Conceptual framework

 In the n exam it’s a current issue

 Framework is a current issue itself

The framework is a:

1) Base
2) Foundation
3) Principle (not rules)
4) Constitution
5) Map

- The future of financial reporting is embodied in the framework

- Framework doesn’t override an accounting standard

Benefits
 IASB creates coherent & consistent IFRS
 Framework give knowledge to accountants top solve problems in absence of regulation
 Reduces creative accounting (like American rules approach)
 Stakeholders can have a better understanding the role and limitations of financial
statements by implementing the framework

Why revised?
 Old one had gaps, new one has chapters on: measurement (cost and value) & presentation
(PL & OCI)
 To make it up to date. Updated and clarified areas on recognition etc

Contents / Chapters of the Conceptual Framework

(2018)
1.the objective of general purpose financial reporting;
2.the qualitative characteristics of useful financial information;
3.a description of the reporting entity and its boundary;
4.definitions of an asset, a liability, equity, income and expenses and guidance
supporting these definitions;
5.criteria for including assets and liabilities in financial statements (recognition)
and guidance on when to remove them (derecognition);
6.measurement bases and guidance on when to use them; and
7.concepts and guidance on presentation and disclosure.
Chapter 1 – The objective of general purpose financial reporting;
 To provide financial information (numbers, money) that is useful (relevant &
faithful representation) in making decisions relating to provide resources (main
audience is capital providers/investors) (creditors/loan creditors) primary user
groups are potential investors

USER DECSIONS INVOLVE

1. Buying/selling/holding (equity etc) debt instruments

2. PROVIDING OR SETTLING LOANS AND OTHER FORMS OF CREDIT
3. Voting or other way of influencing management

TO MAKE DECISIONS USERS ACCESS

1. Access management stewardship

2. Prospects of future of net cash inflow

TO DO ABOVE, USERS NEED INFO ON BOTH:

1. Entity’s economic resources (Balance Sheet, Statement Financial Position, P&L)

2. Have management made good use of the above?

STATKEHOLDERS

1. Main = Investor = think of decisions on buying and selling

2. Other
a. Loan Provider = cash flow, liquidity, asset value (not cost)
b. Staff = job security, pension, pay rise, going concern
c. Government & Society = Sustainable (carbon +renewable energy + pay tax?)
d. Customer & Supplier = Going concern.

Chapter 2 – Useful Information = Relevant & faithful presentation

RELEVENT = To do with the topic = Useful

1. Relevant helps users make decisions

2. Its predictive and looks to the future
 E.g. Held for Sale asset. Sale is classified as current asset if its held for 12 months. Its not
going to be there next year.
 Use of fair value = Market Value = Predictive = relevant = useful
 Diluted EPS = if earning continue, EPS will fall

FAITHFUL = Honest/Facts

1. To tell the truth

2. Substance over form
3. Complete, neutral, free from error
4. Unbiased and prudence
 E.g. prep group accounts, shows all mresources under our control
  If parent Lend to sub cant claim against parent limited liability
 As lender don’t look at group and do credit rating on subs
 If you lend money to sub, don’t come to me for payback. If family is rich, child has own
lenders and payables
o IFRS 16, Lease -> Right pf use leases
o Classification of debt if shares have obligation and redeemable [18:40]

MEASUREMENT UNCERTAINTY

1. Faithful re can be mixed with some level of uncertainty which will reduce its usefulness
2. Less relevant with more measurement certainty preferred

4 ENHANCING QUALITIES (Desirable but not essential)

1. Comparability = more useful

2. Verifiable = more useful
3. Timeliness = good timing is relevant, old accounts are useless
4. Understandable = not too complicated = not useful

 Cost vs benefit analysis = justify cost and use of the above info

Q. large co not included some complex financial info as its difficult

A. missing some info makes the info less relevant

Q. Tech co decided to include staff wages = 12 pages long. Want to show equality etc

A. Will it make a difference to investors? TMI. Cant justify cost of getting and showing this info.
Although faithful, not relevant.

Chapter 3 - The reporting entity

Required or chooses to prepare FS

Subs or parent or CONSOL

CONSOL = P + Subs

UNCONSOL = P

Combined = P + P = 2 non-p/sub type entities together

Chapter 4 – Elements of financial statements (accounts)

Asset – Liability – equity – income – expenses

1. Asset = A present economic resource with a potential economic benefit. Can sell &/or use.
 e.g. (staff vs chair). Staff can’t be thrown away and worked 24/7. Chair can. Hence staff not
included in FS as a figure/asset. Exception is sports, Ronaldo is an asset.
2. Liability = a present obligation to transfer ownership for past events.
  e.g. Land value 100m cost 55m sold at 60m. Sold contract says can buy back 12month later
for 66m. Sold and marked 5m profit on P&L and land disposed on FAR OR the 60m received
is a liability and the 6m is interest. Seems more like a loan than a sale as I will have all future
economic increase and benefit e.g. the land value goes up to 150m in 12months.
3. Equity = Residual interest in asset after deducting liability
 Asset – Liability = Equity
4. Income = increase in asset or decrease in liability = Equity goes up
5. Expense = decrease in asset or increase in liability = Equity goes down

Chapter 5 - Recognition and Derecognition

RECOGNISATION CRITERIA

Relevance =

high probability of economic benefit & existence is certain

Faithful =

Shouldn’t have measurement uncertainty or

Shouldn’t have accounting mismatch Cr -> Dr

Presentation & Disclosure should be okay

DERECOGNITION

Criteria for this is = removal of an asset or liability from FS ( when you lose control over it = you’ve no
obligation or ownership over it)

Asset = when you lose control over it = sell or dispose

Liability = when you no longer have an obligation over it = paid off or settled

Chapter 6 Measurement (New Guidance)

 New Guidance
 Cost & Value is on a case-by-case basis
 Mixed measurement system
o Cost is liked as objective and reliable simple and can see it. Transaction based
o Others dislike as historic and out of date. But depreciation does this to things and reduces
cost
o Some people love value, it looked as forward thinking and relevant but its also subjective.
o Value is not relevant if no intention of selling the asset. E.g a machine which makes your
core product you wont ever sell it.

Cost =

1. Transaction based
 2. Reduced if impaired
3. Amortised costs in intangible

Value =

1. Fair value
2. Market value
3. Value in use (impairment) IAS36. Reflects present value future cash flow for asset and how
much to settle liability
4. Current cost, cost to replace it and buy and another or how much I can sell it?

WHAT TO CONSIDER IN SELECTING A MEASUREMENT BASIS

Relevance

1. Characteristic of asset – is asset sensitive to market forces

2. Contribution to cash flow - If asset used in conjunction with others & not to be sold look at
original cost

Q. 30 years ago cost 50k, in FS at 20k

A. If measured at cost, then neutral and faithful to the true cost, but ignores the current FV

Q. Breed sheep, what’s the cost/value

A. Cost as wrong as you made them (bred them). Value every time for something like this.

Cost wrong for derivative or a gift or breeding it etc.

 Inventory @ Cost IAS2

 PPE @ Cost or Value IAS16
 Investment property @ Cost or Value IAS40
 Derivatives @ Value IFRS9
 Equity/Investments @ Value IFRS9

Chapter 7 – Presentation & Disclosure

 Income Statement / P&L

 Not all gains and losses are in above. Sometimes in other comprehensive
income/equity/reserves. When revalue PPE for first time it goes to Equity/P&L.
 Historically no conceptual underpinning
 Ad Hoc approach is confusing
 Revised framework brings guidance

P&L - Primary Source of information about an entity’s financial performance

OCI – In exceptional circumstances, BoD may exclude from P&L and in P&L.

[Watch from 1:00 to 1:12 for IFRS examples]

RECYCLING
What WE think is the most relevant and most faithful thing to do is, means we take from OCI and
into P&L

Q. Asset cost 50yo £100m. Every year gain of 1m value and this goes to OCI every year. Selling the
asset for £151m. What gain to we show in P&L.

A1. If we do recycle the answer is 51m as we take gain in equity and recycling it and pushing it
through the P&L. recognised as gain on revaluation and now on disposal. Answer1 51m (e.g. group
exchange differences IAS21)

A2. Only 1m is we take the proceeds to the carrying value. The gain of 50m is not recycled. This is an
exception per the framework. Revalued as PPE IAS 16.

PRO - Recycling means that profit is transaction based. Recycling means that profit is reported in the
year of the sale (when its realised – when you’ve sold it). Recycling will ensure substance of cash
flow hedging will be faithfully represented

CON – The gain has already been included in OCI over the years. This means gain is recognised twice.
Once on revaluation once on realisation (double counting? Reporting profits twice?). Also against
accruals over 50 years?