FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

AC 1 & 2 / BAC 111 AC 4 & 5

FRAMEWORK

 Assist the IASB in the development of future IFRS and the review of existing IAS. Assist national standard-setting bodies in developing their own national standards. Assist preparers of financial statements in compliance with GAAP. Assist auditors in expressing opinion on the FS. Assist users in interpreting IFRS financial statements and with the issues not covered by standards. Assist others who are interested in the IFRSs.

PURPOSE AND STATUS OF THE FRAMEWORK

 Describes the objective and basic qualitative concepts underlying IFRS financial statements. Is the priority source for preparers or auditors seeking a standard or interpretation The FRAMEWORK is NOT * an IASB standard * a principle to be applied.

FRAMEWORK: SCOPE
The objective and elements of financial statements. Underlying assumptions and qualitative characteristics of financial reporting. Definition, recognition and measurement of the elements of financial statements: * assets and liabilities * income and expense The concepts of capital and capital maintenance

OBJECTIVE OF FINANCIAL STATEMENTS

To be memorized by students in AC 1 & 2 / BAC 111 / AC 4 & 5

 To provide information about

* financial position * performance and * changes in financial position of an enterprise

that is useful to a wide range of users in making economic decisions.

THE GENERAL PURPOSE FINANCIAL STATEMENTS / REPORTS (GPFSRs)

 Produced at least annually For a wide range of external users who rely on the GPFSRs to meet their information needs. Primary users: investors Secondary users: lenders, suppliers or trade creditors, employees, customers, government and their agencies, the general public Information needs: include forecasting economic decisions and some non-financial information

RESPONSIBILITY FOR AND OBJECTIVE OF FINANCIAL STATEMENTS

Primary responsibility on FS rests with management. The objective is to provide information* about the entitys financial position, changes in it, and performance. * that is useful to users
- primarily for economic decision making - secondarily for recording past stewardship.

FORMS OF FINANCIAL STATEMENTS

 BALANCE SHEET (STATEMENT OF FINANCIAL POSITION: summarizes financial position INCOME STATEMENT: summarizes financial performance
STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOW NOTES & SUPPLEMENTARY SCHEDULES

STATEMENT OF FINANCIAL POSITION / BALANCE SHEET

Financial Position

 Addresses assets owned, amounts owed, residual equity interest in net assets. Is affected by resources controlled, financial structure: liquidity, solvency and adaptability.

INCOME STATEMENT
Financial Performance

Summarizes the entitys ability to earn profit on the resources invested in it. Helps forecasting cash flows.

CASH FLOW STATEMENT

Summarizes financial position changes involving cash (and cash equivalents) flowing through its Operations Investments Financing

USERS OF FINANCIAL STATEMENTS

SUPPLIERS & OTHER TRADE CREDITORS

INVESTORS

LENDERS FINANCIAL STATEMENTS

CUSTOMERS

EMPLOYEES

GOVERNMENT & ITS AGENCIES

PUBLIC

UNDERLYING ASSUMPTIONS

UNDERLYING ASSUMPTIONS
ACCRUAL
Determination of periodic income and financial position depends on measurement of assets and liabilities and changes in them as the changes occur rather than simply when cash is received or paid Framework recognizes when events occur, not when cash changes hands

GOING CONCERN
An accounting entity is viewed as continuing in operation in the absence of evidence to the contrary. Framework assumes cash flow from operations not from liquidation sales

UNDERLYING ASSUMPTIONS
Accounting Entity Time Period Measurement of economic resources and obligations Measurement in terms of money Exchange Price Approximation Judgment Materiality Substance over form General purpose financial statements

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

The Framework identifies four principal qualitative characteristics of financial statements: * Understandability * Relevance * Reliability * Comparability

UNDERSTANDABILITY
PREDICTIVE VALUE

RELEVANCE

FEEDBACK VALUE MATERIALITY

FAITHFUL REPRESENTATION

FAIR VALUE / FAIR PRESENTATION

RELIABILITY

SUBSTANCE OVER FORM

NEUTRALITY PRUDENCE COMPLETENESS

COMPARABILITY

CONSTRAINTS: Timeliness Balance between benefits and costs Balance between qualitative objectives

UNDERSTANDABILITY

Involves assuming reasonable business / economic / accounting knowledge and diligent study of the information. back

RELEVANCE
Includes components of materiality and timeliness next

MATERIALITY
Information is material if the response or misstatment could influence the economic decisions of users. Immaterial information lacks relevance. Several IFRSs contain specific guidance on materiality. No overall quantitative measure.

TIMELINESS

Information must be provided to users within the time frame in which it is most likely to have on their decisions. back

RELIABILITY: includes
Faithful Representation- it is important to represent accurately the information. Substance over Form transactions should reflect the economic substance, rather than the legal form e.g. finance leases. Neutrality information must be decision neutral Prudence involves incorporating a degree of caution to ensure: * assets and revenues are not overstated * liabilities and expenses are not understated. Completeness disclosure of significant information needed for decision making and material errors corrected.

COMPARABILITY
Includes comparability over * time * different entities intercomparability * consistency, the enabling principle for comparability

CONSTRAINTS ON ATTAINMENT OF QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

 Timeliness Benefit Cost Balance

the benefit of providing the information should exceed the cost of providing the information.

Balance Between Qualitative Objectives

Relevance vs. Reliability * the two are often traded-off, yet * each are equally as important as the overriding priority when preparing financial statements.

Fair Presentation

ELEMENTS OF FINANCIAL STATEMENTS

Assets Liabilities Equity Income (includes revenues and gains) Expenses (includes operating expenses and losses)

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) ASSETS: controlled economic resources expected to provide future benefits. LIABILITIES: a present obligation requiring economic resources to settle. EQUITY: the residual interest in assets minus liabilities.

DEFINITIONS: ASSETS, LIABILITY, AND EQUITY

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 LIABILITY

a present obligation of the entity arising from past events Settlement of which is expected to results in an outflow of resources embodying economic benefits.
EQUITY

Residual interest in the assets of the entity after deducting all its liabilities.

ASSETS and LIABILITIES: recognition criteria:

Probability and reliably measured

ASSETS

LIABILITY

When it is probable that When it is probable that future economic there will be an outflow benefits will flow to the of resources to settle entity, and the present obligation. When cost or value of When the outflow can the asset can be reliably be reliably measured. measured.
EXCEPTION: executory contracts EXCEPTIO

DEFINITION OF INCOME AND EXPENSES

INCOME Increases in economic benefits during the accounting period * direct inflows * enhancement of an asset

EXPENSES

Decreases in economic benefits during the accounting period * direct outflows * disposition of assets * increases in liabilities * incurrence of liabilities Result in increases in Result in decreases in equity other than those equity other than those relating to contributions relating to distributions from equity participants to equity participants.

INCOME AND EXPENSE Recognition criteria

INCOME When an increase in future economic benefits can be reliably measured Recognition occurs simultaneously with recognition of an increase in an asset or a decrease in a liability.

EXPENSES When a decrease in future economic benefits can be reliably measured. Recognition occurs simultaneously with recognition of an increase in a liability or a decrease in asset.

Matching concept

MEASUREMENT OF ELEMENTS AND CAPITAL MAINTENANCE CONCEPTS

MEASUREMENT BASES

CAPITAL MAINTENANCE CONCEPTS

Historical cost Current cost Realizable (settlement) value Present value

Financial capital maintenance Physical capital maintenance

SUMMARY OF SIGNIFICANT PROVISIONS

 The Framework is an aid to drafting new or revised IFRSs, PFRSs or PASs. The Framework is a point of reference for preparers, auditors, and or users of financial statements regarding preparation, audit, and understanding the financial statements. The Framework is a key point of reference for preparers of FS in the absence of specific guidance. IFRSs / PFRSs should be accounted for in accordance with their substance, rather than only their legal form. Transactions with shareholders shsould be considered carefully in determining the appropriate accounting standard.

REFERENCE
Retooling seminar materials sponsored by UE in 2008 Guest Speaker: Dean Ester Ledesma ALCALA. LEDESMA.LUPISAN

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