OVERVIEW – F7

A - The conceptual and Regulatory framework for

Financial Reporting

B - Accounting for transactions in Financial Statements

C - Preparation of Financial Statements

D - Analyzing and Interpreting Financial Statements

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Examination Format
3 hours exam+ 15 minutes
OT = Objective Test Question
A short question, capable of a discrete response
(Multiple choice/ Multiple Response/ Number Entry)

15 MCQ
x 2 marks 2 constructed
questions x 20
30% 40% marks

15 Objective
Questions x 2
30%
marks
(3 scenarios)
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 Global Pass Rates: Financial Reporting

51% 51% 47% 50% 46% 44%

Sep 2018 Dec 2018 Mar 2019 Jun 2019 Sep 2019 Mar 2020

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Chapter
01 CONCEPTUAL FRAMEWORK

GIANG HA, FCCA, CPA

HALONGGIANG@GMAIL.COM

091 266 1988

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Advantages & Disadvantages

ADVANTAGES
 Standardizing accounting  Single conceptual framework
practice can be devised for variety of
users.

 Less open to criticism  Report produced for a different

purpose.

 Concentrate on profit or loss  Not clear that apply conceptual

or Valuation of net asset framework will be easier

DISADVANTAGES

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IASB’s Conceptual Framework

• Development of future IFRSs
• Promoting harmonization PURPOSE
• Assist national standard-setting bodies
• Preparers of financial statements
• Assist auditors
• Assist in interpreting the information in F/S

• The objective of financial statements

• Qualitative characteristics
• Definition, recognition and measurement of
the elements from F/S
SCOPE • Concepts of Capital and capital maintenance

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 Going concern Accrual basis

ACCOUNTING ASSUMPTIONS

Economic entity Monetary unit

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Going Concern Assumption

Concept assumes: the business will continue
A normal
to operate in approximately the same
set of
manner for the foreseeable future (at least accounts
the next 12 months).

UNLESS:

 The entity is being liquidated or

BREAK - UP has ceased trading, or
Basis
 The directors either intend to liquidate the
entity or to cease trading
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Going Concern Assumption

 Assets: Net book value A normal

set of
 No provisions for future operating loss accounts

BREAK - UP  Assets: Scrap Value

Basis  Provisions for future operating loss

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Accrual Basis Assumption

Items are recognized as assets, liabilities, equity, income and expenses
(the elements of financial statements) WHEN they satisfy the
definitions and recognition criteria for those elements in the
Framework. (IAS 1)

Record when:
Profit / Revenue earned must
Revenues or expenses are
be matched against the
earned or incurred in the
expenditure incurred in
accounting period, to which
earning it.
they relate, NOT as the cash is
paid or received MATCHING CONVENTION

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Economic Entity Assumption

Keep the sole proprietor's

business transactions separate
from the owner's personal
transactions even though a sole
proprietorship is not legally
separate from the owner.

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Monetary Unit Assumption

Only record business

transactions that can be
expressed in terms of a
currency

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 QUALITATIVE CHARACTERISTICS
Fundamental Enhancing
Comparability

Relevance Verifiability

Faithful
Timeliness
Representation

Understandability
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QUALITATIVE CHARACTERISTICS
Fundamental

The ability to influence decisions

- Predictive value
 Input for predictions
Relevance - Confirmatory value
 Feedback about previous
evaluations

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 QUALITATIVE CHARACTERISTICS
Fundamental

The ability to influence decisions

- Predictive value
 Input for predictions
Materiality Relevance - Confirmatory value
 Feedback about previous
Omission or misstatement could evaluations
influence decisions
- Entity specific
- Based on
 Magnitude
 Nature; or Both
- Subjective – no specific values,
professional judgement

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Materiality
The accountant should strive for complete accuracy
in financial reporting.

All errors that are discovered should be corrected.

The business will not pass an audit if material error

are found.

The general rule for materiality is 5% of Net Income.

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 QUALITATIVE CHARACTERISTICS
Fundamental

Materiality Relevance
Information faithfully represents
what it purports to represent
Faithful - Completeness
 Substance over form
Representation
- Neutrality
- Reliability (Free from material
error)

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QUALITATIVE CHARACTERISTICS
Information is more useful if it
can be compared Enhancing
- Similar information
 Other entities
Comparability
 Same entities for
different date

NOT the same as:

- Consistency
- Uniformity

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 QUALITATIVE CHARACTERISTICS
Enhancing
Consensus could be reached Comparability
amongst different, knowledgeable,
independent observers
- Does not mean complete
agreement
- Direct
Verifiability
 Observation
- Indirect
 Check assumptions of
models

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QUALITATIVE CHARACTERISTICS
Enhancing
Comparability

Verifiability
 Information available in time
to influence decisions
 Newer information is more
useful Timeliness
 Balance between timelines
and the provision of reliable
information

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 QUALITATIVE CHARACTERISTICS
Enhancing
Comparability

Verifiability

 Classifying, characterizing and

Timeliness
presenting information clearly
and concisely
 Reasonable knowledge and
diligence assumed Understandability
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Cost constraint

Costs must be justified

by the benefits of reporting

Not possible to satisfy

every user

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ELEMENT of Financial Statements

Measurement of
Financial Position
 Income

 Assets  Expensces

 Liabilities

 Equity Measurement of
Performance

RECOGNISE ?
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ELEMENT of Financial Statements

RECOGNISE ?

Probability of future Reliability of

economic benefits measurement

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RECOGNITION of the Element of FSs
ITEM Recognised in When

The statement It is probable that the future

economic benefits will flow to the
of Financial entity and the asset has a cost or
ASSET Position value that can be measured reliably.

It is probable that an outflow of

resources embodying economic
The statement benefits will result from the
of Financial settlement of a present obligation
LIABILITY Position and the amount at which the
settlement will take place can be
measured reliably.

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RECOGNITION of the Element of FSs

ITEM Recognised in When

The statement An increase in future economic

of profit or loss benefits related to an increase in
INCOME and other an asset or a decrease of a
comprehensive liability has arisen that can be
income measured reliably

The statement A decrease in future economic

of profit or loss benefits related to a decrease in
EXPENSE and other an asset or an increase of a
comprehensive liability has arisen that can be
income measured reliably

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MEASUREMENT of the Element of FSs

History cost

Realisable Present value

(settlement) of future cash
value flow

Current cost

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Fair presentation & Compliance

with IFRS

IAS 1 state requirement for a fair presentation

 Selection and application of accounting policies

 Presentation of information which relevant, reliable, comparable

and understandable information.

 Additional disclosures where required

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