-- Accounting Frameworks

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THE CONCEPTUAL FRAMEWORK |1

ACCOUNTING CONCEPTUAL FRAMEWORK

A statement of generally accepted theoretical principals which form the frame of reference
for financial reporting. It is better to have accounting principles in place which means
accounting issues of a particular type will be dealt consistently. The conceptual framework
under IFRSs is the “Framework for the preparation and presentation of financial
statements”.

The conceptual framework is an essential part of effective financial reporting. It provides the
framework from which accounting standards can be developed and provides a basis for
dealing with transactions that are not covered by an accounting standards.
GENERALLY (CURRENT) ACCEPTED ACCOUNTING PRINCIPLES (GAAPs)
GAAP signifies all the rules, from whatever source, which govern accounting. GAAPs are
constantly changing as accounting rules evolve to deal with new situations and
circumstances. A conceptual framework can be seen as a way of arranging GAAPs into a
formalized set of principles.
 National company law
Sources for individual  National accounting standards
countries  Local stock exchange requirements
 IASs/IFRSs if applicable
Non-mandatory  Other countries’ statutory requirements
sources
THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING
The objective of general purpose financial reporting is to provide information about the
reporting entity that is useful to existing and potential investor, lenders and other creditors in
making decisions about providing resources to the entity.

Information about the entity’s economic resources and the claims against it helps users to
assess the entity’s liquidity and solvency and its likely needs for additional financing.
 Statement of financial position
Financial position
(resources controlled, financial structure and liquidity/solvency etc)
Financial  Statement of profit or loss and other comprehensive income
performance  Statement of cash flows
 Statement of profit or loss and other comprehensive income
 Statement of cash flows
Changes in
 Statement of changes in equity
financial position
 Notes to the financial statements
 Directors’ report
UNDERLYING ASSUMPTIONS
In the preparation of financial information there are two underlying assumptions that must be
considered:
The effects of transactions and other events are recognised when they
Accruals
occur and they are recorded in the accounting records and reported in the
basis
financial statements of the periods to which they relate.
The entity is normally viewed as continuing in operation for the foreseeable
Going
future. It is assumed that the entity has neither the intention nor the
concern
necessity of liquidation or of curtailing materially the scale of its operations.
 ICMAP M4 Financial Accounting

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

Qualitative characteristics are attributes that make financial reporting
useful.

The new framework distinguishes between fundamental and enhancing

Introduction qualitative characteristics, for analysis purposes. Fundamental qualitative
2| characteristics distinguish useful financial reporting information from
information that is not useful or misleading. Enhancing qualitative
characteristics distinguish more useful information from less useful
information.
 Relevance: Relevant information is capable of making a difference in
the decisions made by users. It is capable of making a difference in
decisions if it has predictive value or confirmatory value or both.
The relevance of information is affected by its nature and its
Fundamental
materiality.
qualitative
characteristics
 Faithful representation: Financial reports represent economic
phenomena (substance over form is implied here) in words and
numbers. Information must be complete, neutral and free from
material error (replacing reliability)
 Comparability: This is usually (not always) achieved by consistency in
use of the same accounting policies. Comparability is the qualitative
characteristic that enables users to identity and understand similarities
in, and differences among, items. Information about a reporting entity is
more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another
period or date.

 Verifiability: The credibility, assurance that information faithfully

represents the economic phenomena. It means that different
Enhancing
knowledgeable and independent observers could reach a consensus
qualitative
that a particular depiction is a faithful representation.
characteristics
 Timeliness: Information is provided before it loses the capacity to
influence decisions.

 Understandability: for users who have a reasonable knowledge of

business and economic activities and who are able to read a financial
report: information should not be excluded on the grounds that it may
be too complex/difficult for some users to understand. It is enhanced
when information is classified, characterised and presented clearly and
concisely.
 Materiality: all material information included; not cluttered with
Constraints of
immaterial information (information is material if its omission or
financial
misstatement could influence user’s decisions).
reporting
 Cost: the benefits of financial information should justify the costs.
QUESTION 01 PE February 2014 Q4 (a)
The Conceptual Framework of IASB provides a list of the purposes of the Framework. One
of the purposes of the Framework is to assist users of financial statements in interpreting the
information contained in financial statements prepared in compliance with IFRSs. List down
the users of the financial statements. (05)

QUESTION 02 PE November 2013 Q4 (b)

What are the formal objectives of the International Accounting Standards Board (IASB) as
formulated in its mission statement? (03)

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 Class Notes

ELEMENTS OF FINANCIAL STATEMENTS

Transactions are grouped into broad classes within the financial statements, these are the
elements of financial statements and include:
 Assets, liabilities and equity (financial position)
 Income and expenses (financial performance)
Asset: a resource controlled by an entity as a result of past events and |3
from which future economic benefits are expected to flow to the entity.
Liability: 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.
Definitions Equity: the residual interest in the assets of the entity after deducting all of
its liabilities.
Income: Increases in economic benefits during the accounting period, other
than those relating to contributions from equity participants.
Expenses: Decreases in economic benefits during the accounting period,
other than those relating to distributions to equity participants.
Elements of financial statements can be recognised providing they meet the
following criteria:
Recognition  It is probable that any future economic benefit associated with the item
will flow to or from the entity; and
 The item has a cost or value that can be measured with reliability.
A number of different measurement bases are used in financial statements,
of which, historical cost is the most common. They include:

Historical cost: assets and liabilities are recorded at the amount

paid/received to acquire them at the time of their acquisition.

Current cost: assets and liabilities are carried at the amount of cash that
Measurement would be required to acquire/settle the same asset or liability at the current
bases time.

Present value: a current estimate of the present discounted value of the

future net cash flows in the normal course of business.

Realizable settlement value: the amount of cash that could be obtained by

selling an asset and the undiscounted amount of cash expected to be paid
to satisfy the liabilities in the normal course of business.
CAPITAL MAINTENANCE
The framework looks at the issue of capital maintenance in measuring the elements of
financial statements. The selection of measurement bases and concept of capital
maintenance together determine the accounting model used.
Profit is earned if the financial amount of the net assets at the end of a
Financial period exceeds the financial amount of net assets at beginning of period
capital after excluding any distribution to and contributions from owners during
maintenance period. This can be measured using either nominal monetary units or units
of constant purchasing power.
Profit is earned if the physical productive capacity (or operating capacity) of
Physical the entity at the end of the period exceeds the physical productive capacity
capital at the beginning of the period after excluding any distribution to and
maintenance contributions from owners during period. This concept requires the current
cost basis of measurement.

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 ICMAP M4 Financial Accounting

QUESTION 03 Model Paper Q5 (a)

Explain the following under Conceptual Framework:
(i) Financial capital maintenance (02)
(ii) Physical capital maintenance (02)

THE REGULATORY FRAMEWORK

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IFRS Foundation AND IASB
The regulatory framework consists of the IFRS Foundation (previously IASCF) and its
associated bodies. Financial reporting is governed on a worldwide basis by International
Accounting Standards Board (IASB). Decisions on accounting principles are made by IASB
and issued in the form of IFRSs (IASs).
IFRS Foundation consisting of 22 trustees who appoint members of IASB,
IFRS Advisory Council (IFRS AC) and IFRS Interpretation Committee (IFRS
IC).
IASB whose primary role is the setting of IASs and IFRSs. IASB consists of
15 members from 9 countries with a mixture of backgrounds – auditors,
Main preparers of financial statements, users of financial statements and
regulatory academics.
bodies
IFRS AC who give advice to the IASB on work priorities and the
implications of proposed accounting standards.
IFRS IC consisting of 12 members who provide guidance on the application
and interpretation of IFRSs, dealing with issues not dealt with in the
standards or where unsatisfactory interpretations have developed.
 To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that
require high quality, transparent and comparable information in the
Objective of financial statements and other financial reporting to help participants in
IASB the world’s capital markets and other users make economic decisions;
 To promote the use and rigorous application of those standards; and
 To bring about convergence of national accounting standards and
IFRSs to high quality solutions.
IFRSs are developed through a formal system of due process and international consultation
involving many interested parties from around the world.
Status The IASB issued 41 IASs and 17 IFRSs so far.
The procedure for issuing an IFRS can be summarized as follows:
1. During the early stages of a project, the IASB may establish an
Advisory Committee to give advice on issues arising in the project.
Consultation with Advisory Committee and IFRS AC occurs throughout
Development the project.
2. IASB may develop and publish Discussion Papers for public comment.
3. Following the receipt and review of comments, IASB would develop and
publish an Exposure Draft for public comment.
4. Following the receipt of comments, the IASB would issue a final IFRS.
In order for the adoption of IFRSs to be successful, the IASB needs to have
a good relationship with national standard setters such as ASB in UK and
Convergence FASB in US. Seven of the full-time members of IASB have formal liaison
responsibilities with national standards setters in order to promote the
convergence of national accounting standards.
 Lack of flexibility in applying rules
 Recent standards e.g. IAS 39 are very detailed and prescriptive
Criticism  Rules may not be applicable in all circumstances
 Standards may be subject to lobbying and government pressure
 Too much choices in standards lead to lack of comparability.

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