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Session 2: Conceptual Framework
Conceptual
Framework
Session 2
AC3091: Financial Reporting
o
Learning Objectives
Define a conceptual framework
Identify the main efforts by the US, IASC and

the UK to introduce a conceptual framework
Describe the objectives of financial reporting

as per the conceptual framework
Define assets and liabilities as suggested by

these frameworks
Explain and describe recognition and

measurement
Conceptual Framework
sets out the concepts that underlie the

p
and p
of financial
statements for external users [IFRS]
sets out the principles that should underlie

the preparation of financial statements [ASB]
coherent system of interrelated objectives and

fundamental concepts that prescribes the
nature, function, and limits of financial
accounting and reporting [FASB]
Rationale for Conceptual Framework

o
Facilitate decisions on controversial accounting

issues
Clear
basis for reaching conclusions that those with vested

interests would find it hard to resist
Provide a common framework of reference on

t
Basis
for resolving accounting disputes
Reduce the need for many d

on specific issues
Fundamental
principles need not be repeated in standards
Includes guidance on the following [IFRS]:

Objective of financial reporting
o Qualitative characteristics of useful financial
information
o Definition, recognition and measurement of the
elements from which financial statements are
constructed
o Concepts of capital and capital maintenance
o
Advantages
Standardised accounting practice avoids the

development of accounting standards on a patchwork
basis
Ease in interpreting information in financial reports
prepared in conformity to framework
Preparers of financial statements have some guidance
regarding topics not covered in accounting standards
Less open to criticism of yielding to external pressure
when there is conflict between user groups
Some standards may concentrate on profit or loss
whereas some may concentrate on valuation of net assets
Disadvantages
Inability to satisfy needs of all users of financial

statements and information
Need for variety of standards for different purposes
due to diversity of user requirements
Not necessarily easier to prepare and implement
standards prescribed
Does not eliminate the need for judgment and
ensuing differences in opinion or interpretation
US FASB
Concept
Statements
(SFAC)
SFAC 4, 5,
6, 7, 8
UK ASB
Statement
of
Principles
for
Financial
Reporting
(SOP)
IASC
Conceptual
Framework
for
Financial
Reporting
Elements of Financial Statements
Transactions & other events grouped into

broad classes according to their economic
characteristics [IFRS]
Building blocks with which financial

statements are constructedthe classes of
items that financial statements comprise
[FASB]
10

Financial Position
(resources & claims
to resources)
Assets
Liabilities
Equity
Performance
(changes in
resources & claims)
Income
Expenses
11
Assets
o
r
p
b
controlled by the entity as a result of

and from which future e
are expected to flow to the entity [IFRS]
probable future economic benefits obtained or

controlled by a particular entity as a result of past
transactions or events [FASB]
12
Liabilities
o
p
of the entity arising from past
events, the settlement of which are expected to
result in o
from the entity of resources
embodying e
[IFRS]
probable future sacrifices of economic benefits

arising from present obligations of a particular
entity to transfer assets or provide services to other
entities in the future as a result of past transactions
or events [FASB]
13
Equity
o
r
in the assets of the entity
after deducting all its liabilities [IFRS/FASB]
14
Income [IFRS]
I
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
o Includes revenue and gains
o
Revenue:
arises from delivering or producing goods,

rendering services, or other activities that constitute the
entitys ongoing major or central operations.
Gain: all other transactions and other events and
circumstances affecting the entity except those that result
from revenues or investments by owners [FASB]
15
Expenses [IFRS]
D
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
o Includes losses
o
Loss:
arises from peripheral or incidental transactions of an

entity and from all other transactions and other events and
circumstances affecting the entity except those that result
from expenses or distributions to owners [FASB]
16
Recognition of elements [IFRS]
Probable flow
of economic
benefits
Reliable
measurement
of cost or
value
Recognition
in Financial
Statements
Probability of future economic benefits

Degree
of uncertainty that is judged based on the

environment in which entity operates in ad evidence
Reliability of measurement
Reasonable
estimate of cost or value
17

Element
Criteria
Asset
Probable inflow of future economic

benefits to entity
Cost or value can be measured reliably
Liabilities
Probable outflow of future economic

benefits from entity
Settlement of present obligation
Amount can be measured reliably
Income
Increase in future economic benefits

Increase in asset or decrease in liability
Expenses
Decrease in future economic benefits

Decrease in asset or increase in liability
Financial
Statement
Statement of
Financial Position
Statement of
Profit or Loss &
Other
Comprehensive
Income
18
Recognition of elements [ASB]

o
If a transaction or other event has created a new

asset or liability or added to an existing asset or
liability, that effect will be recognised if:
sufficient evidence
exists that the new asset or liability has

been created or that there has been an addition to an existing
asset or liability; and
the new asset or liability or the addition to the existing asset
or liability can be measured at a monetary amount with
sufficient reliability. [SOP]
19
Recognition of elements [FASB]

o
Four fundamental recognition criteria:

Item
meets definition of an element

relevant attribute measurable with sufficient reliability
Relevant and capable of making a difference in user
decisions
Reliable and representationally faithful, verifiable and
neutral [SFAC5]
Has
20
Measurement of elements [IASB]
Assets recorded at the amount of cash or

cash equivalents paid or fair value of
consideration
Liabilities recorded at proceeds received
in exchange for the obligation
Assets carried at amount of cash or cash

equivalents that would have been paid if
same item acquired currently
Liabilities carried at cash or cash
equivalents that would be required to settle
the obligation currently
10
21
Measurement of elements [IASB]

Assets recorded at the amount of cash
or cash equivalents that could be
obtained by selling an asset
Liabilities recorded at amount of cash
or cash equivalents paid to satisfy
liabilities
Current estimate of present discounted

value of future net cash flows
22
Measurement of elements [FASB SFAC5]

Historical cost
o Current cost
o Current market value
o Net realizable (settlement) value
o
Present (or discounted) value of future cash flows
11
23
IAS 1: Presentation of Financial

Statements
Covers the form and content of financial

statements, with main components as follows:
a)
b)
c)
d)
e)
f)
Statement of Profit or Loss and Other Comprehensive

Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to Financial Statements
a statement of financial position as at the beginning of
the earliest comparative period when an entity applies
an accounting policy retrospectively or makes a
retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial
statements.
24

Statements
Points to note:
An entity whose financial statements comply with
IFRSs shall make an explicit and unreserved
statement of such compliance in the notes
o When preparing financial statements, management
shall make an assessment of an entitys ability to
continue as a going concern
o
Financial
statements prepared on a going concern basis

unless management either intends to liquidate the entity or
to cease trading, or has no realistic alternative but to do so
12
25

Statements
Points to note:
o
Entities are to prepare financial statements as least

annually. If the end of the reporting period is
changed, entity should disclose:
a)
b)
Reason why a period other than one year is used;

Fact that comparative figures are not in fact comparable
Usefulness of financial statements is diminished in

event of long delay in publication
Specific deadlines
set by local legislation and market

regulation for submission of statements on timely basis
26
IAS 1: Presentation of Financial Statements
Statement of Profit or Loss & Other Comprehensive Income
Minimum disclosure on face of statement

include:
o
Revenue
Finance costs
o Share of profit and losses of associates and joint
ventures accounted for using the equity method
o Single amount comprising the total of (i) the posttax profit or loss of discontinued operations and (ii)
the post-tax gain or loss recognised on the disposal
of the assets or disposal group(s) constituting the
discontinued operation
o
13
27
Minimum disclosure on face of statement

include (continued):
Tax expense
o Profit or loss
o
o Disclosure on
face of statement as allocations

of profit or loss for the period:
o
profit or loss for the period attributable to noncontrolling interests and owners of the parent
total comprehensive income attributable to noncontrolling interests and owners of the parent
28
Separate disclosure either on the face of

statement or in the notes, if material:
write-downs of inventories to net realisable value or
of property, plant and equipment to recoverable
amount, as well as reversals of such write-downs
o restructurings of the activities of an entity and
reversals of any provisions for the costs of
restructuring
o disposals of items of property, plant and equipment
o disposals of investments
o discontinuing operations
o litigation settlements
o other reversals of provisions
o
14
29
Expenses recognised in profit or loss should be

analysed either by:
nature (raw materials, staffing costs, depreciation,

etc.) or
function (cost of sales, selling, administrative, etc).
[IAS 1.99]
If an entity categorises by function, then

additional information on the nature of
expenses at a minimum depreciation,
amortisation and employee benefits expense
must be disclosed.
30
Source: IFRS Foundation - Guidance on Implementing IAS 1 Presentation of Financial Statements
15
31
32
Minimum disclosure on face of statement include:

o
o
o
o
o
o
o
o
o
o
o
o
Property, plant & equipment

Investment property
Intangible assets
Inventories
Trade and other receivables
Cash & cash equivalents
Trade & other payables
Current tax liabilities & assets
Deferred tax liabilities & assets
Investments under the equity method
Non-controlling interests
Any other line items that is necessary for understanding the
entitys financial position
16
33
Criteria for separate presentation in statement:

Nature and liquidity of assets and their materiality
o Function within the entity
o Amounts, nature and timing of liabilities
o
Current/non-current distinction
o Entity
must present current and non-current assets as

separate classifications
o Only if a presentation based on the order of liquidity
provides information that is reliable and more relevant may
the current/non-current split be omitted.
o Entity is to disclose any portion of asset or liability which is
expected to be recovered or settled after more than 12
months
34

Assets which are:
Expected to be realised in normal course of

entitys operating cycle; or
Held primarily for trading purposes or for short term and expected
to be realised within 12 months of balance sheet date; or
Is cash and cash equivalent
CURRENT ASSETS
17
35

Liabilities which are:
Expected to be discharged in normal course of

entitys operating cycle; or
Held primarily for trading purposes or for short term and due to be
settled within 12 months of balance sheet date; or
Entity has no right to defer settlement for at least 12 months after

the end of the reporting period.
CURRENT LIABILITIES
36
18
37
Statement of Changes in Equity
Source: IFRS Foundation - Guidance on Implementing IAS 1 Presentation of Financial

Statements
38
19
39
Notes to the financial statements

o
Performs the following functions:

Provide
information about basis on which financial

statements were prepared
Disclose any information, not shown elsewhere in the
statements, which is required by IFRS
Show any additional information relevant to understanding
which is not provided elsewhere in the financial statements
o
Amplifies information in financial statements by:

Giving
detailed analysis or breakdown of figures

narrative information explaining the figures
Giving additional information
Providing
40
Notes to the financial statements

o
Recommended order of notes [IASB]:

Statement
of compliance with IFRS

of measurement bases & accounting policies
Supporting information for items in financial statements
Other disclosures (e.g. contingent liabilities , non-financial
disclosures etc.)
Statement
Amplifies information in financial statements by:

Giving
detailed analysis or breakdown of figures

Providing narrative information explaining the figures
Giving additional information
20
41
Questions
What are conceptual frameworks? Discuss the main

arguments in favour of and against a conceptual
framework
(UOL 2009 ZA Q6a)
Explain what is meant by conceptual framework.

What issues should be considered when drawing up a
conceptual framework for financial reporting?
(UOL 2005 ZA Q6a)
21

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Session 2: Conceptual Framework

Define a conceptual framework

Identify the main efforts by the US, IASC and

Describe the objectives of financial reporting

Define assets and liabilities as suggested by

Explain and describe recognition and

Session 2: Conceptual Framework

sets out the concepts that underlie the

sets out the principles that should underlie

coherent system of interrelated objectives and

Rationale for Conceptual Framework

Facilitate decisions on controversial accounting

basis for reaching conclusions that those with vested

Provide a common framework of reference on

for resolving accounting disputes

Reduce the need for many d

principles need not be repeated in standards

Session 2: Conceptual Framework

Includes guidance on the following [IFRS]:

Standardised accounting practice avoids the

Session 2: Conceptual Framework

Inability to satisfy needs of all users of financial

Session 2: Conceptual Framework

Elements of Financial Statements

Transactions & other events grouped into

Building blocks with which financial

Elements of Financial Statements

Session 2: Conceptual Framework

Elements of Financial Statements

controlled by the entity as a result of

probable future economic benefits obtained or

Elements of Financial Statements

probable future sacrifices of economic benefits

Session 2: Conceptual Framework

Elements of Financial Statements

Elements of Financial Statements

arises from delivering or producing goods,

Session 2: Conceptual Framework

Elements of Financial Statements

arises from peripheral or incidental transactions of an

Elements of Financial Statements

Recognition of elements [IFRS]

Probability of future economic benefits

of uncertainty that is judged based on the

estimate of cost or value

Session 2: Conceptual Framework

Elements of Financial Statements

Probable inflow of future economic

Probable outflow of future economic

Increase in future economic benefits

Decrease in future economic benefits

Elements of Financial Statements

Recognition of elements [ASB]

If a transaction or other event has created a new

exists that the new asset or liability has

Session 2: Conceptual Framework

Elements of Financial Statements

Recognition of elements [FASB]

Four fundamental recognition criteria:

meets definition of an element

Elements of Financial Statements

Measurement of elements [IASB]

Assets recorded at the amount of cash or