ACCTN101 – Lecture 3 notes

Financial reporting framework

The financial reporting frame may be seen as the framework or structure establishing and
overseeing external reporting requirements. The financial Reporting Act 1993 is related to this.

The framework prescribes:

 Which reports to prepare

 Who to report to
 What measurements and disclosures requirements these are within these reports

Under this financial reporting framework:

 Financial reporting requirements apply to all reporting entities

o Both private and public sector reporting

Significant influences that brought about the change in financial reporting in NZ

 Legislative Backing
o legal backing for accounting standards through the Financial Reporting Act require
compliance with financial reporting standards (NZ IFRSs)
 IFRS Adoption
o NZ adoption of international financial reporting standards
 Consistency
o NZ IFRSs bring consistency in accounting treatments of events; there needs to be
compliance with generally accepted accounting practice (GAAPs)
o a true and fair view of the firm's activities
 Economic reality
o events should be accounted for in accordance with their economic effect
 Benefit: Cost analysis
o relationship between the benefits derived from financial information and the costs
of providing that information

Acts of parliament

 Companies Act 1993

 Financial Reporting Act 1993
o External reporting board
 NZ Framework
 International Financial Reporting Standards (IFRSs)

Conceptual Framework

The IASB’s Conceptual Framework for Financial Reporting issued in 2018 (IASB’s Conceptual
Framework) describes the objective of, and the concepts for, general purpose financial reporting.

The purpose of the IASB’s Conceptual Framework is to:

(a) assist the International Accounting Standards Board (IASB) to develop IFRS Standards (Standards)
that are based on consistent concepts;

(b) assist preparers to develop consistent accounting policies when no Standard applies to a
particular transaction or other event, or when a Standard allows a choice of accounting policy; and
ACCTN101 – Lecture 3 notes

(c) assist all parties to understand and interpret the Standards

The IASB Conceptual Framework aims to provide the foundation for standards that:

contribute to transparency by enhancing the international comparability and quality of financial

information, enabling investors and other market participants to make informed economic decisions.

Strengthen accountability by reducing the information gap between the providers of capital and the
people to whom they have entrusted their money. Standards based on the IASB’s Conceptual
Framework provide information needed to hold management to account. As a source of globally
comparable information, those Standards are also of vital importance to regulators around the
world.

Contribute to economic efficiency by helping investors to identify opportunities and risks across the
world, thus improving capital allocation. For businesses, the use of a single, trusted accounting
language derived from Standards based on the IASB’s Conceptual Framework lowers the cost of
capital and reduces international reporting costs.

(Purpose of the Conceptual Framework SP1.5, NZ Framework, March 2018)

NZ Conceptual Framework

Important Development of a Conceptual Framework

 Objective:
o to provide a coherent and co-ordinated body of knowledge for accounting.
 In New Zealand, we have the NZ Framework
o New Zealand Equivalent to the IASB Conceptual Framework for Financial Reporting
(NZ Framework)

Objective of general-purpose financial reporting:

To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders, and other creditors in making decisions relating to providing resources to the
entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing
or settling loans and other forms of credit, and exercising rights to vote on, or otherwise influence,
management’s actions that affect the use of the entity’s economic resources.

(Section 1.2, NZ Framework, March 2018)

NZ IAS 1

 New Zealand Equivalent to International Accounting Standard 1: Presentation of Financial

Statements (NZ IAS 1) is another essential component of the financial reporting framework
in New Zealand.
 NZ IAS 1 also states that to meet the objective of financial statements, information must be
provided about ‘an entity’s:
o assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses;
(e) contributions by and distributions to owners in their capacity as owners; and (f)
cash flows’.

General features required in the presentation of financial statements

ACCTN101 – Lecture 3 notes

 Fair presentation and compliance with IFRSs

 Going Concern
 Accrual basis of accounting
 Materiality and aggregation
 Offsetting
 Frequency of reporting
 Comparative information
 Consistency of presentation

QUALITATIVE CHARACTERISTICS

 Fundamental characteristics
 Enhancing characteristics

Concepts – Enhancing characteristics:

 Comparability
o Comparing information with other entities: Users’ decisions involve choosing
between alternatives
 Verifiability
o Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent.
 Timeliness
o Timeliness means having information available to decision-makers in time to be
capable of influencing their decisions
 Understandability
o Classifying, characterising, and presenting information clearly and concisely makes it
understandable.

Fundamental elements for financial reporting

The 5 fundamental financial elements to be disclosed in the financial statements:

 Assets
o Current Assets
o Non-current Assets
o Investment Assets
o Intangible Assets
 Liabilities
o Current Liabilities
o Long-term Liabilities
 Owner’s Equity
o Contributed Capital
o Retained Earnings (Profit/Losses and Drawings/Dividends)
o Reserves

 Income
ACCTN101 – Lecture 3 notes

o Sales Income
o Services/Fees Income
o Gains
 Expenses
o Cost of goods sold
o Administrative expenses
o Selling and Distribution expenses
o Finance costs
GAAP (Generally Accepted Accounting Principles)

 Constructs of accounting developed over a long period of time

 Changing to adapt to society’s needs
 The GAAP could be seen as the assumptions that:
o underpin the practice of accounting and
o are fundamental to an understanding of how the accounting system works and what
it is based upon.

KEY ACCOUNTING CONSTRUCTS (Concepts)

 Entity Concept
o Identifies the area to be covered by accounting records
o Transactions are recorded from the viewpoint of the entity itself and not from the
point of owners or managers
o Transactions of the owner(s) must be kept separate and distinct from the business
activities
 Legal Entity
o Need to be aware of different business structures and the legal entity issue with
regards to:
 Sole Trader
 Partnership -
 Company – can only take belongings from the company not shareholders.
Owner and company are separate entity
 Accounting Period Concept
o Economic activities of the entity
 are divided into arbitrary time periods for measurement purposes
 Quarters (3 months)
 Half year (6 months)
 Full year (12 months)
 Monetary Concept
o Accounting transactions must be expressed in money terms, before they can be
entered in the financial records of a firm
 Revenue Recognition
o At what point a firm should recognise revenue as being earned for the firm
 Order
 Cash
 Credit

 Double Entry
ACCTN101 – Lecture 3 notes

o Based on the assumption that:

 Benefits = sacrifices
 Uses = Sources
 Assets = Liabilities + Equity
 Historical Cost
o Involves recording transactions and events at the amount of cash or cash
equivalents paid (or payable) at the time of their acquisition
o Decision usefulness issues with regards to financial information being provided form
the application of this concept
 Going Concern
o The entity will continue to exist indefinitely because if the assumption, records are
produced is such a manner to account for the continued existence of the entity
 Cash Basis
o Recording only those transactions that involve cash being received or paid out
regardless of the period to which the cash movement actually belongs to.
o Issues:
 Financial information provided not complete and therefore is not an
accurate portrayal of performance and position of the entity.
 Accrual Basis
o Recording and recognising all those transactions relating to a particular accounting
period
o Issues
 Some financial information may need to be estimated
 Depreciation
 Inventory