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Topic 3 Week 6

Low Chui Fen 1112701885


Boong Lek Yang 1112702060
Kek Yik Joe 1112702574
Yap Kian Jin 1121116617

Tutorial Questions
A statement on the objectives of financial statement (i.e. the
conceptual framework) has always been recognized as urgent and
essential if debate over alternative standards and reporting
techniques is to be resolved by reason and logic.
1.

Explain the purpose of a conceptual framework.

2.

List five benefits of a conceptual framework.

3.

What are the essential elements disclose in CF?

4.

List and explain FOUR accounting principles.

Question 1

To a
ssi s
t
t
I
c
A
SB
a e
To th Incede
n
velo
a
p
d
i
gu

is t
ass
To
B
IAS
te
mo
pro
In

To assist

as

To
as
St
s is
an
t
-s
d
et ar
t in d
g

Users

The
purpose of
a
To
A
cc asConceptual
ou si
nt st
assist
aFramework
o
T
n
t

Auditors

Assist IASB in
development of the
future accounting
standards
Review of existing
accounting standard
Ensuring consistency
across standards

To a
ssis
t
IAS
B
In d
eve
lop

The
purpose of
a
Conceptual
Framework

ist
as s
To
B
IAS
te
mo
pro
In

Assist IASB in
promoting
harmonisation of
regulations,
accounting standards
and procedures
Provide a basis for
reducing the number
of alternative
accounting treatment
permitted by
accounting standards

The
purpose of
a
Conceptual
Framework

The
purpose of
a
Conceptual
Framework

To
as
St
s is
an
t
-s
d
et ar
tin d
g

Assist standard-setting
bodies such as the
FASB and the IASB in
developing standards
of financial reporting
Enable all interested
parties to gain a better
understanding of the
reasons for standard
setters conclusions

Assist auditors in
forming an opinion
Whether financial
statements comply
with international
accounting standards

The
purpose of
a
Conceptual
Framework
st
To assi
Auditors

Assist preparers of
financial statements
such as accountant in
applying IASB
approved accounting
standards

The
purpose of
a
To
A
cc asConceptual
ou si
st
nt Framework
a
nt

The
purpose of
a
Conceptual
Framework

Users

To assist

Assist users of
financial statements
in interpreting the
information contained
in financial
statements
Conformity with IASB
approved accounting
standards

Guidance to provide
most consistent way
to prepare the
financial statement

s
a
t
c
a e
e
To th
c
n
a
d
i
gu

The
purpose of
a
Conceptual
Framework

e benefits of a Conceptual Framewo


Benefits
1
Benefits
2
Benefits
3
Benefits
4
Benefits
5

e benefits of a Conceptual Framewo


Benefits
1

Consistent, logical reporting


requirement

e benefits of a Conceptual Framewo

Benefits
2

Increased international
compatibility of Accounting
Standards

e benefits of a Conceptual Framewo

Enhanced accountability
Benefits
3

e benefits of a Conceptual Framewo


Enhanced understanding of
reporting requirements
Benefits
4

e benefits of a Conceptual Framewo

More economical standard


settings

Benefits
5

SEVEN KEY CONCEPTUAL FRAMEWORK


The Objective of
ELEMENTS
Financial Statement
Concepts of Capital &
Capital Maintenance

1
7

Measurement of the
Elements of Financial
Statements

Recognition of the Elements


of Financial Statements

2
CONCEPTUAL
FRAMEWORK
Elements

Underlying
Assumptions

Qualitative
Characteristics of
Financial
Statement

The Elements of
Financial Statements

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTS The Objective of
1
CONCEPTUAL
FRAMEWORK
Elements

Financial Statement

Financial Position
Financial
Performance
Changes in
Financial Position

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTS
Underlying
Assumptions

2
CONCEPTUAL
FRAMEWORK
Elements

Accrual Basis
Going Concern

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTS Qualitative
Characteristics of
Financial
Statement
Understandability

CONCEPTUAL
FRAMEWORK
Elements

Relevance
Reliability
Comparability
Constraints on
relevant & reliable
information
True & Fair view /
Fair Presentation

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTS
The Elements of
Financial Statements

CONCEPTUAL
FRAMEWORK
Elements

Financial Position
Assets
Liabilities
Equity
Performance
Income
Expenses
Capital
maintenance
adjustments

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTS
Recognition of the
Elements of Financial
Statements

CONCEPTUAL
FRAMEWORK
Elements

Reliability of
Measurement
Recognition of
assets, liabilities,
income expenses

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTSMeasurement of the
Elements of Financial
Statements
Measurement

CONCEPTUAL
FRAMEWORK
Elements

toward Assets,
Liabilities, Equity,
Income &
Expenses

SEVEN KEY CONCEPTUAL FRAMEWORK


ELEMENTS
Concepts of Capital &
Capital Maintenance

7
CONCEPTUAL
FRAMEWORK
Elements

Concepts of
Capital
Concepts of
Capital
Maintenance and
the
determination of
profit

FOUR accounting principles

Matching

Full
Disclosure

Revenue
Recognition

Historical
Cost

FOUR accounting principles


Historical
Cost
Initial

Historical
Cost

recording of
financial
transactions
must be at
their original
cash
equivalent
cost.

FOUR accounting principles


Full Disclosure

Full
Disclosure

Financial
statements
contain
enough
information
that they are
not
misleading.

FOUR accounting principles


Matching

Matching

A company
records revenue
in the accounting
period when
services are
completed or
goods are
delivered to the
customer, not
when the
customer makes
payment.

FOUR accounting principles

Revenue
Recognition

Revenue
Recognition
A
company
records
expenses in the
accounting
period in which
it helped create
revenue, not
when payment
was made for
the expenses.

Tutorial Activities
Explain the main changes proposed in the new Exposure
Draft on Conceptual Framework by IASB issued on 28 May
2015. You need to prepare 20 minutes presentation

Main changes (In term of chapters)

Objective
In describing the objective of general purpose financial
reporting, CF does not use the word stewardship. Some have
interpreted this as meaning that the Conceptual Framework no
longer treats information about stewardship as part of what is
needed to meet the objective of financial reporting.
Current objective of general purpose financial reporting:

The objective of general purpose financial reporting is to


provide financial information about the reporting entity that
is useful to existing and potential investors, lenders and
other creditors (users of financial statements) in making
decisions about providing resources to the entity.

Objective (cont)

Information useful in judging management's ability to utilize


enterprise resources effectively in achieving the primary
enterprise goal

when investing in a company, you do not simply buy some


assets and liabilities, you essentially trust the intentions of
the company. i.e. the management and the way they intend
to steward the capital entrusted to them. Otherwise, the
investor would have bought other assets or shares

in not having stewardship as an objective, there is a danger


in the future

Sources from the article Commentary on phase A of the revised conceptual framework:
Implications for global financial reporting Rajni Mala & Parmod Chand (2015)

Objective (cont)
In 2015 Exposure Draft proposes:

To give more prominence, within the objective of financial


reporting, to the importance of providing information
needed to assess managements stewardship of the
entitys resources;

Qualitative Characteristics
Since 2010, the Conceptual Framework has no longer identified
was reliability is no longer identified as a qualitative
characteristic of useful financial information. And description of
faithful representation was too general. As a result it failed to
identify the kind of information that should be presented in
financial statements. Their main concern seems to be that
measurement uncertainty makes financial information less
useful. In response, the IASB proposes to clarify that
measurement uncertainty is one factor that can make financial
information less relevant.

Qualitative Characteristics
In this Exposure Draft proposes:

(a) To clarify that measurement uncertainty is one factor


that can make financial information less relevant, and
that there is a trade-off between the level of
measurement uncertainty and other factors that make
information relevant; and

(b) To continue to identify relevance and faithful


representation as the two fundamental qualitative
characteristics of useful financial information.

Changes: Reporting Entity


Reporting Entity
1. Problem Faced
(Existing
Conceptual
Framework)

No clear guideline description and boundaries of


reporting entity

2.
Recommendations
(Exposure Draft
28.5.2015)

(i) Description of reporting entity


Entity that chooses/ required to prepare general purpose
financial statements.
Not necessarily legal entity.
Portion of entity / >2 entities.

Changes: Reporting Entity


Reporting Entity
2.
Recommendations
(Exposure Draft
28.5.2015)

(ii) Boundary of reporting entity


Determined by 2 ways:
Direct Control
Indirect Control
Differences

Direct Control

Indirect Control

1. Financial
Statement of
reporting entity

Unconsolidated
financial
statements

Consolidated
financial
statements

2. Reported by
parents

Economic
resources
controlled
directly

Economic
resources
controlled
indirectly

3. Returns to
investor., lenders
and other
creditors

Depend on the
future net cash
flows of the
parent entity

Depend partly on
the future net
cash inflows and
benefits flow into
subsidiary.

4. Useful
information

Less useful

More useful

Changes: Elements of Financial Statement


Problems Faced (Existing Conceptual Framework)
Problems
Main
Problem:
Definition is
subjective,
vague and
broad

Asset

Liability

(i) Confused
about expected
future economic
benefit
-Expected will
be interpreted as
conveying
probability and
not provide
guideline on the
minimum
threshold.
(ii) Emphasize
more on
identifying the
future economic
benefits.

(i) Confused
about expected
future economic
benefit
-Expected will
be interpreted
as conveying
probability and
not provide
guideline on the
minimum
threshold.
(ii) Lack of
guideline on
justify pass
event sufficient
to create
present
obligation.

Equity

Income
No effect.

Expense
s

Changes: Elements of Financial Statement


Recommendation (Exposure Draft 28.5.2015)
Recommendation
Main
Recommendation:
Revised the definition

1. ASSET
Existing CF:
An asset is a resource which is controlled by an entity as
a result of past event and future economic benefits are
expected to flow into the entity.
Current ED:
An asset is the present economic resource controlled by
an entity as a result of past events.
Present = Economic resources and right to use the
assets must exist on balance sheet date.
Economic resources = right to produce economic
benefits.
Economic benefit need not be certain but must capable
to produce economic benefits.
Asset is a resource, not ultimate cash inflow.

Changes: Elements of Financial Statement


Recommendation (Exposure Draft 28.5.2015)
Recommendation
Main
Recommendation:
Revised the definition

2. LIABILITY
Existing CF:
A liability is a present obligation of the entity arising
from past events, the settlements of which is expected
to result in an outflow from the entity of resources
embodying economic benefits.
Current ED:
A liability is a present obligation of the entity to transfer
an economic resource as a result of past events.
Present = Economic obligation and entity is the obligor
must exist on balance sheet date.
Economic obligation = unconditional promises to give up
economic resources.
Present obligation need not be certain but must
capable to transfer the economic resources in future.

Changes: Elements of Financial Statement


Recommendation (Exposure Draft 28.5.2015)

Recommendation
Main
Recommendation:
Revised the definition

3. EQUITY

4. INCOME

5. EXPENSES

Remain the same / No significant changes

Changes: Elements of Financial Statement


Impact on Changes / Example
Impact on
Changes /
Example
Impacts /
Examples:
Some of the
items are
reclassified.

Asset

Liability

(i) Call Option


Based on ED,
call option will
be categorized as
asset
Capability to
produce
economic
benefits.

(i) Stand-ready
obligation
Based on ED,
stand-ready
obligation will
be recognized as
liability.
Capability to
transfer the
economic
resources
.Eg: obligation
under a product
warranty

Equity

Income

Expense
s

Recognition & Derecognition


Recognition
Process of capturing an assets and liability for inclusion
of the statement of financial position.

Problem

Existing recognition requirement (probability and


reliable measurement) have caused issues in the past.
- Some existing Standards do not apply a
probability recognition criterion.
- For example, IFRS 9 Financial Instruments. Those that
do apply such a criterion use different probability
thresholds. These include probable, more likely than
not, virtually certain and reasonably possible.

Recognition Criteria

Under the ED, an entity would recognize an asset or a


liability if such recognition provides financial statement
users with:

i.

Relevant information about the asset or the liability and


about any income, expenses or changes in equity.

ii.

A faithful representation of the asset or the liability and


of any income, expenses or changes in equity.

iii.

Information that results benefits exceeding the cost of


providing that information.

Those criteria may not always be met when one or more


of the following applies:

i.

It is uncertain whether an asset or liability exists;

ii.

There is only a low probability of future inflows


(outflows) of economic benefits from the asset
(liability); or

iii.

The level of measurement uncertainty is so high that


the resulting information has little relevance.

Impact
An entity should recognise all its assets and liabilities,
unless the IASB decides that:
i.

Recognising an asset or a liability would provide users


of financial statements with information that is not
relevant, or is not sufficiently relevant to justify the
cost; or

ii.

No measure of an asset or a liability would result in a


sufficiently faithful representation of both that asset
or liability and the resulting income or expense.

Derecognition
Process of removing all or a part of an
assets or liability from the statement
of financial position.

The existing Conceptual Framework does not provide


guidance on derecognition. The Exposure Draft
proposes guidance aimed at providing a faithful
representation of:
i.

The assets and liabilities retained after a transaction


or other event that led to derecognition; and

ii.

The change in the entitys assets and liabilities as a


result of that transaction or other event.

The Discussion Paper suggested that possible


approaches for this could include:
(i)

Enhanced disclosure;

(ii)

Presenting any rights or obligations retained on a line


item different from the line item that was used for
the original rights or obligations, to highlight the
greater concentration of risk; or

(iii)

Continuing to recognise the original asset or liability


and treating the proceeds received or paid for the
transfer as a loan received or granted

The IASB noted that it is possible to resolve some, but


not all, apparent conflicts between the control
approach and the risks-and-rewards approach by
considering:
i.

whether a transferee acquires an asset as a principal


or as an agent; and

ii.

the fact that, in some cases, continuing exposure to


variations in benefits (sometimes known as exposure
to the significant risks and rewards of ownership) is an
indicator of continuing control.

Measurement
Problem:

Little guidance is provided on measurement and when


particular measurement basis should be used

Impact / examples:

Measure all the assets and liabilities on the same or one basis
- Measure at fair value basis
Some of the users may consider information about current market
prices to be less relevant than information about margins generated
by past transactions
- Measure at historical cost basis
Fail to provide relevant information to the users of financial
statement

Hard to determine the basis used since the relevance of a particular


measurement depend on how the users are likely to assess how an
asset or a liability contribute to the entitys future cash flow
- Fair value basis
* Disposal of assets contribute to the entitys future cash flow
* Derivatives such as financial assets or liabilities that rapidly
changes in value
- Historical cost basis
* Users will often assess how such assets will contribute to future
cash flows about transactions and the consumption of assets to
identify past margins and estimate future margins

Faithful representation does have some implications in terms of the


selection of measurement basis
- IASB may need to consider how best to portray any link between
items when deciding whether a particular measurement faithfully
represents an entitys financial position and performance
- Same measurement approach is encouraged to use for related
assets or liabilities since the use of different measurements may
lead to measurement inconsistency problem
- Conflict was created in terms of the use of measurement basis since
it was unable to satisfy both qualitative characteristics of the useful
financial information

Recommendation / suggestion:

The application of single measurement basis for all assets and


liabilities is not encouraged

Suggestion on the use of measurement basis for a particular asset or


liability should consider the following elements:
- How the assets contribute to the future cash flows or how the entity
will fulfil or settle the liability
- What information that measurement basis will produce in the
statement of financial position and the statement of comprehensive
income

The number of different measurements used should be the smallest


number necessary to provide relevant information

Presentation and disclosure


Problem:

No principles provided in the existing conceptual


framework to determine (a) which items of income or
expense should be presented in Profit and Loss (b) which
items should be presented in Other Comprehensive Income
(OCI)

A section on disclosures didnt provided which lead to


burden on preparers and fail to disclose more relevant
information to investors

Impact / examples:

According to GAAP, realized gains are included in Profit


and Loss (P/L) while unrealized gains should be disclosed in
Other Comprehensive Income (OCI)

Different treatments are adopted in terms of unrealized


gains for
respective standards
- IAS 16 Property Plant and Equipment
- IAS 40 Investment Properties

The reclassification of from equity to P/L (recycling)

Different treatments are adopted in terms of where gains or losses

are reclassified from equity to P/L as a reclassification adjustment


- IAS 21 The Effects of Changes in Foreign Exchange Rates
- IAS 16 Property Plant and Equipment

No reclassification rule is provided


- Gains that have become realized from transactions in the
accounting period are not fully reported in the Profit and Loss
(P/L)

The recording of asset purchases, revaluation, disposal and the transfer


to RE (IAS 116 - Property, Plant and Equipment)
On purchase

$m

$m

Dr Land PPE

10

Cr Cash

10

On revaluation

$m

$m

Dr Land PPE

Cr OCE and
recognized
in OCI

Sources from the article CONCEPTS OF PROFIT OR LOSS AND OTHER


COMPREHENSIVE INCOME (2015)

On disposal
Dr Cash

$m

$m

13

Cr Land PPE

12

Cr P/L

On transfer

$m

$m

Dr OCE

Cr Retained earnings

Sources from the article CONCEPTS OF PROFIT OR LOSS AND OTHER


COMPREHENSIVE INCOME (2015)

Recommendation / suggestion :

Two approaches are recommended that are used to describe which


items could be included in Other Comprehensive Income (OCI)
- narrow approach and
- broad approach

The approaches recommended in grouping OCI items has evolved into


three categories
- bridging items
- mismatched remeasurements
- transitory remeasurements

Bridging items same asset or liability is represented in the


statement of financial position and impacts profit
loss using two different measurements

Mismatched remeasurements
- arises when offsetting impact of linked transactions or other events
is not yet recognized

Transitory remeasurements arise when an item meet all the


conditions:- assets utilized / liabilities settled over the long term
- current period remeasurement is expected to reverse fully, or
change significantly, over the holding period of the asset or liability
- current period remeasurement enhances the relevance of profit or
loss

When the items recognized in OCI should be reclassified into profit


or loss?
- Bridging items
Recycle as a consequence of the measurement basis presented in
profit or loss (P/L)
- Mismatched remeasurements
Recycle when the item can be presented with the matched items
- Transitory remeasurements
Recycle for some types of OCI items if and when it provides
relevant information in profit and loss (P/L)

Q&A