The Regulatory and conceptual framework of

Accounting
• Financial Accounting is the art and science of
recording and classifying financial transactions
in the books, summarizing and communicating
financial information through production of
financial statements/reports, and
interpretation of the operating results
portrayed in financial statements/reports to
facilitate decision-making (Omonuk, 1999)
 Explaining Financial Accounting
• Financial Accounting is the art and science of
recording and classifying financial transactions
in the books, summarizing and communicating
financial information through production of
financial statements/reports, and
interpretation of the operating results
portrayed in financial statements/reports to
facilitate decision-making (Omonuk, 1999)
• Accounting means explaining and defending
or justifying actions or results of those actions.
All those who have been entrusted with safe
custody of others resources are usually
required to account or submit accountability
to the owners of the resources.
 By what means can we provide Financial Accountability?

• 1. Production of documentary evidence

• 2. Books of accounts
• 3. Financial statements / reports
• 4. Output / result
 The conceptual framework

• Status and purpose and status of the Framework

• The Framework's purpose is to assist the IASB in
developing and revising IFRSs that are based on
consistent concepts, to help preparers to develop
consistent accounting policies for areas that are
not covered by a standard or where there is
choice of accounting policy, and to assist all
parties to understand and interpret IFRS.
 Conceptual Framework

• Conceptual Framework
• A conceptual framework can be defined as a system of ideas and
objectives that lead to the creation of a consistent set of rules and
standards. Specifically in accounting, the rule and standards set the
nature, function and limits of financial accounting and financial
statements.
• The main reasons for developing an agreed conceptual framework
are that it provides:
• a framework for setting accounting standards;
• a basis for resolving accounting disputes;
• fundamental principles which then do not have to be repeated in
accounting standards.
 The need for regulation
• Accounting Standards- Objectives, Benefits,
Limitations
• Financial Statements are basically a report
card for the company. So it is important that
they are regulated and do not report
misleading information.
• Accounting Standards (AS) provide us with a
framework for this regulation.
• These Accounting Standards (AS) are issued by an
accounting body or a regulatory board or sometimes by
the government directly.
• Accounting Standards mainly deal with four major issues
of accounting, namely
• 1. Recognition of financial events
• 2. Measurement of financial transactions
• 3. Presentation of financial statements in a fair manner
• 4. Disclosure requirement of companies to ensure
stakeholders are not misinformed
• Benefits of Accounting Standards
• Accounting Standards are the ruling authority in the world of accounting. It makes sure that the
information provided to potential investors is not misleading in any way

• 1] Attains Uniformity in Accounting

• Accounting Standards provides rules for standard treatment and recording of transactions. They even
have a standard format for financial statements. These are steps in achieving uniformity in accounting
methods.

• 2] Improves Reliability of Financial Statements

• There are many stakeholders of a company and they rely on the financial statements for their
information. Many of these stakeholders base their decisions on the data provided by these financial
statements. Then there are also potential investors who make their investment decisions based on such
financial statements.

• 3] Prevents Frauds and Accounting Manipulations

• Accounting Standards (AS) lay down the accounting principles and methodologies that all entities must
follow. One outcome of this is that the management of an entity cannot manipulate with financial data.
• 4] Assists Auditors
• Now the accounting standards lay down all the accounting policies, rules, regulations, etc in
a written format. These policies have to be followed. So if an auditor checks that the
policies have been correctly followed he can be assured that the financial statements are
true and fair.

• 5] Comparability
• This is another major objective of accounting standards. Since all entities of the country
follow the same set of standards their financial accounts become comparable to some
extent. The users of the financial statements can analyze and compare the financial
performances of various companies before taking any decisions.

• 6] Determining Managerial Accountability

• The accounting standards help measure the performance of the management of an entity.
It can help measure the management’s ability to increase profitability, maintain the
solvency of the firm, and other such important financial duties of the management.
 The Framework

• Scope
• The Framework addresses:
• the objective of general purpose financial reporting
• qualitative characteristics of useful financial information
• financial statements and the reporting entity
• the elements of financial statements
• recognition and de-recognition
• measurement
• presentation and disclosure
• concepts of capital and capital maintenance
• The ultimate role of accounting is to provide
information to decision makers. Besides that,
preparation of accounts plays the following roles:
• 1. Ascertainment of profit and loss
• 2. Assessment of tax
• 3. To facilitate the credit transactions
• 4. A tool for control
• 5. Base for further planning
• 6. Monitoring of management
• Who are the Users/interested parties of
accounting information?
• Accounting information is in form of financial
statements/ reports, entries in books of
accounts and business documents. The users or
decision makers interested in accounting
information are broadly divided into two
groups, i.e. internal users and external users.
•  
 Desirable qualitative characteristics of accounting information

• These characteristics are the attributes that

make the information in financial statements
useful to investors, creditors, and others. The
characteristics are classified as : Fundamental
and Enhancing qualitative characteristics
• Fundamental: Relevance and Faithful
representation
• Enhancing: Comparability, Verifiability,
Timeliness and Understandability
• Relevance; accounting information must be
capable of making a difference in a decision.
• Relevant information also helps users confirm or
correct prior expectations.
• Information is material if omitting it or misstating
it could influence decisions that users make on
the basis of the reported financial information.
•  
• Faithful representation
• -Completeness
• -Neutrality
• -Understandability
• Enhancing qualitative characteristics
• Comparability; Information should be measured and reported
in a similar manner for different companies.
• Verifiability; this occurs when independent measurers, using
the same methods, obtain similar results.
• Timeliness; this is having information available to decision-
makers before it loses its capacity to influence decisions.
• Understandability; accounting information should be clear in
such a way that it will be understandable by reasonably
informed users who will see its significance.
 Financial statements and the reporting entity

• Objective and scope of financial statements

• The objective of financial statements is to provide
information about an entity's assets, liabilities, equity,
income and expenses that is useful to financial
statements users in assessing the prospects for future
net cash inflows to the entity and in assessing
management's stewardship of the entity's resources.
• This information is provided in the statement of
financial position and the statement(s) of financial
performance as well as in other statements and notes
• Reporting period
• Financial statements are prepared for a specified period of
time and provide comparative information and under certain
circumstances forward-looking information.
• Perspective adopted in financial statements and going
concern assumption
• Financial statements provide information about transactions
and other events viewed from the perspective of the
reporting entity as a whole and are normally prepared on
the assumption that the reporting entity is a going concern
and will continue in operation for the foreseeable future.
• The reporting entity
• A reporting entity is an entity that is required, or chooses, to
prepare financial statements. It can be a single entity or a portion
of an entity or can comprise more than one entity. A reporting
entity is not necessarily a legal entity.
• Determining the appropriate boundary of a reporting entity is
driven by the information needs of the primary users of the
reporting entity’s financial statements.
• Consolidated and unconsolidated financial statements
• Generally, consolidated financial statements are more likely to
provide useful information to users of financial statements than
unconsolidated financial statements.
• The elements of financial statements
• Financial statements portray the financial effects of
transactions and other events by grouping them into broad
classes according to their economic characteristics. These
broad classes are termed the elements of financial
statements.
• The elements directly related to financial position (balance
sheet) are:
• Assets
• Liabilities
• Equity
• The elements directly related to performance
(income statement) are:
• Income
• Expenses
• The cash flow statement reflects both income
statement elements and some changes in
balance sheet elements.
• Definitions of the elements relating to performance
• Income. Income is increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
contributions from equity participants.
• Expense. Expenses are decreases in economic benefits
during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result
in decreases in equity, other than those relating to
distributions to equity participants.
• The definition of income encompasses both revenue
and gains. Revenue arises in the course of the
ordinary activities of an entity and is referred to by a
variety of different names including sales, fees,
interest, dividends, royalties and rent.
• Gains represent other items that meet the definition
of income and may, or may not, arise in the course of
the ordinary activities of an entity. Gains represent
increases in economic benefits and as such are no
different in nature from revenue.
• Recognition of the elements of financial statements
• Recognition is the process of incorporating in the SOFP or income
statement an item that meets the definition of an element and
satisfies the following criteria for recognition
• Based on these general criteria:
• An asset is recognised in the SOFP when it is probable that the
future economic benefits will flow to the entity and the asset has a
cost or value that can be measured reliably.
• A liability is recognised in the SOFP when it is probable that an
outflow of resources embodying economic benefits will result
from the settlement of a present obligation and the amount at
which the settlement will take place can be measured reliably.
• Income is recognised in the income statement when an
increase in future economic benefits related to an increase
in an asset or a decrease of a liability has arisen that can be
measured reliably.
• Expenses are recognised when a decrease in future
economic benefits related to a decrease in an asset or an
increase of a liability has arisen that can be measured
reliably. This means, in effect, that recognition of expenses
occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example, the accrual of
employee entitlements or the depreciation of equipment).
• Measurement of the elements of financial statements
• Measurement involves assigning monetary amounts at which
the elements of the financial statements are to be recognised
and reported.
• The IFRS Framework acknowledges that a variety of
measurement bases are used today to different degrees and in
varying combinations in financial statements, including:
• Historical cost
• Current cost
• Net realisable (settlement) value
• Present value (discounted)
 List of 10 Basic Accounting Principles

basic accounting principles that make up GAAP

in the United States
• Historical Cost Principle
• Revenue Recognition Principle
• Matching Principle
• Full Disclosure Principle
• Cost Benefit Principle
• Conservatism Principle
• Consistency Principle
• Objectivity Principle
• Accrual Principle
• Economic Entity Principle
 International Accounting Standards

• International Accounting Standards (IASs)

were issued by the International Accounting
Standards Council (IASC), and endorsed and
amended by the International Accounting
Standards Board (IASB). The IASB will also
reissue standards in this series where it
considers it appropriate.
 IAS 1 — Presentation of Financial Statements

• IAS 1 Presentation of Financial Statements sets out the

overall requirements for financial statements, including
how they should be structured, the minimum
requirements for their content and overriding concepts
such as going concern, the accrual basis of accounting
and the current/non-current distinction. The standard
requires a complete set of financial statements to
comprise a statement of financial position, a statement
of comprehensive income, a statement of changes in
equity and a statement of cash flows.
• Objective of IAS 1
• The objective of IAS 1 (2007) is to prescribe the basis for
presentation of general purpose financial statements, to ensure
comparability both with the entity's financial statements of
previous periods and with the financial statements of other
entities.
• IAS 1 sets out the overall requirements for the presentation of
financial statements, guidelines for their structure and minimum
requirements for their content.
• Standards for recognising, measuring, and disclosing specific
transactions are addressed in other Standards and
Interpretations.
• IAS 1 sets out the overall requirements for the presentation
of financial statements, guidelines for their structure and
minimum requirements for their content.
• Scope
• IAS 1 applies to all general purpose financial statements
that are prepared and presented in accordance with
International Financial Reporting Standards (IFRSs).
• General purpose financial statements are those intended to
serve users who are not in a position to require financial
reports tailored to their particular information needs.
 Objective of financial statements

• The objective of general purpose financial statements is to provide

information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in
making economic decisions. To meet that objective, financial
statements provide information about an entity's:
• assets
• liabilities
• equity
• income and expenses, including gains and losses
• contributions by and distributions to owners (in their capacity as
owners)
• cash flows.
• That information, along with other
information in the notes, assists users of
financial statements in predicting the entity's
future cash flows and, in particular, their
timing and certainty.
 Components of financial statements

• A complete set of financial statements includes:

• a statement of financial position (balance sheet) at the
end of the period
• a statement of profit or loss and other comprehensive
income for the period (presented as a single
statement, or by presenting the profit or loss section in
a separate statement of profit or loss, immediately
followed by a statement presenting comprehensive
income beginning with profit or loss)
• a statement of changes in equity for the
period
• a statement of cash flows for the period
• notes, comprising a summary of significant
accounting policies and other explanatory
notes
• comparative information prescribed by the
standard.
• Reports that are presented outside of the financial statements –
including financial reviews by management, environmental
reports, and value added statements – are outside the scope of
IFRSs.
• Fair presentation and compliance with IFRSs
• The financial statements must "present fairly" the financial
position, financial performance and cash flows of an entity.
• Fair presentation requires the faithful representation of the
effects of transactions, other events, and conditions in
accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework.
• Fair presentation and compliance with IFRSs
• The financial statements must "present fairly" the
financial position, financial performance and cash
flows of an entity.
• Fair presentation requires the faithful representation
of the effects of transactions, other events, and
conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and
expenses set out in the Framework.
• Going concern
• The Conceptual Framework notes that financial
statements are normally prepared assuming
the entity is a going concern and will continue
in operation for the foreseeable future.
• IAS 1 requires management to make an
assessment of an entity's ability to continue as
a going concern. 
• Accrual basis of accounting
• IAS 1 requires that an entity prepare its financial
statements, except for cash flow information, using
the accrual basis of accounting.
• Consistency of presentation
• The presentation and classification of items in the
financial statements shall be retained from one period
to the next unless a change is justified either by a
change in circumstances or a requirement of a new
IFRS.
• Materiality and aggregation
• Information is material if omitting, misstating
or obscuring it could reasonably be expected
to influence decisions that the primary users
of general purpose financial statements make
on the basis of those financial statements,
which provide financial information about a
specific reporting entity.
• Comparative information
• IAS 1 requires that comparative information to be disclosed
in respect of the previous period for all amounts reported
in the financial statements, both on the face of the
financial statements and in the notes, unless another
Standard requires otherwise. Comparative information is
provided for narrative and descriptive where it is relevant
to understanding the financial statements of the current
period.
• An entity is required to present at least two of each of the
following primary financial statements:
• Structure and content of financial statements
in general
• IAS 1 requires an entity to clearly identify:
• the financial statements, which must be
distinguished from other information in a
published document each financial statement
and the notes to the financial statements.
• Reporting period
• There is a presumption that financial
statements will be prepared at least annually.
If the annual reporting period changes and
financial statements are prepared for a
different period, the entity must disclose the
reason for the change and state that amounts
are not entirely comparable.