The Conceptual Framework for Financial Reporting The New name for Framework 1
Earlier it was known as Framework for the Preparation and Presentation of Financial Statements 2
This presentation is based on Framework prescribed by International Accounting standards Board ( IASB ) as of January 1, 2011 3
Framework Sets out the concepts that underlie the preparation and presentation of financial statements for external users. 4
Framework also assists The Board In: the development of future International Accounting Standards and in its review of existing International Accounting Standards; promoting harmonisation of regulations, accounting standards and procedures by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards; 5
Conceptual Framework Deals with (a) the objective of financial reporting; (b) the qualitative characteristics of useful financial information; (c) the definition, recognition and measurement of the elements from which financial statements are constructed; and (d) concepts of capital and capital maintenance. 6
Framework Not a standard Still Important Neither Framework is a standard Nor does it override any standard In case of Conflict between Framework & Standards The Standards Prevail Still Framework s importance is recognised like this For Example IAS 2.. > 7
International Accounting Standard 2 Inventories (IAS 2) is set out in paragraphs 1 42 and the Appendix. All IASB. IAS 2 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. 8
Framework Applies to : All commercial, industrial and business reporting entities, whether in the public or the private sectors. Not applied to Non-Profit Organizations. 9
Reference of Framework in IAS 8 In the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is: (a)relevant to the economic decision-making needs of users; and (b) reliable, in that the financial statements: (i) represent faithfully the financial position, financial performance and cash flows of the entity; (ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form; (iii) are neutral, ie free from bias; (iv) are prudent; and (v) are complete in all material respects. (Para IAS 8.10) 10
Key Reference : IAS 8 In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements in IFRSs dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. 11
Fair Presentation 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 1.15) 12
Framework Deals with : (a) the objective of financial statements; (b) the qualitative characteristics that determine the usefulness of information in financial statements; (c) the definition, recognition and measurement of the elements from which financial statements are constructed; and (d) concepts of capital and capital maintenance. 13
Objective of General Purpose Financial Reporting * : - is to provide information about the Financial position Statement of Financial Position. Performance - Statement of Comprehensive Income Changes in financial position of an entity Cash Flow Statement. 14
Fundamental Qualitative Characteristics Relevance & Faithful Presentation Thus, Replacing age old Content Reliable Presentation Understandability Relevance Comparability 15
Enhancing qualitative characteristics Comparability, Verifiability, Timeliness and Understandability ( CU @VT) are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. 16
These are too replaced Qualitative Characters Reliability comprises : representational faithfulness, substance over form, completeness, neutrality and prudence. 17
True & Fair? The Framework does not specifically include a true and fair requirement, but says that application of the specified qualitative characteristics should result in statements that present fairly or are true and fair. 18
IAS 1, Presentation of Financial Statements, as revised in 2007, states that financial statements are a structured representation of the financial position and financial performance of an entity (whose) objective is 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. 19
It further states that fair presentation requires faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria set out in the Framework.The application of IFRS, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. Of Such a great importance are the definitions of assets and liabilities. 20
Materiality The relevance of information is affected by the nature and materiality, though In some cases, the nature of information alone is sufficient. In a way, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful. 21
Materiality Materiality also need to be given consideration in assessing whether an item meets these criteria and therefore qualifies for recognition in the financial statements. 22
Framework Defines Elements The elements directly related to the measurement of financial position in the balance sheet are : Assets, liabilities and equity. The elements directly related to the measurement of performance in the income statement are : Income and expenses. In assessing the definition of an asset, liability or equity, consider its underlying substance and economic reality and not merely its legal form. 23
Framework Defines Elements (a) 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. (b) 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. (c) Equity is the residual interest in the assets of the entity after deducting all its liabilities. 24
Framework Defines Elements (a) 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. (b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. 25
What is Recognition? Is the process of incorporating in the SOFP or income statement an item that meets the definition of an element and satisfies the criteria for recognition set out in paragraph. 26
When to Recognise? An item that meets the definition of an element should be recognised if: (a)it is probable that any future economic benefit associated with the item will flow to or from the entity; and (b) the item has a cost or value that can be measured with reliability. 27
What are the Fundamental Assumptions? 28
Underlying Assumptions ONLY Going Concern Consistency and Accruals are addressed by IAS 1 (Para 45) 29
Underlying Assumptions However, Framework does talk of Comparability in para 39, (rather than mere uniformity) which is more relevant & reliable. 30
Measurement of the elements of financial statements- How Much? Measurement is the process of determining the monetary amounts - - at which the elements of the financial statements are to be recognised. This involves the selection of the particular basis of measurement. 31
Types of Measurement Bases Historical Cost Current Cost Realisable (settlement) value. Present value. Mostly Historical Cost method is followed 32
With Best Wishes 33