lecture 1 conceptual framework (1)

8/11/2019 Lecture 1 Conceptual Framework (1)

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International Financial Reporting Standards

The views expressed in this presentation are those of the presenter,not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Conceptual Frameworkfor Financial Reporting

Joint World Bank and IFRS Foundation trainthe trainers workshop hosted by the ECCB,30 April to 4 May 2012

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The views expressed in this presentation are those of the presenter, notnecessarily those of the IASB or IFRS Foundation.

Adopted by S. ShorterLecturer - McGrath HighSchool


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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK . www.ifrs.org

Role of the Conc eptu al Fram ew ork

Conceptual Framework sets out agreed concepts thatunderlie financial reporting

objective, qualitative characteristics, elements, recognitionand measurement concepts.

IASB uses Conceptual Framework to set standards enhances consistency across standards enhances consistency over time as Board members change provides benchmark for judgments

Preparers use Conceptual Framework to developaccounting policies in the absence of specific standard orinterpretation

IAS 8 hierarchy

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Conceptual Framework for FinancialReporting

DISTRIBUTEHAND OUTS


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The Framework has three differentlevels,comprised of:

The first level consists of objectives . The second level explains financial elements and

characteristics of information .

The third level incorporates recognition andmeasurement criteria .

Overview of the ConceptualFramework


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55Objective of financial reporting

Provide financial information about the reporting entitythat is useful to existing and potential investors, lendersand other creditors in making decisions.

Investors, lenders and other creditors expectationsabout returns depend on their assessment of theamount, timing and the prospects for future net cashinflows to the entity.



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66Qualitative characteristics

If financial information is to be useful, it must berelevant and faithfully represent what it purportsto represent (ie fundamental qualities).

The usefulness of financial information is

enhanced if it is comparable, verifiable, timelyand understandable



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77Fundamental qualitative characteristics

Relevance : capable of making a difference in usersdecisions. Ingredients of relevant information are:

Timeliness Predictive value Feedback value

Faithful representation : faithfully represents thephenomena it purports to represent

completeness (depiction including numbers and words) neutrality (unbiased) free from error (ideally)Note: faithful representation replaces reliability



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88Enhancing Qualitative Characteristics

Comparability : the similar measurement andreporting for different enterprises.

Verifiability : knowledgeable and independentobservers could reach consensus, but notnecessarily complete agreement, that a depiction isa faithful representation

Timeliness : having information available todecision-makers in time to be capable of influencingtheir decisions

Understandability : Classify, characterise, andpresent information clearly and concisely



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999Pervasive constraint

Reporting financial information imposes costs, and it isimportant that those costs are justified by the benefits ofreporting that information.

Benefits include more efficient functioning of capital markets and alower cost of capital for the economy.

Costs include collecting, processing, verifying and disseminatingfinancial information and the costs of analysing and interpreting theinformation provided.

In applying the cost constraint, the IASB assesses whetherthe benefits of reporting particular information are likely to

justify the costs incurred to provide and use that information.Those assessments are usually based on a combination ofquantitative and qualitative information.



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101010Summary

Reporting financial information that is relevant andfaithfully represents what it purports to representhelps users to make decisions with moreconfidence (ie financial information must possessthe fundamental qualitative characteristics).

IFRS requirements must be cost-beneficial Applying the enhancing qualitative

characteristics is an iterative process that doesnot follow a prescribed order. Sometimes, one

enhancing qualitative characteristic may have tobe diminished to maximise another qualitativecharacteristic.



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1111Elements

Asset : Resource controlled as a result of past events and

from which future economic benefits are expected to flow Liability : Present obligation arising from past events, the

settlement of which is expected to result in outflow ofresources embodying economic benefits

Equity : Assets minus liabilities Income (expense ): Increases (decreases) in economic

benefits during period from inflows or enhancements(outflows or depletions) of assets (liabilities) or decreases(incurrences) of liabilities from in increases (decreases) inequity, other than contributions from (distributions to) equity



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Basic

Assumptions

1. Economicentity 2. Going

concern 3. Monetary

unit 4. Periodicity

Principles

1. Historicalcost2. Revenue

recognition 3. Matching

4. Fulldisclosure

Constraints

1. Cost benefit 2. Materiality3. Industry

practices 4. Conservatism

Recognition and MeasurementCriteria


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13Recognition

Accrual basis of accounting recognise element (eg asset) when satisfy

definition and recognition criteria

Recognise item that meets element definition when probable that benefits will flow to/from the entity has cost or value that can measured reliably



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14Measurement concepts 14

Measurement is the process of determining monetaryamounts at which elements are recognised andcarried. (CF.4.54)

To a large extent, financial reports are based onestimates, judgements and models rather than exactdepictions. The Framework establishes the conceptsthat underlie those estimates, judgements and models

(CF.OB11) IASB guided by objective and qualitative

characteristics when specifying measurements. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


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See financial reports Assignment (see next slide)

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Assignment

Past paper question. Q. 1, 2013a. Outline the structure of the Conceptual Frameworkof Accounting. (6 marks)

b. State THREE reasons why the ConceptualFramework of Accounting was developed by theInternational Accounting Standards Board (IASB).

(3 marks)

lecture 1 conceptual framework (1)

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