IASB’s

Conceptual
Framework

01/13/2024 By S.Chaitezvi
Background

• In preparing financial statements, accountants follow certain

fundamental assumptions. Accounting practice has developed
gradually over time.
• Many of its procedures are operated automatically by people
who have never questioned whether alternative methods exist
which have equal validity.

01/13/2024 By S.Chaitezvi
Introduction to the Conceptual
Framework
• The Conceptual Framework for Financial Reporting
('Conceptual Framework') is a set of principles which underpin
the foundations of financial accounting.

• It is a conceptual framework on which all IFRSs are based and

hence determines how financial statements are prepared and
the information they contain. The Conceptual Framework is
not an accounting standard in itself.

01/13/2024 By S.Chaitezvi
Underlying assumption

• The Conceptual Framework sets out one important

underlying assumption for financial statements, the going
concern concept.
• Going concern. 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.
Hence, it is assumed that the entity has neither the intention
nor the need to liquidate or curtail materially the scale of its
operations.
01/13/2024 By S.Chaitezvi
Going concern

• This concept assumes that, when preparing a normal set of

accounts, the business will continue to operate in
approximately the same manner for the foreseeable future (at
least the next 12 months). In particular, the entity will not go
into liquidation or scale down its operations in a material way.
• The main significance of the going concern concept is that the
assets should not be valued at their 'break-up' value (the
amount they would sell for if they were sold off piecemeal and
the business were broken up).

01/13/2024 By S.Chaitezvi
QUESTION

• Going Concern is one of the most critical assumption laid

down in the IASB’s conceptual Framework. Explain what you
understand by the term going concern and show evidence of
its existence in Zimbabwean firms following the Covid 19’s
world pandemic.
(10 marks)

01/13/2024 By S.Chaitezvi
Accruals basis

• The accruals basis is not an underlying assumption but Chapter 1 of the

Conceptual Framework makes it clear that financial statements should
be prepared on an accruals basis.
• Entities should prepare their financial statements on the basis that
transactions are recorded in them, not as the cash is paid or received,
but as the revenues or expenses are earned or incurred in the
accounting period to which they relate.
• According to the accruals assumption, in computing profit, revenue
earned must be matched against the expenditure incurred in earning it.
This is also known as the matching convention.

01/13/2024 By S.Chaitezvi
The qualitative characteristics of financial
information
• The Conceptual Framework states that qualitative
characteristics are the attributes that make the information
provided in financial statements useful to users.

• The two fundamental qualitative characteristics are relevance

and faithful representation.
• Enhancing qualitative characteristics are comparability,
verifiability, timeliness and understandability.

01/13/2024 By S.Chaitezvi
Relevance

• Only relevant information can be useful. Information should be released

on a timely basis to be relevant to users.

• Relevant information is capable of making a difference in the decisions

made by users. Financial information is capable of making a difference
in decisions if it has predictive value, confirmatory value or both.

01/13/2024 By S.Chaitezvi
Materiality

• Information is material if omitting it or misstating it could influence

decisions that users make on the basis of financial information about
a specific reporting entity.
• Information may be judged relevant simply because of its nature. In
other cases, both the nature and materiality of the information are
important.
• An error which is too trivial to affect anyone's understanding of the
accounts is referred to as immaterial. In preparing accounts it is
important to assess what is material and what is not, so that time and
money are not wasted in the pursuit of excessive detail.

01/13/2024 By S.Chaitezvi
Materiality Cont,,,,

• Determining whether or not an item is material is a very subjective

exercise. There is no absolute measure of materiality. It is common to
apply a convenient rule of thumb (for example, material items are
those with a value greater than 5% of net profits).
• However, some items disclosed in the accounts are regarded as
particularly sensitive and even a very small misstatement of such an
item is taken as a material error. An example, in the accounts of a
limited liability company, is the amount of remuneration (salaries and
other rewards) paid to directors of the company.

01/13/2024 By S.Chaitezvi
Materiality Cont,,,,
• In assessing whether or not an item is material, it is not only the value
of the item which needs to be considered. The context is also
important.
• (a) If a statement of financial position shows non-current assets of
$2m and inventories of $30,000, an error of $20,000 in the
depreciation calculations might not be regarded as material. However,
an error of $20,000 in the inventory valuation would be material. In
other words, the total of which the error forms part must be
considered.

01/13/2024 By S.Chaitezvi
(b) If a business has a bank loan of $50,000 and a $55,000 balance on
bank deposit account, it will be a material misstatement if these two
amounts are netted off on the statement of financial position as 'cash
at bank $5,000’.
• In other words, incorrect presentation may amount to material
misstatement even if there is no monetary error.

01/13/2024 By S.Chaitezvi
QUESTION

• Would you treat the following items as assets in the accounts of a

company?
a) A box file
b) A computer
c) A plastic display stand

01/13/2024 By S.Chaitezvi
Solution

a) No. You would write it off to the statement of profit or loss as an

expense.
b) Yes. You would capitalise the computer and charge depreciation on
it.
c) Your answer depends on the size of the company and whether
writing off the item has a material effect on its profits.
A larger organisation might well write this item off under the heading of
advertising expenses, while a small one might capitalise it and
depreciate it over time. This is because the item is material to the
small company, but not to the large company.
01/13/2024 By S.Chaitezvi
Faithful representation
• To be a faithful representation information must be complete, neutral and free
from error.
• A complete depiction includes all information necessary for a user to understand
the phenomenon being depicted, including all necessary descriptions and
explanations.
• A neutral depiction is without bias in the selection or presentation of financial
information. This means that information must not be manipulated in any way in
order to influence the decisions of users.
• Free from error means there are no errors or omissions in the description of the
phenomenon and no errors made in the process by which the financial
information was produced. It does not mean that no inaccuracies can arise,
particularly where estimates have to be made.
01/13/2024 By S.Chaitezvi
Substance over form

• This is not a separate qualitative characteristic under the Conceptual

Framework. The IASB says that to so include it would be redundant
because it is implied in faithful representation. Faithful representation
of a transaction is only possible if it is accounted for according to its
substance and economic reality.
• For example, a business may have entered into a leasing agreement
for some equipment. However, the terms are such that the business is
really buying the equipment. The equipment should therefore be
included in the statement of financial position as an asset of the
business and the leasing agreement should be treated as a financing
arrangement.
01/13/2024 By S.Chaitezvi
Enhancing qualitative characteristics

• Comparability is the qualitative characteristic that enables users

to identify and understand similarities in, and differences
among, items. Information about a reporting entity is more
useful if it can be compared with similar information about other
entities and with similar information about the same entity for
another period or date.
• Consistency, although related to comparability, is not the same.
It refers to the use of the same methods for the same items (ie
consistency of treatment) either from period to period within a
reporting entity or in a single period across entities .
01/13/2024 By S.Chaitezvi
 • The disclosure of accounting policies is particularly important here.
Users must be able to distinguish between different accounting
policies in order to be able to make a valid comparison of similar
items in the accounts of different entities.
• Comparability is not the same as uniformity. Entities should change
accounting policies if those policies become inappropriate.
• Corresponding information for preceding periods should be shown to
enable comparison to be made over time.

01/13/2024 By S.Chaitezvi
Verifiability
• Verifiability helps assure users that information faithfully represents
the economic phenomena it purports to represent. It means that
different knowledgeable and independent observers could reach
consensus that a particular depiction is a faithful representation

• Information that can be independently verified is generally more

decision-useful than information that cannot.

01/13/2024 By S.Chaitezvi
Timeliness
• Timeliness. Timeliness means having information available to decision-
makers in time to be capable of influencing their decisions. Generally, the
older information is the less useful it is.
• Information may become less useful if there is a delay in reporting it. There
is a balance between timeliness and the provision of reliable information.
• If information is reported on a timely basis when not all aspects of the
transaction are known, it may not be complete or free from error.
• Conversely, if every detail of a transaction is known, it may be too late to
publish the information because it has become irrelevant. The overriding
consideration is how best to satisfy the economic decision-making needs of
the users.
01/13/2024 By S.Chaitezvi
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. Some phenomena are inherently
complex and cannot be made easy to understand.

01/13/2024 By S.Chaitezvi
• Excluding information on those phenomena might make the
information easier to understand, but without it those reports would
be incomplete and therefore misleading.
• Therefore matters should not be left out of financial statements simply
due to their difficulty, as even well-informed and diligent users may
sometimes need the aid of an adviser to understand information about
complex economic phenomena.

01/13/2024 By S.Chaitezvi
Other Accounting Concepts

• There are other accounting concepts which are useful in the

preparation of financial statements.
Consistency
• To maintain consistency, the presentation and classification of items in
the financial statements should stay the same from one period to the
next, except as follows.
a) There is a significant change in the nature of the operations or a
review of the financial statements indicates a more appropriate
presentation
b) A change in presentation is required by an IFRS
01/13/2024 By S.Chaitezvi
The business entity concept

• Financial statements always treat the business as a separate entity. It

is crucial that you understand that the convention adopted in
preparing accounts (the business entity concept) is always to treat a
business as a separate entity from its owner(s).

• This means the transactions of the owner should never be mixed

with the business's transactions. This applies whether or not the
business is recognised in law as a separate legal entity.

01/13/2024 By S.Chaitezvi
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 (statement of
financial position) are:
1. Assets
2. Liabilities
3. Equity

01/13/2024 By S.Chaitezvi
 • The elements directly related to performance (statement of profit or
loss and other comprehensive income) are:
1. Income
2. Expenses

• The statement of cash flows reflects both statement of profit or loss

and other comprehensive income elements and some changes in
statement of financial position elements.

01/13/2024 By S.Chaitezvi
Definitions of the elements relating to financial position

1. Asset. An asset is a resource controlled by the entity as a result of

past events and from which future economic benefits are expected
to flow to the entity.
2. Liability. A liability is a present obligation of the entity arising from
past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits.
3. Equity. Equity is the residual interest in the assets of the entity after
deducting all its liabilities.

01/13/2024 By S.Chaitezvi
Definitions of the elements relating to performance

1. 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.
2. 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. [F
4.25(b)]

01/13/2024 By S.Chaitezvi
QUESTION
Explain the following terms and their significance in financial
statements preparation:

i. Faithful representation
ii. Relevance
iii. Comparability
iv. Timelines
v. Understandability (10 marks)

01/13/2024 By S.Chaitezvi
 END
01/13/2024 By S.Chaitezvi