BM 3340– Financial Reporting

Research Groups
Topic 01: Conceptual Framework
for Financial Reporting
Year: 3 – Semester: I

Ms. Thisali Liyanage

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Financial Reporting
BM3340

Thisali Liyanage
MBA (Colombo), BBA Accounting Sp. First Class (Colombo), CIMA (Passed
Finalist)
Lecturer,
SLIIT Business School.
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Introduction to the
Module
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Things to Remember

 Courseweb is the official mode of communication

 Check the Courseweb regularly
 Enrollment key – BM3340
 Email : thisali.l@sliit.lk
 Be prepared
 Dev elop self learning/ study skills
 Ask questions and get maximum from the live sessions
 Improve communication skills
 Obtain a good grade
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Introduction
 This module introduces underlying concepts of financial
reporting and how the information contained in them can be
used. Students will gain the knowledge and develop
competencies in preparation of financial statements for both
individual entities and groups using Sri Lanka Accounting
Standards. The scope of corporate governance regulation in
local and global context will be discussed.
Learning Outcomes: 6
At the end of the module students
should be able to:
LO1: Explain conceptual and regulatory framework for financial reporting.
LO2: Solve accounting transactions in accordance with Sri Lanka
Accounting Standards.
LO3: Prepare and present financial statements for individual entities in
accordance with Sri Lanka Accounting Standards
LO4: Prepare and present financial statements for group entities in
accordance with Sri Lanka Accounting Standards.
LO5: Analyze corporate governance disclosures of an entity
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Course Outline

Conceptual Framework for Financial Reporting

LKAS 01-Presentation of Financial Statements
LKAS 02-Inventories
SLFRS 13-Fair value
LKAS 12-Income Taxes
LKAS 16-Property Plant and Equipment
SLFRS 17-Leases
LKAS 18-Revenue
SLFRS 10-Consolidated Financial Statements
Corporate Governance
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What is Financial Accounting and Reporting?

 Financial accounting is the accurate recording of all transactions

and combining these into a statement which shows the
performance for an accounting period which is normally a year
and a statement which shows the resources and liabilities at the
end of the period.
 Financial reporting presents the performance, the resources and
liabilities to the stakeholders in accordance with International
Financial Reporting Standards.
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Financial reporting framework in Sri Lanka

 The Institute of Chartered Accountants of Sri Lanka (ICASL) is the official standard-
setter in Sri Lanka
 In late 2009, the Institute of Chartered Accountants of Sri Lanka made a decision
to converge fully with all pronouncements issued by the IASB and thereafter to
adopt all pronouncements issued by the IASB. Since 2012, specified business
enterprises (SBE), which include listed companies, banks, insurance companies,
factoring companies, finance companies, leasing companies, unit trusts, fund
management companies, stockbrokers and stock dealers, and stock exchanges,
have to apply Sri Lanka Financial Reporting Standards (SLFRS), which are nearly
identical with International Financial Reporting Standards (IFRS).
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Financial reporting framework in Sri Lanka

Accounting
Standards
Committee

IASB IFRS ICASL LKAS/SLFRS

International Organization Sri Lanka

IASB- International Accounting Standards Board SLFRS- Sri Lanka Financial Reporting Standards
IFRS- International Financial Reporting standards
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Introduction to the Conceptual Framework

 The conceptual framework for Financial Reporting of the International

Accounting Standards Board (IASB) is a set of principles which
underpin the foundation of financial accounting. It is a conceptual
framework upon which all international Financial Reporting Standards
(IFRS) are based and hence determine how financial statements are
prepared and the information they contain. The conceptual
framework is not an accounting standards itself. CA Sri Lanka has
adopted the conceptual framework and Sri Lanka Accounting
Standards are based on IFRSs.
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Why Conceptual Framework?

 Financial statements are prepared and presented for external users by entities around
the world.
 There are differences which have a probably been caused by a variety of social,
economic and legal circumstances and by different countries having in mind the
different users of financial statements when setting national requirements.
 These differences have led to the use of variety of definitions of the elements of the
financial statements. They have also resulted in the use of different criteria for the
recognition of items in the in the financial statements and in a preference for different
bases for measurements.
 Thus, conceptual framework narrowing these differences by seeking to harmonies
regulations, accounting standards and procedures relating to the preparation and
presentation of Financial Statements.
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Purpose of Conceptual Framework

 assist the Council of the Institute of Chartered Accountants of Sri

Lanka (Council)to develop Sri Lanka Accounting Standards
(Standards) that are based on consistent concepts;
 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
 assist all parties to understand and interpret the Standards.
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Scope of the Conceptual Framework

a) The objective of the financial reporting

b) The qualitative characteristics of useful financial information
c) The definition recognition and measurement of the elements from
which financial statements are constructed.
d) Concept of capital and capital maintainace
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Objective of the General-Purpose Financial
Reporting

 The objective of the general-purpose financial statement is to

provide financial information about the reporting entity that is
useful to existing and potential investors , lenders and other
creditors, in making decisions about providing resources to the
entity.
 Those decisions involves; buying, selling or holding equity and debt
instruments, and providing or settling loans and other form of
credits.
 Qualitative Characteristics of Financial 17
Statements

FUNDAMENTAL ENHANCING

COMPARABILITY
UNDERSTANDABILITY

VERIFIABILITY
RELEVANCE FAITHFUL
REPRESENTATION
TIMELINESS

Qualitative Characteristics are the attributes that make the information provided in
financial statements useful to users.
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Relevance

Information should be relevant for the needs of the users. (i.e.

assist users in making decisions)
For information to be relevant, they should have,
 predictive value – use information as inputs to predict
 confirmatory value or – provides feedback about previous evaluations
 both
 Materiality –
Material (significant) if omitted or misstated, the economic decisions tends to be
influenced
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Faithful Representation

To be a perfectly faithful representation, information

should be;
 Complete – includes all necessary information with
descriptions and explanations
 Neutral – information provided without any bias (not
emphasized, de-emphasized or manipulated)
 Free from error – no errors or omissions in the
description of the information.
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Comparability

Information in financial reports should be comparable over time

in the same business entity to identify trends in the financial
position and performance.

Also, financial statements of different business entities should

be comparable.
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Verifiability

Verifiability assure users that information faithfully

represents the economic phenomena it purports to
represent.
 Verification can be
• Direct – verifying through direct observation
• Indirect – checking the inputs to a model, formula or other
technique and recalculating the outputs using the same
methodology.
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Timeliness

This means having information on time for the users to

make decisions.

 Older the information, less useful it is.

 Some information may continue to be timely long after the

reporting period because users may need to identify and assess
trends.
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Understandability

Accounting information should be readily understandable

to its users.
They should be presented in a manner which is
understood by any user who have reasonable knowledge
of the business and economic activities and who is willing
to study the information.
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 Assets- Asset is a resource controlled by the business from which future

economic benefits are expected to flow, arising out of past transaction or
event.
 Liabilities- Present obligation of the entity arisen from past events, the
settlement of which is expected to result in an outflow from the entity’s
resources embodying economic benefits
Underlying Assumption of the Conceptual 25
framework
 The conceptual framework set out one underlying assumption for
financial statements, the going concern concept.
 Going concern-The financial statement are normally prepared on
the assumption that an entity is a going concern and will continue in
operation for the foreseeable future. Hence, it is assumed that the
entity has neither the intention nor need to liquidate or curtail
materially the scale of its operations.
 The concept assume that, when preparing normal set of accounts,
the business will continue to operate in approximately the same
manner for the foreseeable future (at least the next 12 months).In
particular, the entity will not go into liquidation or sale down its
operations in a material way.
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Question

 A retailer commences business on 1 st January and buys inventory

of 20 washing machines, each costing Rs.100 000. During the year
he sells 17 machines at Rs.150 000 each.
 Required, explain how the remaining machines should be valued
at 31st December in the following circumstances.
 He is forced to close down his business at the end of the year
and the remaining machines will realize only Rs.60 000 each in a
forced sale.
 He intends to continue his business into the next year
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Answer

 If the business is to be close down, the remaining three machines

must be valued at the amount they will realize in a forced sale,
 3* Rs.60 000= 180 000
 If the business is regarded as going concern, the inventory unsold at
31st December will be carried into the following year, when the cost
of the three machines will be matched against the eventual sales
proceeds in computing that year’s profits.
 Thethree machines will be therefore be valued at cost 3* Rs.100
000= Rs.300 000.
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If going concern assumption is not followed?

 That fact must be disclosed together with the following information.

 The basis on which financial statements have been prepared.
 The reasons why the entity is not considered to be a going concern.
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Accrual Basis But, not an underlaying
assumption

 The effect of transactions and other events are recognized

when they occur (and not when cash or its equivalents is
received or paid) and they are recorded in the accounting
records and reported in the financial statements of the period
to which they relate.
 Entities should prepare their financial statements on the basis
that transactions are recorded in the books of accounts, not
as cash is paid or received, but as the revenue or expenses
are earned or incurred in the accounting period to which they
relate.
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Example

 The monthly rent expense of Mr.Piyal’s business is Rs. 10 000 and he has paid Rs. 100 000
in cash.
 Explain the accounting treatment for the above transaction in the financial statements.

 Statement of Profit and Loss

Administrative Expenses
Rent expenses 120 000
 Statement of Financial Position
Current Liabilities
Accrued rent expense 20 000
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Example – Self Activity

 Monthly fuel expense is 20,000 of Peter and he paid 200,000 in

cash.

 Explain the accounting treatment for the above transaction in the

financial statements.
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30 Mins Break-Come back

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Matching Principle

 According to the accrual assumption, in computing profit,

revenue earned must be matched against the expenditure
incurred in earning it.
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Example

 Tania purchased 20 T-shirts per Rs. 5000 on credit. During the month of trading, she
sold 18 T-shirts per Rs. 10 000 on credit.
 Explain the accounting treatment for the above transaction in the Financial
Statements

 Statement of Profit and Loss

Sales (10 000*18) 180 000
Cost of good sold
Purchases (5000*20) 100 000
(-) Closing inventory (10 000) 90 000
Gross Profit 90 000
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Example

 Tania purchased 20 T-shirts per Rs. 5000 on credit. During the month of trading, she
sold 18 T-shirts per Rs. 10 000 on credit.
 Explain the accounting treatment for the above transaction in the Financial
Statements

Statement of Financial Position

Current Assets
Receivables 180 000
Closing stock 10 000
Current Liabilities
Payables 100 000
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Elements of Financial Statements

 The effect of transactions and events are classified into broad classes
according to their economic characteristics.
 These broad classes are termed as elements of financial statements.
 The elements directly related to the measurement of financial position in
the balance sheet are assets, liabilities and equity.
 The elements directly related to the measurement of the financial
performance in the income statement are income and expenses.
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Accounting Standards

 The Institute of Chartered Accountants of Sri Lanka (ICASL) is the official

standard-setter in Sri Lanka
 In late 2009, the Institute of Chartered Accountants of Sri Lanka made a
decision to converge fully with all pronouncements issued by the IASB and
thereafter to adopt all pronouncements issued by the IASB. Since 2012,
specified business enterprises (SBE), which include listed companies, banks,
insurance companies, factoring companies, finance companies, leasing
companies, unit trusts, fund management companies, stockbrokers and stock
dealers, and stock exchanges, have to apply Sri Lanka Financial Reporting
Standards (SLFRS), which are nearly identical with International Financial
Reporting Standards (IFRS).
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Accounting Standards
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Accounting Standards
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GAAP

 Generally accepted accounting principles (GAAP) refer to a common set of

accounting rules, standards, and procedures issued by the Financial
Accounting Standards Board (FASB). Public companies in the U.S. must
follow GAAP when their accountants compile their financial statements.

 GAAP is guided by ten key tenets and is a rules-based set of standards. It is

often compared with the International Financial Reporting Standards (IFRS),
which is considered more of a principles-based standard. IFRS is a more
international standard, and there have been recent efforts to transition
GAAP reporting to IFRS.
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Homework

 Discuss the difference between GAAP and IFRS .

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Course Outline

Conceptual Framework for Financial Reporting

LKAS 01-Presentation of Financial Statements
LKAS 02-Inventories
SLFRS 13-Fair value
LKAS 12-Income Taxes
LKAS 16-Property Plant and Equipment
SLFRS 17-Leases
LKAS 18-Revenue
SLFRS 10-Consolidated Financial Statements
Corporate Governance
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
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