Framework For The Preparation and Presentation of Financial

Framework for the Preparation
and Presentation of Financial

Statement
C MBAHIJONA
LEARNING OUTCOME
After you have studied this unit, you should be able to:
 Describe what framework entails and list the specific purposes of the
framework regarding the preparation and presentation of financial
statements;
• Explain the underlying assumptions which are made when recording
and reporting accounting data as discussed in the framework;
• Explain the several purposes which financial statements are used for;
Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

LEARNING OUTCOME
• Differentiate between objectivity and subjectivity;
• Describe the basic concepts of accounting, including recognition and
disclosure of the elements incorporated in the financial statements as
explained in the framework;
• Identify the overriding concepts of accounting and see that they affect
the recording and adjustment of data;
• Explain the acronyms GAAP, IFRS, APB and SAICA;
• Define each of the following terms by referring to IAS 1 (AC101)
LEARNING OUTCOME
 Fair presentation
 Reporting period
 Consistency of presentation
 Materiality and aggregation
 Offsetting
 Comparative information
• Explain what financial instruments, equity instruments, the four categories of
financial instruments.
• Present financial statements
THE FRAMEWORK
A framework provides guidance to prepares of financial reports
about which business, economic and other events should be
accounted for and how should these events should be measured
and communicated to users.

THE FRAMEWORK
• The Framework deals with the objective and fundamentals of
financial accounting.
• Deals with qualitative characteristics that determine the
usefulness of information in the financial statements.
• Deals with the definition, recognition and measurements of the
elements from which financial statement are constructed as
well as concepts of capital and capital maintenance.
WHO ARE THE INFORMATION USERS AND THEIR NEEDS?
USERS OF FINANCIAL STATEMENTS
• Users of financial statements include present and potential
investor, employees, lenders, suppliers and other trade
creditors, customers, government and their agencies and the
public. Each user of financial information uses information
disclosed in financial statements in order to satisfy particular
needs, which may include, but not limited to the following;

• Investors – these are the providers of risk capital and their advisers are
concerned with the risk inherent in, and return provided by their
investments. They need information to help them determine whether they
should buy or hold or dispose the investments.
• Employees – employees and their representative groups are interested in
the information about the stability and profitability of the entity.
Employees are particularly interested on information concerning the
employer’s ability to provide remuneration, retirement benefits and
employment opportunities.
• Lenders – Lenders are interested in information that enables them
to determine whether loans and the interest attaching to it will be
paid when due.
• Suppliers and Other Trade Creditors – The users need
information that will ensure them that outstanding amount will be
paid when due.
• Customers – they are interested in the continuation of a an entity,
when they are depending on the entity.
• Government and their Agencies – these are interested in the
allocation of resources, regulate the activities of the entity,
determine taxation policies, national income and similar
statistics.
• Public – Entities affect members of the public in a variety of
ways. Entities contribute to local economy by employing
people and supporting supplies.
WHAT ARE THE OBJECTIVES OF FINANCIAL STATEMENTS?
The objective of the financial statements is to provide information about:

• The financial position of the entities;
• Performances of the entities
• Changes in financial position of the entities
• Cash flows
These information is useful to a wide range of users in making economic
decisions.
UNDERLYING ASSUMPTION OF FINANCIAL STATEMENTS
• Accrual Basis – financial statements are prepared on the

accrual basis of accounting. The transactions and other events
are recognise when they occur (and not as cash or its
equivalent are received or paid). The information are recorded
in the accounting records and reported in the financial
statements in the period to which each relate.

• Going Concern – financial statement of entity are usually

prepared under the assumption that the entity will continue to
exist for the foreseeable future. It is therefore assumed that the
entity has no intention or need to liquidate or to scale down its
operations materially, if such intention or need exist, the
financial statements may be have to be prepared on a different
basis, if so, the basis must be disclosed.
• Offsetting – IAS 1, states that assets and liabilities may not be

offset against one another, except when such offsetting is
required or permitted by a standard or interpretation. Income
and expenditure items should likewise not be offset against
one another.

• Frequency of reporting – financial information should be

published at least annually. In exceptional cases, in which an
entity’s reporting date changes, with the result that the
financial statements are presented for a period shorter or
longer than one year.

• Comparative information – all numerical information in

financial statements should be accompanied by a comparative
amount for the previous period, unless a standard or
interpretation permits otherwise.

• Consistency of presentation – there should be consistency of

accounting treatment of like items within each accounting
period, and from one period to the next. Consistency has
therefore two aspects: consistency over time and consistency
of disclosure of similar items.

QUALITATIVE CHARACTERISTICS OF FINANCIAL
STATEMENTS
Qualitative characteristics are the attributes that make the
information provided in the financial statements useful to users.
Users would like to be certain that the information in the
statements gives a fair presentation of the results and financial
position of the entity.

STATEMENTS
• Understandability – users of financial statements who have a
reasonable knowledge of business and economic activities and
accounting and willingness to study the information with
reasonable diligence, must be able to understand financial
statements, otherwise they serve no purpose.
• Relevance – information must be relevant in order to influence
the economic decisions of users by helping them evaluate past,
present or future events or confirming, their past evaluations.
STATEMENTS
If the decision cannot be made based on the financial
statements, the information provided in the financial statements
in not relevant and not useful.
Materiality – the relevance of information is affected by its
nature and materiality. Information is material if its omission
or misstatements could influence the economic decisions of
users taken in the basis of the financial statements.
STATEMENTS
• Reliability – for the information to be useful, it has to be reliable.
The information has the quality of reliability when it is free from
material error and bias and can be depended upon by the users to
represent faithfully that which it either purports to represent. The
following are the qualities of reliability;
Faithfull representation – to be reliable, information must
represent faithfully the transaction and other events it either
purports to represent or could reasonable be expected to represent.
STATEMENTS
Neutrality – information must be neutral, that is, free from
bias. If not neutral by selection or presentation of information
in such way that will influence the decision making or
predetermined outcome.

STATEMENTS
Prudence – information have to be contend with the
uncertainties that inevitably surround many events and
circumstances, such as the collectability of doubtful
receivables, the probable useful life of plant and equipment.
Prudence is the inclusion of a degree of caution in the exercise
of judgements where uncertainties exist. Assets or income
should not be overstated and liabilities or expenses understated.
STATEMENTS
Completeness – reliability information should be complete within the
bounds of materiality and cost.
• Comparability – users must be able to compare the information
disclosed in the financial statements of an entity from time to time in
order to identify trends to its financial position and performance. The
comparison with different entities to evaluate their comparative financial
position and performance and the measurement and disclosure of similar
transactions must be carried out consistently over time, in the entity and
similar entity.
CONSTRAINTS ON RELEVANT AND RELIABLE
INFORMATION
• Timelines – if the information is delayed it may lose its
relevance. Management may need the relative merits of timely
reporting and the provision of reliable information. The
information may be highly reliable but of little use to users
who have to make a decision.

INFORMATION
• Balance between benefit and cost – the balance between benefit
and cost is a pervasive constraint rather than a qualitative
characteristics. The benefits derived from information should
exceed the cost of providing it.
• Balance between qualitative characteristics – balancing, or trade
off, between qualitative characteristics is often necessarily. The aim
is to achieve an appropriate balance among the characteristics in
order to meet the objective of financial statements.
INFORMATION
• True and fair presentation – financial statements are
frequently describes as showing a true and fair view of or a
presenting fairly, the financial position, performance and
inventory accountpurchases
changes in financial position of an entity.

CONCEPTUAL FRAMEWORK –
Recognition
Definition Measurement
(Probability)
Presentation Disclosure
28
FRAMEWORK: DEFINITIONS
ASSET IS
• A RESOURCE
• CONTROLLED BY AN ENTERPRISE (NOT OWNED)
• RESULT OF PAST EVENTS
• INFLOW OF ECONOMIC BENEFITS EXPECTED
LIABILITY IS
• A PRESENT OBLIGATION (LEGAL OR
CONSTRUCTIVE)
• ARISING FROM PAST EVENTS
• OUTFLOW OF ECONOMIC BENEFITS EXPECTED
CAPITAL (EQUITY) IS
• RESIDUAL INTEREST IN ASSETS LESS LIABILITIES 29
FRAMEWORK - DEFINITIONS
INCOME IS
• INCREASES IN ECONOMIC BENEFITS
• DURING THE ACCOUNTING PERIOD
• FROM INCREASES IN ASSETS OR DECREASES IN LIABILITIES
• INCREASE IN EQUITY (OTHER THAN CONTRIBUTIONS FROM THE
OWNERS)
EXPENSES ARE
• DECREASES IN ECONOMIC BENEFITS
• DURING THE ACCOUNTING PERIOD
• FROM DECREASES IN ASSETS OR INCREASES IN LIABILITIES
• DECREASE IN EQUITY (OTHER THAN DISTRIBUTIONS TO THE
OWNERS) 30
FRAMEWORK - RECOGNITION
RECOGNITION REQUIREMENT: AN ELEMENT (ASSET,

LIABILITY, INCOME OR EXPENSE) IS RECOGNISED
ONLY IF IT COMPLIES WITH THE DEFINITIONS AND:
• IT IS PROBABLE THAT ECONOMIC BENEFITS WILL FLOW

TO OR FROM THE ENTERPRISE, AND
• THE ITEM HAS A COST OR VALUE THAT CAN BE
MEASURED WITH RELIABILITY
31
FRAMEWORK – MEASUREMENT BASES
• HISTORICAL COST - PROVIDE MONETARY INFORMATION ABOUT
ASSETS, LIABILITIES AND RELATED INCOME AND EXPENSES, USING
INFORMATION DERIVED, AT LEAST IN PART, FROM THE PRICE OF THE
TRANSACTION OR OTHER EVENT THAT GAVE RISE TO THEM.
• CURRENT COST - PROVIDE MONETARY INFORMATION ABOUT
ASSETS, LIABILITIES AND RELATED INCOME AND EXPENSES, USING
INFORMATION UPDATED TO REFLECT CONDITIONS AT THE
MEASUREMENT DATE.
• FAIR VALUE - IS THE PRICE THAT WOULD BE RECEIVED TO SELL AN
ASSET, OR PAID TO TRANSFER A LIABILITY, IN AN ORDERLY
TRANSACTION BETWEEN MARKET PARTICIPANTS AT THE
MEASUREMENT DATE. 32
ELEMENTS OF FINANCIAL STATEMENTS
• Assets
• Liabilities
• Equity
• Income
• expenses

Assets
An asset of an entity is:
• A resource
• That is under the control of the entity
• That is expected to result in future economic benefits flowing to
the entity, and
• That originated as a result of past events.
Liabilities
A liability of an entity is:
• A present obligation
• Arising from past events
• The settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
Equity
Equity is the residual interest in the assets of the entity after
deducting all its liabilities; in other words, equity is the
difference between the assets and the liabilities of an entity.

Income
An income:
• Increase 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
An expense:
• Decreases in economic benefits during the accounting period
• In the form of outflows or depletion of assets or incurrence of
liabilities
• That result in decreases in equity other than those relating to
distributions to equity participants.
MEASUREMENT OF THE ELEMENTS OF FINANCIAL
STATEMENTS
Measurements – is the process of determining the monetary
amounts at which the elements of the financial statements are to
be recognised and carried in the statement of financial position
and statement of comprehensive income.
The following are the elements of financial statements:

STATEMENTS
• Historical cost – assets are recorded at the amount of cash or
cash equivalents paid or the fair value of the consideration
given to acquire them at the time their acquisition. Liabilities
are recorded at the amount of proceeds received in exchange
for the obligation or in some circumstances at the amounts of
cash or cash equivalents expected to be paid to satisfy the
liability in the normal course of business.
STATEMENTS
• Current cost – assets are carried at the amount of cash or cash
equivalents that would have to be paid if the same or an
equivalents asset was acquired currently. Liabilities are carried
at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.

STATEMENTS
• Realisable value – assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the
asset by selling the asset in an orderly disposal. Liabilities are
carried at their settlement values, that is the undiscounted
amounts of cash or cash equivalents expected to be paid to
satisfy the liabilities in the normal course of business.

STATEMENTS
• Present value – assets are carried at the present discounted
value of the future net cash inflows that the item is expected to
generate in the normal course of business. Liabilities are
carried at the present discounted value of the future net cash
outflows that are expected to be required to settle the liabilities
in the normal course of business.

END
QUESTION!
ANSWERS!

Framework For The Preparation and Presentation of Financial

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Framework for the Preparation

and Presentation of Financial

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

The objective of the financial statements is to provide information about:

• Accrual Basis – financial statements are prepared on the

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

• Going Concern – financial statement of entity are usually

• Offsetting – IAS 1, states that assets and liabilities may not be

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

• Frequency of reporting – financial information should be

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

• Comparative information – all numerical information in

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

• Consistency of presentation – there should be consistency of

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

RECOGNITION REQUIREMENT: AN ELEMENT (ASSET,

• IT IS PROBABLE THAT ECONOMIC BENEFITS WILL FLOW

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

The following are the elements of financial statements:

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

Fundamentals of Accounting_2022 C Mbahijona 24 August 2022

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