Conceptual Framework

and Theoretical Structure

of Financial Accounting
and Reporting, Part II
Financial Statements

 Financial statements are the principal means through which a company

communicates its financial information to those outside it.
 A reporting entity is an entity that chooses or is required to prepare
financial statements and is not necessarily a legal entity.
  Financial Statements can be presented in any of the following forms:

Combined FS
Consolidated FS Provides information about
Unconsolidated FS
Provides information about assets, liabilities, equity,
Provides information about
assets, liabilities, income and income and expenses of two
assets, liabilities, equity,
expenses of both the parent or more entities that are not
income and expenses of the
and its subsidiary as a single all linked by a parent-
parent only.
reporting entity subsidiary relationship.
Complete set of Financial Statements;

 1. Statement of Financial Position – this statement shows the resources of a

company (the asset), the company’s obligations (Liabilities) and net
difference between its assets and liabilities, which represents the equity of
the owner.
 2. Statement of Other Comprehensive income – this reflects the net assets
generated through business organizations (revenues), the net assets
consumed (expenses), and the difference which is called net income as
well as other comprehensive income. The Revised Conceptual framework
introduce the new title of this statement as “Statement of Financial
Performance”.
 3. Statement of Cash flows – this statement shows the amount of cash
generated and consumed by a company through the following three
types of activities; operating, investing and financing.
 4. Statement of Changes in Equity – which summarizes the changes in each
item of equity for a period of time.
 5. Notes to financial statements – this contain the supplemental information
as well as information about items not included in the financial statements
such as accounting estimates.
OBJECTIVE OF FINANCIAL STATEMENT

 “The objective of financial statement is to provide information about the

financial position, performance and changes in financial position of an
entity that is useful to a wide range of users in making economic
decisions.”
ELEMENTS OF FINANCIAL STATEMENT

 1. Statement of Financial Position – asset, liability and equity.

 *Assets are present economic resources controlled by the entity as a result of
past events. An economic resources is a right that has the potential to produce
economic benefits.
 *Liability are present obligation of the entity to transfer an economic resource as
a result of past events. An obligation is a duty or responsibility that the entity has
no practical ability to avoid.
 *Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
 2. Statement of Financial Performance – income and expenses.
 *Income is increases in assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from holders of equity claims.
Revenue – ordinary course of business
INCOME
Gains – not in the ordinary course of business
 *Expenses are decreases in assets or increases in liabilities that results in decrease in equity,
other than those relating to distributions to holders of equity claim.
Capital Maintenance Adjustments

 The revaluation or restatement of assets and liabilities gives rise to

increases or decreases in equity. While these increases or decreases meet
the definition of income and expenses, they are not included in the
income statement under certain concepts of capital maintenance.
Instead these items are included in equity as capital maintenance or
revaluation reserves.
Recognition and Derecognition
Concepts

 Recognition is the process of capturing for inclusions in the statement of

financial position or the statement of financial performance as an item
that meets the definition of an asset, a liability, equity, income or expense..
 Recognition criteria
 Relevance
 Faithful representation
 Derecognition is the removal of all or part of a recognized asset or liability
from an entity’s statement of financial position.
 a. For an asset, when the entity losses control of all or part of the recognized
asset.
 b. For a liability, when the entity no longer has a present obligations to all or part
of the recognized liability.
Measurement of the Elements of
Financial Statements

 Measurement is the process of determining the monetary amounts at

which the elements of the financial statements are to be recognized and
carried in the statement of financial position and income statement.
 *Historical Cost measurement basis
 *Current Value measurement basis
Historical cost measurement basis

 Historical cost measurement basis provide information derived, at least in

part, from the price of the transaction or other event that gave rise to the
item being measured. One way to apply a historical cost measurement
basis to financial assets and financial liabilities is to measure it at amortized
cost.
Current Value measurement basis

 Current value measurement basis provide information updated to reflect

conditions at the measurement date.
 Fair value – the price that would be received to sell an asset, or paid or transfer
a liability, in an orderly transaction between market participants at
measurement date.
 Value in use (for assets) fulfilment value (for liability) – reflects entity-specific
current expectations about the amount, timing and uncertainty of future cash
flows.
 Current cost – reflects the current amount that would be paid to acquire an
equivalent asset and received to take on an equivalent liability.
Capital and Capital Maintenance

 Concepts of Capital
 a. Financial concept – invested money or invested purchasing power, capital is
synonymous with the net assets or equity of the enterprise. If the primary
concern of users are the maintenance of nominal invested capital or the
purchasing power of invested capital, financial concept should be used.
 b. Physical concept – capital is regarded as the productive capacity of the
enterprise based on, for example, units of output per day. If the main concern of
users is with the operating capability of the enterprise, a physical concept of
capital should be used.
Capital Maintenance

 A. Financial capital maintenance – under this concept, a profit is earned

only if the financial (or money) amount of the net assets at the end of the
period exceeds the financial (or money) amount of net assets at the
beginning of the period, after excluding any distributions to and
contributions from, owners during the period.
 B. Physical concept maintenance – under this concept, a profit is earned
only if the physical productive capacity (or operating capability) of the
enterprise at the end of the period exceeds the physical productive
capacity at the beginning of the period.