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1-Conceptual Framework Summary
1-Conceptual Framework Summary
Conceptual Framework
1. General-Purpose Financial Statements- Provide financial reporting information to a wide variety of users.
Provide the most useful information possible at the least cost.
Answer: To develop a coherent set of standards and rules. To solve new and emerging practical problems.
3. The FASB has issued seven Statements of Financial Accounting Concepts (SFAC) for business enterprises.
SFAC No.7 - Using Cash Flow Information and Present Value in Accounting Measurements.
SFAC No.8 - The Objective of General Purpose Financial Reporting and Qualitative Characteristics of Useful
Financial Information (replaces SFAC No. 1 and No. 2)
Elements
Disclosure Concepts.
Objective of Financial Reporting- Provide financial information about the reporting entity that is useful to present
and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital
providers.
Fundamental Qualities
A.1.1. PREDICTIVE VALUE- Financial information has predictive value if it has value as an input to predictive
processes used by investors to form their own expectations about the future.
A.1.2 CONFIRMATORY VALUE- Relevant information also helps users confirm or correct prior expectations.
A1.3. MATERIALITY- Information is material if omitting it or misstating it could influence decisions that users
make on the basis of the reported financial information.
B. Faithful Representation- means that the numbers and descriptions match what really existed or happened.
B.1. Ingredients of FR
B.1.1. Completeness- means that all the information that is necessary for faithful representation is
provided
B.1.2. Neutrality- means that a company cannot select information to favor one set of interested parties
over another.
B.1.3. Free from Error- An information item that is free from error will be a more accurate (faithful)
representation of a financial item.
Enhancing Qualities
A. Comparability- Information that is measured and reported in a similar manner for different companies is
considered comparable.
B. Verifiability -occurs when independent measurers, using the same methods, obtain similar results.
C. Timeliness- means having information available to decision-makers before it loses its capacity to influence
decisions.
D. Understandability is the quality of information that lets reasonably informed users see its significance.
Concepts Statement No. 6 defines ten interrelated elements that relate to measuring the performance and
financial status of a business enterprise.
D.Revenue
E.Expenses
F.Gains
G.Losses
The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition
and Measurement in Financial Statements of Business Enterprises.”
A. Economic Entity – company keeps its activity separate from its owners and other businesses.
B. Going Concern - company to last long enough to fulfill objectives and commitments.
C. Monetary Unit - money is the common denominator.
D. Periodicity - company can divide its economic activities into time periods.
Measurement Principle – The most commonly used measurements are based on historical cost and fair value.
Issues:
Recently the FASB has taken the step of giving companies the option to use fair value as the basis for
measurement of financial assets and financial liabilities. Reporting of fair value information is increasing.
Recognition Principles
A. Revenue Recognition - requires that companies recognize revenue in the accounting period in which the
performance obligation is satisfied.
Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of
an informed user.
Provided through:
A. Financial Statements
Supplementary information
Cost Constraint – cost of providing information must be weighed against the benefits that can be derived from
using it.
While the conceptual framework that underlies IFRS is very similar to that used to develop GAAP, the elements
identified and their definitions under IFRS are different. The IASB elements and their definitions are as follows.
A. Assets. 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.
B. Liabilities. 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. Liabilities may be legally
enforceable via a contract or law, but need not be, i.e., they can arise due to normal business practice or customs.
C. Equity. A residual interest in the assets of the entity after deducting all its liabilities.
D. Income. Increases in economic benefits that result in increases in equity (other than those related to
contributions from shareholders). Income includes both revenues (resulting from ordinary activities) and gains.
E. Expenses. Decreases in economic benefits that result in decreases in equity (other than those related to
distributions to shareholders). Expenses includes losses that are not the result of ordinary activities.
I. Objective of IAS 1- The objective of IAS 1 is to prescribe the basis for presentation of general purpose financial
statements, to ensure comparability both with
Applies to all general purpose financial statements based on International Financial Reporting Standards
II. Objective of Financial Statements- 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.
B. Single Statement of Profit or Loss and Other Comprehensive Income “for the period” (or two statements:
Statement of Profit and Loss and Statement of Other Comprehensive Income),
IV. An entity must also present a statement of financial position as at the beginning of the earliest comparative
period when:
V. General Features
The financial statements must be clearly identified and distinguished from other information in the same
published document.
reporting date;
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.
IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved
statement of such compliance in the notes.
Inappropriate accounting policies are NOT rectified either by disclosure of the accounting policies used or by
notes or explanatory material.
An entity preparing IFRS financial statements is presumed to be a going concern. Otherwise, it should disclose
the fact to the contrary
Guidance
B. Items of a dissimilar nature or function must be presented separately unless they are immaterial
D. A specific disclosure requirement in IFRS need not be satisfied if the information is not material
VIi. Offsetting- Assets and liabilities, and income and expenses, must not be offset unless required or permitted by
IFRS
IAS 32 (Financial Instruments: Presentation) contains rules on the offset of financial assets and financial liabilities
which require offset when (and only when) an entity:
B. Current Liabilities- are those to be settled within the entity's normal operating cycle or due within 12 months,
or those held for trading, or those for which the entity does NOT have an unconditional right to defer payment
beyond 12 months. Other liabilities are noncurrent.
IAS 1 does NOT prescribe the format of the Statement of Financial Position. Assets can be presented current then
noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice
versa. A net asset presentation (assets minus liabilities) is allowed.
Certain items (“line items”) must be shown on the face of the statement of financial position as a minimum:
2. Financial Assets
4. Inventories
7. Intangible Assets
8. Investment Property
9. Biological Assets
14. Provisions
All items of income and expense recognized in a period must be included in profit or loss unless a Standard or
an Interpretation requires otherwise.
Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be
included in other comprehensive income.
B. Actuarial gains and losses on defined benefit plans recognized in accordance with IAS 19
C. Gains and losses arising from translating the financial statements of a foreign operation (IAS 21)
1. Income Statement
Or
No items may be presented in the statement of profit or loss and other comprehensive income (or in the
statement of profit or loss, if separately presented) or in the notes as ‘extraordinary items’.
Expenses recognized in profit or loss should be analyzed either by nature (raw materials, staffing costs,
depreciation, etc.) or by function (cost of sales, selling, administrative, etc).
If an entity categorizes by function, then additional information on the nature of expenses – at a minimum
depreciation, amortization and employee benefits expense – must be disclosed.
Components of Expense
A. Cost of Sales
B. Selling Expenses
C. Administrative Expenses
D. Other Expenses
A. Revenue
C. Finance Cost
IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial
statements. The statement must show:
total comprehensive income for the period, showing separately amounts attributable to owners of the parent
and to non-controlling interests
reconciliations between the carrying amounts at the beginning and the end of the period for each component
of equity, separately disclosing:
profit or loss,
IAS 1 suggests that the notes should normally be presented in the following order:
2. supporting information for items presented on the face of the statement of financial position, statement of
profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows, in the
order in which each statement and each line item is presented
3.1 contingent liabilities (see IAS 37) and unrecognized contractual commitments
3.2 non-financial disclosures, such as the entity's financial risk management objectives and policies (see IFRS
7)
Disclosures-
An entity must disclose, in the notes, information about the key assumptions concerning the future, and other key
sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Capital Disclosures
An entity should disclose information about its objectives, policies and processes for managing capital.
A. A dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the
discretion of the entity
B. An entity should measure the dividend payable at the fair value of the net assets to be distributed
C. An entity should remeasure the liability at each reporting date and at settlement, with changes recognized
directly in equity
D. An entity should recognize the difference between the dividend paid and the carrying amount of the net assets
distributed in profit or loss, and should disclose it separately
E. An entity should provide additional disclosures if the net assets being held for distribution to owners meet the
definition of a discontinued operation.
IAS 7 objective:
A. to provide a statement to help investors assess the prospects for future cash flows, and to confirm or change
their past expectations
B. Statement provides historical information on the entity’s operating, investing and financing cash flows and how
its cash balances have changed in the period as a result
Cash on hand and on deposit and “short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value”
Can include bank overdrafts if part of cash management activities and balance fluctuates between positive and
negative amounts
Operating activities are the principal revenue-producing activities; and those that are not investing or financing
activities
Operating cash flows are important: surplus cash flows needed to invest in increased capacity, pay debt when due,
and provide a return to shareholders
A. Cash received from customers for the sale of goods and provision of services, or on account of royalties, fees, or
commissions
B. Cash payments to suppliers for goods and services provided; and to and on behalf of employees for their
services
C. Cash received from or paid for financial instruments held specifically for dealing or trading purposes
Investing activities:
“the acquisition and disposal of long-term assets and other investments not included in cash equivalents”
Importance:
Is the entity maintaining its capacity and increasing the potential for increased operating cash flows in the future?
Examples:
1. Cash payments to acquire property, plant, and equipment; intangibles; and other long-term assets, including
capitalized development costs
3. Cash payments to acquire debt and equity instruments of other entities or interests in joint ventures; excluding
investments held for trading or in cash equivalents
5. Cash advances and loans to other parties and their cash repayments
Cash payments for and receipts from futures, forwards, options and swaps unless they are held for trading or are
classified as financing flows.
Financing activities:
“result in changes in the size and composition of the contributed equity and borrowings of the entity”
Importance:
Financing cash flows change the capital structure of the firm and affect the relative interests of those with claims
to future cash flows of the entity
Interest and dividends received and interest and dividends paid – choice of operating, investing or financing
flows as appropriate
A. Cash flows between an entity and its subsidiaries, associates and joint ventures reported only if accounted for
by the cost or equity method
C. Exchange rate changes on foreign cash balances – reconciling item at bottom of statement
Disclosures
Compensating Balance- generally takes the form of minimum checking or demand deposit account balance
that must be maintaineed/
A. Window Dressing- extending the opening of books to record next year’s collection in current year.
B. Lapping- Covering up shortage by using current collection to cover up shortage from previous collection.
C. Kiting- Drawing check from one bank and deposited to another bank to reflect additional cash to cover up
shortage.