International Accounting Standards

IAS 4 Framework

Preview
This module looks at:
The
IASC
Framework
for
Preparation
and
Presentation
Financial Statements.

the
of

Objective
To explain the IASC Framework for the
Preparation and Presentation of
Financial Statements.

Purpose and Status

The IASC Framework sets out the concepts
that underlie:

the preparation and

presentation of financial statements for external
users.

Continued- Purpose and Status

The purpose of the Framework is to:

Assist the IASC in setting accounting standards;

Serve as a basis for promoting harmonization of
accounting standards and procedures;
Assist national standard-setters in developing national
standards;
Assist preparers of financial statements in applying
accounting standards;
Assist auditors in forming opinions as to whether financial
statements conform with accounting standards; and
Assist users of financial statements to interpret the
information contained in financial statements.

Continued- Purpose and Status

The Framework is :
not

authoritative and
is not an IAS.
it does not override IAS.

In the event of a conflict between the

Framework and the requirements of a
Standard, the Standard prevails.
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Scope
The Framework deals with:
The objective and elements of general purpose financial
statements;
The qualitative characteristics that determine the
usefulness of information;
The definition, recognition and measurement of the
elements of financial statements; and
Concepts of capital and capital maintenance.

The Framework applies to the financial statements

of all commercial, industrial and business
reporting enterprises.
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Building Blocks of the Framework

Figure 1 is a diagrammatic representation of the building blocks of the IASC Framework.

Figure 1: IASC Framework

1. Financial reporting
2. Reporting entity
3. Objective
4. Qualitative characteristics

5. Elements

6. Basis of 7. Basis of measurement

recognition

8. Techniques of
measurement

9. Financial 10. Performance 11. Finance

position
and investing

12. Compliance
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Continued-Building Blocks
Block 1: Financial Reporting delineates the
boundaries of financial reporting and the
scope of the Framework.

The IASC Framework is concerned with

general-purpose financial statements.

General-purpose financial statements are

intended to meet the information needs of
users not in a position to command the
preparation of reports tailored to their
information needs.
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Continued-Building Blocks
Block 2: Reporting Enterprise concerned
with establishing the criterion for the
determination of those enterprises that
should prepare general-purpose financial
statements.
Reporting enterprise an enterprise for which
there are users who rely on the generalpurpose financial statements as their major
source of information about the enterprise.
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Continued-Building Blocks
Block 3: Objective specifies:
The broad objective that general-purpose
financial statements should seek to serve.
The users of general-purpose financial
statements and
Their information needs.

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Continued-Building Blocks
The IASC Framework specifies the objective
of financial statements as the provision of
information about an enterprises:

financial position,
performance and
changes in financial position.

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Continued-Building Blocks
It identifies the users of general-purpose financial
statements as including:
investors,
employees,
lenders,
suppliers and trade creditors,
customers,
governments and their agencies and
the public.
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Continued-Building Blocks
IAS places emphasis on cash flows.
Financial statements provide information on:

the capability to generate cash;

the timing and
certainty of cash flows.

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Continued-Building Blocks
Block 4: Qualitative Characteristics
identifies qualitative characteristics that
financial information should possess if it is
to achieve the objective of general-purpose
financial statements.

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Continued-Building Blocks
Blocks 5 and 6: Elements Definition and
Recognition
Blocks 5 and 6 of the Framework deal with
the elements of financial statements (assets,
liabilities, equity, income and expenses).

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IASC Framework-Financial Position

The Framework identifies and discusses the
following factors affecting an enterprises
financial position, performance and changes in
financial position:
for financial position:

the economic resources the enterprise controls (that

is, its wealth);
its financial structure;
its liquidity and solvency; and
its capacity to adapt to changes in the environment
in which it operates;
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IASC Framework-Performance &

Changes in Financial Position
for performance:

changes in the economic resources controlled

by the enterprise and variability of its
performance; and

for changes in financial position, the

enterprises investing, financing and
operating activities.
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IASC Framework Underlying

Assumptions

Accrual basis
Going concern
The financial statements are prepared on the accrual
basis of accounting, i.e., the effects of
transactions and other events are recognized
when they occur.
The financial statements are prepared on the
assumption that an enterprise is a going concern
and will continue to be so.

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Qualitative Characteristics of
Financial Statements

Qualitative characteristics attributes that

make the information provided in financial
statements useful to users.
These are:
o relevance;
o reliability;
o understandability; and
o comparability.
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Reliability
Information is reliable when it is free from
material error and bias and can be depended
upon by users to represent faithfully that
which it either purports to represent.
Faithful Representation
To be reliable, information must represent
faithfully the transactions and other events
it either purports to represent.
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Continued-Reliability
Substance Over Form
If information is to be both relevant and reliable,
it is necessary that the substance rather than the
form of transactions or events be reported.

Neutrality
To be reliable, information must be neutral, that
is, free from bias.

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Continued-Reliability
Prudence
Prudence is the inclusion of a degree of caution
in the exercise of judgment when making
estimates under conditions of uncertainty.

Completeness
To be reliable, the information in financial
statements must be complete within the bounds
of materiality and cost.
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Understandability
Information included in financial
statements should be readily
understandable by users

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Comparability
To enable users to compare the financial position,
performance and changes in financial position of
different enterprises or of a single enterprise over
time, the measurement and display of the
financial effect of like transactions and other
events should be carried out in a consistent way:

for different enterprises;

throughout an enterprise; and
over time for an enterprise.
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Constraints on Relevant and

Reliable Information

The IASC Framework identifies the following

constraints on the provision of relevant and reliable
information:

timeliness management may need to balance the

relative merits of timely reporting and the provision of
reliable information;
the balance between benefit and cost the benefits
derived from information should exceed the cost of
providing it; and
the balance between qualitative characteristics a tradeoff between qualitative characteristics is often necessary.

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The Elements of Financial Statements

Assets
Assets are resources controlled by the
enterprise and from which future economic
benefits are expected to flow to the
enterprise.

Liabilities
Liabilities are present obligations of the
enterprise arising from past events.
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Continued-Elements of...
Assets and liabilities: recognition criteria
Items are to be recognized as assets or liabilities (or as
income and expenses) if:

it is probable that any future economic benefit associated

with the item will flow to or from the enterprise, and
the item has a cost or value that can be measured with
reliability.

The probability of future economic benefits refers to

the degree of uncertainty that the future economic
benefits associated with the item will flow to or from
the enterprise.
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Continued-Elements of...
Equity
Equity the residual interest in the assets of the enterprise
after deducting all its liabilities.

Income
Income increases in economic benefits in the form of
increases of assets or decreases of liabilities that result in
an increase in equity, other than those relating to
contributions from equity participants.

Revenue
Revenue arises in the course of the ordinary activities of
an enterprise, including sales, fees, interest, dividends,
royalties and rent.

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Continued-Elements of...
Expenses
Expenses decreases in economic benefits
in the form of decreases in assets or
increases in liabilities that result in a
decrease in equity, other than those
relating to distributions to equity
participants.
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Continued-Elements of...
Gains represent other items that meet the
definition of income and may, or may not,
arise in the course of the ordinary activities of
an enterprise (e.g. gains on the disposal of
non-current assets).

The definition of expenses encompasses

losses as well as those expenses that arise
in the course of the ordinary activities of
the enterprise.
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Continued-Elements of...
Losses represent other items that meet the
definition of expenses and may, or may not,
arise in the course of the ordinary activities of
the enterprise.
Income and expenses: recognition criteria the
same as for the recognition of assets and
liabilities.
Income is recognized when an increase in future economic
benefits has arisen.
Expenses are recognized when a decrease in future
economic benefits has arisen.

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Recognition of the Elements of

Financial Statements

Recognition the process of incorporating an

item that meets the definition of an element
in the balance sheet or income statement.
An item meeting the definition of an element
should be recognized if:

it is probable that the future economic benefits

associated with the item will flow to or from the
enterprise; and
the item has a cost or value that can be reliably
measured.

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Continued-Recognition
An item meeting the definition of an element
but failing to meet the above recognition
criteria may:

warrant disclosure in the notes when

knowledge of the item is thought to be
relevant to users and/or
qualify for recognition at a later date as a
result of subsequent events or circumstances.
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Blocks 7 and 8: Measurement

The measurement bases identified are:

historical cost;
current cost;
realizable (selling) value; and
present value.

Most enterprises adopt an historical cost basis and

often combine this with other measurement bases.
For example, inventories are usually carried at the
lower of cost and net realizable value.
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Blocks 9 and 12: Display of

Financial Information
Users of financial information can make
better decisions if they are provided with
information that focuses on:

the financial position,

performance and
changes in financial position of the enterprise.

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* THE END *

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