Chapter 1 Conceptual Framework of Financial reporting.

What is conceptual Framework

1 Document that proides basis guidelines for acounitng
2It helps the accountants, Standard Developers and Auditors to perform accounitng
Accounitng Concept
Substance overform
Every transaction has two aspects
Legalaspect Economic aspect Assets A Leased Car
By law to whom this Who is entitled to recevive Aresource controlled by anentity. Owned bya bank Used by the lesse.
em belongs to |benefit.
Legal Aspect Economic Aspect
For accounting always consider Economic nature. Bankholds legal title Individualderive benefits from the use of car.

Bank The individual

Materiality
any informtion either ommitted or misstated, that will impact the deicsion of decisoin maker.
Amoun
2 Any other information.
 Alternatives to historical Cost accounting Another name for Historiacal Cost Accounitng is Money Financial Capital Maintenance
CPP Based on General price index Also know as Financial Capital Maintenance/Real Capital Maintenance Genral inflation rate is 10%
Constant Purchasing Povwer
2 Current Cost Accounting CCA Based on Specific Price index Also know as Physical Capital Maintenace/ Operating Capital Miantenance

A distinction between Monetory and Non Monetory items is required

1 Monetory Items Exact unit of Currency Loan

Non Monetory Items No Exact unit of Currency Land CCA/CPP aP 1076

Example
2 Ross Co made a profit of $350,000 for 20X9 based on historical Company ABC PP CCA

cost accounting principles. Ross Co had opening capital of Assets Book Value
$1,000,000. Specific price indices increase during the year by 20% Invenotry 10,000 1,000 12500
and general price indices by 59%.
ceveiables 50,000 50,000 50,000
for 20X9 under three
How much profit should Ross Co record Cast 25,000 25 25,000
different capital maintenance concepts? Investments Property 250,000 275,000 45%
362500
A 150,000 165,000 217500
$350,000 under real financial capital maintenance. $300.000
under money financial capital maintenance, and $150,000
Property
Land 110,000 102000
100,000
under physical capital maintenance Furniture 75,000 82,500 1% 75750
B
$350.000 under money financial capitalmaintenance,
and Total Assets 718,500 845250
S150,000 under real financial capital maintenance,
$300,000 under physical capital maintenance
660,000
58500 185,250
C $350,000 under money financial capital maintenance, Profit before inflation Inflation Profit under
$300,000 under real financial capital maintenance, and Physical capital maintenance CCA 350,000 200000
150,000
$150,000 under physical capital maintenance Real Capital maintenance CPP 350,000 SO000 300,000
D Money capital mintenance No impact of inflation 350,000 350,000
$150,.000 under money financial capital maintenance,
under real financial capital maintenance, and
$350,000
$300,000 under physical capital maintenance
Clutter Bulk ot information should never be provided inFs. Only need to providerelevant intormation tothe users.

Going concern itsan assumption that there is no event exist to this date and the company will remains in operationsfor the forseable future
No more going concern thenFS should be prepaired on break up basis. allthe items must be reported on Assets NRV and Liabilites @the value of settelment.
Accounting standards canonly be applied only if two conditions are met
1Materiality
GOingCConcecern

Aggregation Ifmany items are immaterialin nature but when aggregated results in a material amount.

Netting off Assets and Liabilitescan be reported as single amount. Never offsetassets with liabilties. IAS12 FRSS

Note: f there isa conflict between acounting standard and Frameworkthen accounting standardrules will previal.
Basis of accounting wO DSis or accounang Sales of SI000 were made on 1st Jan 20X1 and amount will be received in one month time

CashBasis ofaccounting Recording Accrualbasis ofaccounting Cash basis of

accounting Accrual basis of accounting
you can oniy record Lst Jan
1000
dacuo we casn 1s recived or transaction when transaction ishappened. Donothing vaDies
pad 1000

Components of Financialstatements 1stFeb cash 1000 1000

OLomprenenisive income Staten P/L 1000| Receivabies
Seat oon Balance Sneet

IAS7 What real cash was genenrated by thebusines.

5 notes toFS These provides details how Finanical statements
Weasurment 5asis
Framework proivdes 4basic for the measurrment of elerments ofES Close T Accounts
Historical Cost Drafted Triai b
2 Current Cost Replacement cost Adjustedments Dep, Amo
3 Realisable Value Also knowm as Cost tose NRV Adjusted Trial Balacne
4 Present Value NPV ie value
Economic value RS9-FRS 16 , SOFP
Audit
Example thustc
stration 2-Other asset values
Acompany owns a machine which it purchased four years ago for Present Value
S100,000. The accumulated depreciation on the machine to date is Year Cashflows DF@10% Present Veleus
40,000. The machine could be sold to another manufocturer torS50,000 125000 0.909090o09 22727
Dut there would be dismanting costs of s5,000. To replace themachine 225000 0.826446281 20661
witha new version would cost $110.000. The cash flows from the existing 320000 0.751314801 15026
machine are estimated to be $25,000 for the next two years followed by 420000 0.683013455 13660
S20.000Per year tor the rermaining tour years of the machine s lie. 520000 0.620921323 12418
The relevant discount rate for this company is 10% and thediscount 6 20000 0.564473030 11289
Tactors are
Year 1 95783
Year 2 0.826 4 Present Value
Years 3-6 inclusive 2.619 (annuity rate) Year Cashflows DF @106Present Valeus
Calculate the following values for the machine: 25000 0.909 22725
2 25000 0.82620650
(o) Historical cost 03 todo 20000 2.61900000052380
(6) Net realisable value
(C) Replacement cost
(d) Economic value
Elements of Financial Statements.
Assets A present economic resource controlled by business entity as a result of past events.
An economic resource is a right, that has a potential to produce economic benefit.
Liabilites A present obligation of an entity to transfer an economic resource as a result of past events.
Obligation is a duty or responsibility to transfer the economic resource which is unavoidable.

Capital The residual interest in the assets of an entity after deducting all liabilites.
Assets Liabilites +Capital Assets-Liabilites Capital
Income Increase in assets or decrease in liabilities of an entity but does not result from the contribution made by owner of the business.

Expenses Decrease in Assets or increase in liabilites of an entity but does not result from the distribution to the owner of the business.

Qualitative charterstics of financial information.

1 Fundamental Qualitiative Chartersitcs
1 Fatihfull representation
1 Complete
Materiality
2 Free from Error
3 Nuetral Unbiased
2 Relevance relevant to the decision of user of FS.

2 Enhancing Qualitative Charterstics

Comparability With the comparative data. IAS 8 Comparable with the rest of industry
2 Verifiability
3 Understandability data should be understandable to the person who posses basic knowledge of accountancy
4 Timeliness Ledger acounts
Prudance Concept
Substance overform
Don't overstate assets and don't understate liabilites.
don't overstate income and don't understate
expenses.
Two basic aspects of every transaction

Legal Aspect Economic Aspect

Who holds the legal title of an item. who is entitled to generate
economic benefot from an
item.

Accounting must be done on the basis of economicof an item.

House Rent Who can record this House as his assets.

Leagal ownership rented to party B Party A
party A

House Leased Who can record this House as his assets.

Leagal ownership rented to party B Party B
party A

Car Rent Who can record this House as his assets.

Leagal ownership rented to party B Party A
party A

Car Leased Who can record this House as his assets.

Leagal ownership rented to party B Party B
party A
 Statement of Comprehensive income
1 Profit and Loss statement
Revenue Revenue value from the sales of items held for sale in ordinary course of business. IFRS 15
COGS Cost of items held for sale in ordinary course of business.
GP

Operating Expenses Production Non Production

Income from associate TAS 28 Direct Adimn

Gain or loss on disposal of NCA TAS 16 & 38 Indirect OH Seelimn
Gain or loss n disposal of Associate IAS 228 Distr
Gain or loss n disposal of Subsidiary IFRS 10 Market
Other Income
PBIT
Interest Exp IAS 16 (From IAS 37), JFRS 9, IFRS 16, IAS 23,
PBT
Tax Exp AS 12
Net Profit A 150,000
Same
2 Other comprehensive income
Only includes gain/losses those met following 2 Page
Revaluation Gains IAS 1
criteria's
FVTOCI Gain Losses IFRS 9 1 Gain/losses are unrealized
2 Non trading activities

Tax Expense related to OCI IAS 12

Total Other comprehensive inccB 50,000
Meaning of unrealised gain/Losses
Total Comprehensive income C=A+B 200,000 Against which no cash inflow occurs.

Net Profit Attibutable to:

Parent 142,000
NCI 8,000
Net Profit 150,000

Total Comprehensive income Attibutable to:

Parent 190,000
NCI R 10,000
Total Comprehensive income C 200,000
 Statement of Comprehensive income
Profit and Loss statement
Revenu Sales value from the sales of items held for foe sale in ordinary course of business.
COGS Cost of items held for sale in ordinary course of business.
GP

Operating Expenses
Income from associate
Gain or loss on disposal of NCA
Gain or loss n disposal of Associate 16000 Page 1
Gain or loss n disposal of Subsidiary
800
PBIT

Interest Exp 235

PBT
Tax Exp
Net Profit
Other comprehensive income
Net Profit A

Revaluation Gains
FVTOCI Gain Losses
Cash flow Hedges
Foreign Excahge gain losses on Foreign operations
Acturial Gain losses
Share of OCI in associates

Tax Expense related to OCI

Total Other comprehensive income
Page 2
Total Comprehensive income C-A+B

Net Profit Attibutable to:

Parent
NCI
Net Profit

Total Comprehensive income Attibutable to:

Parent
NCI R
Total Comprehensive incomme
 Statement of Changes in Equty
OCE
Share capital Share premium retinaedearnings Revaluation Surplus FVTOCIGain/Losses Total
Openingin balances 100,000 250,000 80,000 2,000 1,000 433,000
New Sahres 100,000 00,000 500,000
Profit for the year 150,000 150,000
Bonus Issue 250,000 250,000
Scrip Issue 25,000 75,000 100,000
ci
Revaluation Surplus 1000 -1000
FVTOCI Gain/Losses 4,000 4,000

Dividend -25,000 -25,000

Closing Balances 475,000 475,000 106,0 ,000 ,000 1,062,000

 Statement of Financial Position
Assets
Non-Current Assets 2018 2017
Investments
Investment property
Machinery
Building
Land
Total non Current Assets

Current Assets
Cash at bank and in hand
Investories
Receivables
Non Current Assets held for
sale
Total Current Assets
Total Assets

Capital & Liabilities

Capital
Share capital 475,000
Share premium 475,000
Reetained earnings 106,000
OCE 6,000
Total Parent Equity 1,062,000
NCI
Total Capital 2,124,000

Liabilites
Non Current Liabilities
Loan
Debuntures
Lease Obligation
Deferred Tax Liability
Total Non Current Liabilities

Current Liabiliteis
Bank Overdraft

Payables
Income tax liability

Lease obligation
Total Current Liabilities
Total Liabilites