfill

objectives and commitments.

Monetary Unit - money is the common denominator.

Periodicity - company can divide its economic activities into

time periods.

Accrual Basis -

Third Level: Basic AssumptionsThird Level: Basic AssumptionsThird Level: Basic AssumptionsThird Level: Basic Assumptions

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Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements


Recognition is the process of incorporating in the Recognition is the process of incorporating in the balance sheet or income statement an item that balance sheet or income statement an item that meets the definition of an element and satisfies the meets the definition of an element and satisfies the following criteria for recognition: following criteria for recognition:

It is probable that any future economic benefit It is probable that any future economic benefit associated with the item will flow to or from the associated with the item will flow to or from the entity; andentity; and

The item's cost or value can be measured with The item's cost or value can be measured with reliability.reliability.

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Based on these general criteria:Based on these general criteria: An asset is recognised in the balance sheet An asset is recognised in the balance sheet

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

A liability is recognised in the balance sheet A liability is recognised in the balance sheet when it is probable that an outflow of resources when it is probable that an outflow of resources embodying economic benefits will result from the embodying economic benefits will result from the settlement of a present obligation and the amount at settlement of a present obligation and the amount at which the settlement will take place can be which the settlement will take place can be measured reliably. measured reliably.

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oo Income is recognised in the income statement when Income is recognised in the income statement when an increase in future economic benefits related to an an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen increase in an asset or a decrease of a liability has arisen that can be measured reliably. that can be measured reliably.

oo Expenses are recognised when a decrease in future Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured increase of a liability has arisen that can be measured reliably. reliably.

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Measurement Principle – Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported.

Issues:

Historical cost provides a reliable benchmark for measuring historical trends.

NRV

Present Value (Discounted)

Current Cost

Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles

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Illustration 2-5 Timing of Revenue Recognition

Revenue Recognition - generally occurs (1) when realized

or realizable and (2) when earned.

Exceptions:

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Expense Recognition - “Let the expense follow the

revenues.”


Illustration 2-6 Expense Recognition

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Full Disclosure – providing information that is of sufficient

importance to influence the judgment and decisions of an

informed user.

Provided through:

Financial Statements

Notes to the Financial Statements

Supplementary information

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Brief Exercise 2-8: Identify which basic principle of accounting is best described in each item below.

(a) KFC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected.

(b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.

(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.

(d) Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater.

Revenue Revenue RecognitionRecognition

Expense Expense RecognitionRecognition

Full Full DisclosureDisclosure

MeasurementMeasurement

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Cost Constraint – cost of providing information must be

weighed against the benefits that can be derived from using it.

Industry Practice - the peculiar nature of some industries

and business concerns sometimes requires departure from

basic accounting theory.

Third Level: ConstraintsThird Level: ConstraintsThird Level: ConstraintsThird Level: Constraints

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Summary Summary of the of the

StructureStructure

Summary Summary of the of the

StructureStructure

iasb framework

Education

financial information

limits of financial

basic principles of

different conceptual

consistent conceptual

basic objectivesfirst

basic objectives review

accepted accounting