ACCT 860: Financial Accounting

Week 1: NZ Framework
Learning Objectives
• The NZ Conceptual Framework:
• Status & purpose of the conceptual framework
• Chapter 1 - The objective of General Purpose Financial
Statements
• Chapter 2 - Qualitative characteristics of useful financial
information
• Chapter 3 - Financial statements & the reporting entity
• Chapter 4 - The elements of financial statements
• Chapter 5 - Recognition & derecognition
• Chapter 6 - Measurement
• Chapter 7 - presentation & disclosure
• Chapter 8 - Concepts of capital & capital maintenance
• Read:
• 2018 NZ Conceptual Framework
• IAS 1
Status & purpose of the Conceptual Framework:

• Issued by the IASB in 2018

• Describes the objective of general purpose financial reporting
• Describes the concepts for general purpose financial reporting.
• The purpose of the Conceptual Framework is to:
• (a) assist the International Accounting Standards Board (IASB);
• (b) assist preparers; and
• (c) assist all parties to understand and interpret the Standards.
• Who are these parties?
• The Conceptual Framework is not a standard
• The Conceptual Framework does not override the requirements of any
standard
• Therefore the IASB may specify requirements which depart from
aspects in the Conceptual Framework
• The Conceptual Framework provides a foundation for standards
2018 NZ Conceptual Framework
Chapters:
1. The objective of General Purpose Financial Statements (GPFS)
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Chapter 1 - The objective of GPFS
The objective of GPFS
• The objective of GPFS is to (para 1.2 Conceptual
Framework):
• provide financial information about the reporting entity
• that is useful to existing and potential investors, lenders
and other creditors
• in making decisions relating to providing resources to
the entity
• e.g. about trading with debt or equity instruments of
a reporting entity
The objective of GPFS
• GPFS should contain the following information
about:
1. Economic resources (i.e. assets) & claims against the entity (i.e. liabilities):
• Financial position
• Financial strength and weakness
• Ability to borrow money
2. Changes in economic resources & claims which result from the reporting
entities financial performance
• Managements stewardship role
• Return on resources
• Financial performance reflected by accrual accounting
• Financial performance reflected by past cash flows
3. Changes in economic resources and claims not resulting from financial
performance
• Issuing equity or debt instruments
Underlying assumptions
• Accrual accounting: effect of transactions and events are
recognised when they occur (and not as cash or cash
equivalent is received or paid) and they are recorded in the
accounts and reported in the financial statements of the
period to which they relate
• Accrual based accounting vs. cash based accounting
Chapter 2 - Qualitative characteristics of useful
financial information
Qualitative characteristics of useful financial
information
• Financial information should have qualitative characteristics in
order to be useful for economic decision making.
• Types of qualitative characteristics:
• Fundamental qualitative characteristics
• Relevance
• Faithful representation
• Enhancing qualitative characteristics
• Comparability
• Verifiability
• Timeliness
• Understandability
Qualitative characteristics of useful financial
information
• Relevant financial information is capable of making
a difference in the decisions made by users
• Should have both predictive value and confirmatory
value
• Materiality
• An item is material if omitting it or misstating it could
influence economic decisions of users
Qualitative characteristics of useful financial
information
Faithful representation:
• Replaces the qualitative characteristics of reliability
• Information that is complete (vs. incomplete)
• Information that is neutral (vs. biased)
• Information that is free from error (vs. full of errors)
• Information that depicts the economic substance (economic
reality) of a transaction or event - not necessarily the same as its
legal form.
• Does not mean total absence of error
• Information is measured under conditions uncertainty
• Information involves various estimates and instances of
professional judgement (example?)
Chapter 2: Qualitative characteristics of
useful financial information
Relevance vs. faithful representation
• Is it possible for information to be faithfully represented,
but not very relevant, or the other way around?
• Often a trade-off between relevance and
representational faithfulness
• E.g. historic cost versus fair value
Chapter 2: Qualitative characteristics of useful
financial information
• Enhancing qualitative characteristics enhance information
usefulness:
• Comparability
• Verifiability
• Timeliness
• Understandability
• Applying the enhancing qualitative characteristics
Chapter 2: Qualitative characteristics of useful
financial information

Comparability
• Methods of measurement/disclosure must be consistent
across entities and over time.
• Should be changed only if no longer relevant to the
entity’s circumstance.
Verifiability
• Information faithfully represents the economic
phenomena it purports to represent.
• Knowledgeable and independent observers could reach
consensus that a particular depiction is a faithful
representation
Chapter 2: Qualitative characteristics of
useful financial information

Timeliness
• Information available to decision-makers in time to be
capable of influencing their decisions.
• The older the information is, the less useful it is.
• Some information may continue to be timely long after
the end of a reporting period e.g. to identify & assess
trends
Understandability
• Likely to be understood by users with some business and
accounting knowledge.
• Does not obviate the necessity to present complex
information relevant to economic decision making.
Chapter 3 - Financial statements & the
reporting entity
Financial statements & the reporting entity
• “The objective of financial statements is to provide financial
information about the reporting entity’s assets, liabilities,
equity, income and expenses that is useful to users of
financial statements in assessing the prospects for future
net cash inflows to the reporting entity and in assessing
management’s stewardship of the entity’s economic
resources” (para. 3.2 NZ Conceptual Framework).

• Financial statements are prepared on the basis of the going

concern assumption (para. 3.9)
• the entity is viewed as a going concern, i.e. that will continue to operate for
the foreseeable future and that management has no intention or need to
liquidate or materially curtail the scale of the entities operations.
Financial statements & the reporting entity
• Statement of Financial Position
• Assets
• Liabilities
• Equity
• Statement of Financial Performance
• Income
• Expenses
• Statement of Cash Flows
• Cash flows
• Statement of Changes in Equity
• Contributions from and distributions to, equity holders
• Notes to the financial statements
• Methods, assumptions, judgements used, and their changes.
Financial statements & the reporting entity
• Financial statements provide information from the
perspective of the reporting entity (para. 3.8 NZ Conceptual
Framework)
• Any entity that prepares general purpose financial
statements (para. 3.10 NZ Conceptual Framework):
• a single entity, (e.g. a division)
• a part of an entity (i.e. a part of one entity, e.g. a division)
• or a group of entities (a group of companies, i.e. parent &
subsidiaries)
Chapter 4 - Elements of financial statements
Elements of financial statements
• NZ Conceptual Framework, Table 4.1 – the elements of financial statements:
• Economic resource
• Assets: A present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce
economic benefits.
• Claim
• Liabilities: A present obligation of the entity to transfer an economic resource
as a result of past events.
• Equity: The residual interest in the assets of the entity after deducting all its
liabilities.
• Changes in economic resources & claims reflecting claims
• Income: Increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims.
• Expenses: Decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of
equity claims.
• Other changes in economic resources & claims reflecting claims
• Contributions from holders of equity claims, and distributions to them.
• Exchanges of assets or liabilities that do not result in increases or decreases in
equity.
Elements of financial statements
Accounting equation:
Assets = liabilities + equity
Assets = liabilities + (equity + income – expenses -
drawings)
Equity = Assets – liabilities (or net assets)

Example:
Assets = $150,000
Liabilities = $ 50,000
Equity = $ 100,000 (150,000 – 50,000)

150,000 = 50,000 + 100,000

Chapter 5 - Recognition & derecognition
Recognition & derecognition
• “Recognition is the process of capturing for inclusion in the
statement of financial position or the statement(s) of
financial performance an item that meets the definition of
one of the elements of financial statements—an asset, a
liability, equity, income or expenses” (para 5.1 NZ
Conceptual Framework).

• Basically deciding whether to include an item in the

financial statements!
Recognition & derecognition
• How do you decide?
• Only items that meet the definition of an element of financial statements
are recognized
• However, sometimes the definition is met but the item is still not
recognized
• This is because recognizing the item would not provide useful information
• Relevance?
• Existence uncertainty &/or low probability of an inflow or outflow of
economic benefits
• Faithful representation
• Measurement uncertainty
• Derecognition is the removal of an asset or liability from the financial
statements.
• “Derecognition normally occurs when that item no longer meets the
definition of an asset or of a liability” (para. 5.26 NZ Conceptual
Framework)
Chapter 6 - Measurement
Measurement
• Measurement uncertainty
• “Measures of assets and liabilities are subject to measurement
uncertainty. Estimates are integral part of accounting.
Measurement uncertainty does not necessarily prevent assets and
liabilities from being useful if they are clearly and accurately
described as such” (para. 5.19, NZ Conceptual Framework).
• “In limited circumstances, measures of assets and liabilities may be
subject to such high measurement uncertainty that the measures
do not provide useful information even if the measures are
accompanied by a description of the estimates and an explanation
of the uncertainty. In such cases, the items shall not be recognised”
(para. 5.22, NZ Conceptual Framework).
Measurement
• Measurement attributes
• “A measurement basis is an identified feature—for example,
historical cost, fair value or fulfilment value—of an item
being measured” (para. 6.1, NZ Conceptual Framework).

• Basically what amount (i.e. $ value) to give to an asset,

liability, equity, income or expense!

• Two basic measurement basis:

• Historical cost: … price of the transaction at the time of transaction
• Current value: … reflect conditions at the time of measurement:
a. Fair value
b. Value-in-use
c. Current cost
Chapter 7 – Presentation & disclosure
Chapter 7 – Presentation & disclosure
• Financial statements used to communicate information
about assets, liabilities, equity, income & expenses
• Relevance vs faithful representation
• Information that is comparable
• Over time for the same entity
• Across entities
• Classification of assets & liabilities
• Offsetting
• Classification of income & expenses
Chapter 8 – Concepts of capital & capital
maintenance
Chapter 8 – Concepts of capital & capital
maintenance
• Financial capital
• Net assets or equity
• Profit is earned when closing net assets are greater than opening
net assets
• Physical capital
• Productive capacity of resources
• Profit is earned if the net productive capacity of the reporting entity
increases
• Net productive capacity, i.e. excluding increases in productive
capacity arising from contributions from equity holders
Summary
• The NZ Conceptual Framework:
• Status & purpose of the conceptual framework
• Chapter 1 - The objective of General Purpose Financial
Statements
• Chapter 2 - Qualitative characteristics of useful financial
information
• Chapter 3 - Financial statements & the reporting entity
• Chapter 4 - The elements of financial statements
• Chapter 5 - Recognition & derecognition
• Chapter 6 - Measurement
• Chapter 7 - presentation & disclosure
• Chapter 8 - Concepts of capital & capital maintenance