Financial reporting

By: Yurasova Irina Olegovna,

Associate Professor,
Department of Audit & Corporate Reporting
iyurasova@fa.ru
Assessment scheme
Marks
attendance:
-lectures 1
-classes 2
class work 4
mind maps 5
HT/tests/cases/ etc. 8
science in addition
Total 20
References
 Financial Reporting (FR) ACCA
 www.ifrs.org
 Международные стандарты
финансовой отчетности :
учебник / под ред. В.Г. Гетьмана.
— 4-е изд., перераб. и доп. — М. :
ИНФРА-М, 2022. — 582 с.
Conceptual framework
 is a statement of generally accepted
theoretical principles which form the
frame of reference for financial
reporting
Conceptual framework and
GAAP
 Conceptual framework will form the
theoretical basis
Danger of not having a conceptual
framework:
 contradictions and inconsistencies in
basic concepts
 highly detailed standards
 political pressure
Advantages of a conceptual
framework
 standardising accounting practice
 lower political interference
 concentration on the same aspects
Disadvantages of a conceptual
framework
 not certain that a single conceptual
framework can be devised which will
suit all users
 may be a need for a variety of
accounting standards
 not clear that a conceptual framework
makes the task of preparing and then
implementing standards any easier than
without a framework
 Sources of Regulation

Accounting Standards Company Law

*Listing Rules
The objective of general
purpose financial reporting
 to provide information about the
reporting entity that is useful to existing
and potential investors, lenders and
other creditors in making decisions
about providing resources to the entity
Types of economic decisions
 Buying, selling or holding equity and
debt instruments;
 Providing or settling loans and other
forms of credit; or
 Exercising rights to vote on, or
otherwise influence, management's
actions that affect the use of the
entity's economic resources
Review of the stewardship
 to be able to review the financial
performance of the entity (effectively,
the income and expenses) as well as
other transactions (such as issuing
debt, the capital maintenance and
equity of the entity)
 Scope of the Conceptual
Framework:
Chapter 1 The objective of general purpose financial reporting
Chapter 2 Qualitative characteristics of useful financial information
Chapter 3 Financial statements and the reporting entity
Chapter 4 The elements of financial statements
Chapter 5 Recognition and derecognition
Chapter 6 Measurement
Chapter 7 Presentation and disclosure
Chapter 8 Concepts of capital and capital maintenance
Accrual accounting
 The effects of transactions and other
events and circumstances on a
reporting entity's economic resources
and claims are recognised in the
periods in which they occur , even if the
resulting cash receipts and payments
occur in a different period
The qualitative characteristics
identify the types of information that are likely
to be most useful to the existing and potential
investors, lenders and other creditors for
making decisions about the reporting entity on
the basis of information in its financial report
(financial information).
 Qualitative characteristics of financial statements

Faithful
Relevance
representation

Materiality

free
complete neutral from
error
 Relevance
Relevant financial information is capable of making a difference in the
decisions made by users.

Information may be capable of making a difference in a decision even if

some users choose not to take advantage of it or are already aware of it
from other sources.

Confirmatory
Predictive value
value

16
 Faithful representation

financial information must faithfully represent the

phenomena that it purports to represent
 complete

A complete depiction includes all information

necessary for a user to understand the phenomenon
being depicted, including all necessary descriptions
and explanations

18
 neutral

A neutral depiction is without bias in the selection or

presentation of financial information

19
free
from
error

there are no errors or omissions in the description of

the phenomenon, and the process used to produce
the reported information has been selected and
applied with no errors in the process

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 Enhancing qualitative characteristics of financial statements

Comparability Verifiability Timeliness Understandability

Comparability

enables users to identify and understand similarities

in, and differences among, items

Consistency
disclosure of
changes in an not the same as
accounting
accounting policy uniformity
policies

Corresponding
information
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Verifiability
different knowledgeable and independent observers
could reach consensus, although not necessarily
complete agreement, that a particular depiction is a
faithful representation

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Timeliness
having information available to decision-makers in
time to be capable of influencing their decisions

24
Understandability
Classifying, characterising and presenting information
clearly and concisely makes it understandable

Financial reports are prepared for users who have a

reasonable knowledge of business and economic
activities and who review and analyse the information
diligently
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 The cost constraint on
useful financial reporting
 Benefits must exceed the costs
 Providers of financial information - collecting,
processing, verifying and disseminating financial
information
 Users of financial information - analysing and
interpreting the information provided
 subjective area
 Underlying assumption
The financial statements are normally prepared
on the assumption that an entity is a going
concern and will continue in operation for the
foreseeable future.
The elements of financial
statements

Assets Liabilities
financial
position

Equity
Financial position
 Asset. 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 (para.4.3-4.4)
 Liability. A present obligation of the entity to transfer an
economic resource as a result of past events. (para.4.26)
 Equity. The residual interest in the assets of the entity after
deducting all its liabilities (para.4.63).
Consider the following situations In each case, do
we have an asset or liability within the definitions
given by the Conceptual Framework?

(a) Pat Co has purchased a patent for $20,000. The patent gives
the company sole use of a particular manufacturing process which
will save $3,000 a year for the next five years.
(b) Baldwin Co paid Don Brennan $10,000 to set up a car repair
shop, on condition that priority treatment is given to cars from the
company's fleet.
(c) Deals on Wheels Co provides a warranty with every car sold.
 Profit

Income Expenses
Performance
Performance
 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.
Recognition and derecognition
 Recognition. The process of capturing for inclusion in the
statement of financial position or statement(s) of profit or loss
and other comprehensive income an item that meets the
definition of one of the elements of financial statements – an
asset, a liability, equity, income or expenses.
 Derecognition is the removal of all or part of a recognised asset
or liability from an entity's statement of financial position.
Derecognition normally occurs when that item no longer meets
the definition of an asset or liability
Measurement of the elements of financial
statements

Historical cost

Value in use

Fair value

Current cost

Measurement. Elements recognised in the financial

statements are quantified in monetary terms. This
requires the selection of a measurement basis
Presentation and disclosure
 Classification of assets and liabilities of a similar nature
together, according to their nature, function or method of
measurement. This is also avoid the issue of 'offsetting'
whereby items of a dissimilar nature are grouped together, for
example an asset and a liability offset to provide a much smaller
number in the financial statements.
 Avoiding unnecessary detail which can obscure the important
facts
 Equally, avoiding a standardised approach (often referred to as
'boilerplate') but instead giving the entity an opportunity to
provide details relevant to the organisation and its business
 Specific details regarding the classification of assets, liabilities,
equity, income and expenses
Interaction with IAS 1
 Financial statements should present
fairly the financial position, financial
performance and cash flows of an
entity. Compliance with IFRS is
presumed to result in financial
statements that achieve a fair
presentation
IAS 1 states what is required
for a fair presentation
(a) Selection and application of accounting policies
(b) Presentation of information in a manner which
provides relevant, reliable, comparable and
understandable information
(c) Additional disclosures where required
The following points made by
IAS 1 expand on this principle
(a) Compliance with IFRS should be disclosed
(b) All relevant IFRS must be followed if compliance with IFRS is
disclosed
(c) Use of an inappropriate accounting treatment cannot be
rectified either by disclosure of accounting policies or
notes/explanatory material
 Concepts of capital

financial concept physical concept

 Conceptual Framework

Review:
A conceptual framework underlying financial
accounting is important because it can lead to
consistent standards and it prescribes the
nature, function, and limits of financial
accounting and financial statements.

True
 Conceptual Framework

Review:
A conceptual framework underlying financial
accounting is necessary because future
accounting practice problems can be solved by
reference to the conceptual framework and a
formal standard-setting body will not be
necessary.

False
 Conceptual Framework
Review:

According to the conceptual framework, the

objectives of financial reporting for business
enterprises are based on?
a. Generally accepted accounting principles
b. Reporting on management’s stewardship.
c. The need for conservatism.
d. The needs of the users of the
information.