Iasb framework

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Iasb framework

  1. 1. 2-1 IASB conceptual FRAMEWORKIASB conceptual FRAMEWORKIASB conceptual FRAMEWORKIASB conceptual FRAMEWORK
  2. 2. 2-2 1. Describe the usefulness of a conceptual framework. 2. Understand the objectives of financial reporting. 3. Identify the qualitative characteristics of accounting information. 4. Define the basic elements of financial statements. 5. Describe the basic assumptions of accounting. 6. Explain the application of the basic principles of accounting. 7. Describe the impact that constraints have on reporting accounting information. Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
  3. 3. 2-3 Conceptual Framework First Level: Basic Objectives Second Level: Fundamental Concepts Third Level: Recognition and Measurement Need Development Overview Qualitative characteristics Basic elements Basic assumptions Basic principles Constraints Summary of the structure Conceptual Framework ForConceptual Framework For Financial AccountingFinancial Accounting Conceptual Framework ForConceptual Framework For Financial AccountingFinancial Accounting
  4. 4. 2-4 The Need for a Conceptual Framework  To develop a coherent set of standards and rules.  To solve new and emerging practical problems.  The evaluation of existing ones. Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
  5. 5. 2-5 It is defined as: A constitution, a coherent system of interrelated objectives and fundamentals. A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements. Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
  6. 6. 2-6 A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework. Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
  7. 7. 2-7 Advantages and DisadvantagesAdvantages and DisadvantagesAdvantages and DisadvantagesAdvantages and Disadvantages AdvantagesAdvantages  A consistent conceptual base.A consistent conceptual base.  A consistent approach for financialA consistent approach for financial statements.statements.  Avoids fire-fighting approach to settingAvoids fire-fighting approach to setting standards.standards. DisadvantagesDisadvantages  Different users have different needs.Different users have different needs.  Different users may require differentDifferent users may require different conceptual bases.conceptual bases.  It may hamper the development forIt may hamper the development for preparation of standards.preparation of standards.
  8. 8. 2-8 The framework is broken down into seven sections as follows. Development of Conceptual FrameworkDevelopment of Conceptual FrameworkDevelopment of Conceptual FrameworkDevelopment of Conceptual Framework No.1 - Objectives of Financial Reporting. No.2 - Qualitative Characteristics of Accounting Information. No.3 - Elements of Financial Statements. No.4- Underlying Assumptions. No.5 - Recognition of the elements of Financial Statements. No.6 - Measurements of the elements of Financial Statements. No.7 - Concepts of Capital and Capital Maintenance. .
  9. 9. 2-9  First Level = Basic Objectives  Second Level = Qualitative Characteristics and Elements  Third Level = Recognition, Measurement, and Disclosure Concepts. Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework Overview of the Conceptual Framework
  10. 10. 2-10 LO 2 Illustration 2-7 Conceptual Framework for Financial Reporting
  11. 11. 2-11 What are the Statements of Financial Accounting Concepts intended to establish? a. Generally accepted accounting principles in financial reporting by business enterprises. b. The meaning of “Present fairly in accordance with generally accepted accounting principles.” c. The objectives and concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of sources of generally accepted accounting principles. Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework Review
  12. 12. 2-12 First Level: Basic Objective of FinancialFirst Level: Basic Objective of Financial StatementsStatements First Level: Basic Objective of FinancialFirst Level: Basic Objective of Financial StatementsStatements Objective of general-purpose financial reporting is: To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.
  13. 13. 2-13 According to the IASB conceptual framework, the objectives of financial reporting for business enterprises are based on? a. Generally accepted accounting principles b. Reporting on management’s stewardship. c. The need for conservatism. d. The needs of the users of the information. First Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic Objectives Review
  14. 14. 2-14 “The IASB identified the Qualitative Characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.” Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts Qualitative Characteristics
  15. 15. 2-15 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Illustration 2-2 Hierarchy of Accounting Qualities
  16. 16. 2-16 Illustration 2-7 Conceptual Framework for Financial Reporting RelevanceRelevanceRelevanceRelevance
  17. 17. 2-17 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Relevance To be relevant, accounting information must be capable of making a difference in a decision.
  18. 18. 2-18 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Relevance Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future.
  19. 19. 2-19 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Relevance Relevant information also helps users confirm or correct prior expectations.
  20. 20. 2-20 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Relevance Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.
  21. 21. 2-21 Illustration 2-7 Conceptual Framework for Financial Reporting Faithful RepresentationFaithful RepresentationFaithful RepresentationFaithful Representation
  22. 22. 2-22 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Faithful representation means that the numbers and descriptions match what really existed or happened.
  23. 23. 2-23 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Completeness means that all the information that is necessary for faithful representation is provided.
  24. 24. 2-24 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Faithful Representation Neutrality means that a company cannot select information to favor one set of interested parties over another.
  25. 25. 2-25 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Fundamental Quality—Faithful Representation An information item that is free from error will be a more accurate (faithful) representation of a financial item.
  26. 26. 2-26 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Enhancing Qualities Information that is measured and reported in a similar manner for different companies is considered comparable.
  27. 27. 2-27 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Enhancing Qualities Verifiability occurs when independent measurers, using the same methods, obtain similar results.
  28. 28. 2-28 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Enhancing Qualities Timeliness means having information available to decision- makers before it loses its capacity to influence decisions.
  29. 29. 2-29 Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics Enhancing Qualities Understandability is the quality of information that lets reasonably informed users see its significance.
  30. 30. 2-30 LO 5 Illustration 2-7 Conceptual Framework for Financial Reporting Basic ElementsBasic ElementsBasic ElementsBasic Elements
  31. 31. 2-31 Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements.
  32. 32. 2-32 Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements The elements directly related to financial position (balance sheet) are: Assets Liabilities Equity
  33. 33. 2-33 Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements The IASB elements and their definitions are as follows. 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. Liabilities. 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. Liabilities may be legally enforceable via a contract or law, but need not be, i.e., they can arise due to normal business practice or customs Equity. A residual interest in the assets of the entity after deducting all its liabilities.
  34. 34. 2-34 Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements The elements directly related to performance (income statement) are: Income Expenses
  35. 35. 2-35 Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Second Level: Basic Elements of FinancialSecond Level: Basic Elements of Financial StatementsStatements Income. Increases in economic benefits that result in increases in equity (other than those related to contributions from shareholders). Income includes both revenues (resulting from ordinary activities) and gains. Expenses. Decreases in economic benefits that result in decreases in equity (other than those related to distributions to shareholders). Expenses includes losses that are not the result of ordinary activities
  36. 36. 2-36 Review: Second Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic Elements According to the IASB conceptual framework, an entity’s revenue may result from a. A decrease in an asset from primary operations. b. An increase in an asset from incidental transactions. c. An increase in a liability from incidental transactions. d. A decrease in a liability from primary operations.
  37. 37. 2-37 Illustration 2-7 Conceptual Framework for Financial Reporting Third Level: Recognition and MeasurementThird Level: Recognition and MeasurementThird Level: Recognition and MeasurementThird Level: Recognition and Measurement The FASB sets forth most of these concepts in its Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.”
  38. 38. 2-38 Economic Entity – company keeps its activity separate from its owners and other businesses. Going Concern - company to last long enough to fulfill objectives and commitments. Monetary Unit - money is the common denominator. Periodicity - company can divide its economic activities into time periods. Accrual Basis - Third Level: Basic AssumptionsThird Level: Basic AssumptionsThird Level: Basic AssumptionsThird Level: Basic Assumptions
  39. 39. 2-39 Recognition of the elements of FinancialRecognition of the elements of Financial statementsstatements Recognition of the elements of FinancialRecognition of the elements of Financial statementsstatements Recognition is the process of incorporating in theRecognition is the process of incorporating in the balance sheet or income statement an item thatbalance sheet or income statement an item that meets the definition of an element and satisfies themeets the definition of an element and satisfies the following criteria for recognition:following criteria for recognition:  It is probable that any future economic benefitIt is probable that any future economic benefit associated with the item will flow to or from theassociated with the item will flow to or from the entity; andentity; and  The item's cost or value can be measured withThe item's cost or value can be measured with reliability.reliability.
  40. 40. 2-40 Recognition of the elements of FinancialRecognition of the elements of Financial statementsstatements Recognition of the elements of FinancialRecognition of the elements of Financial statementsstatements  Based on these general criteria:Based on these general criteria:  An asset is recognised in the balance sheetAn asset is recognised in the balance sheet when it is probable that the future economic benefitswhen it is probable that the future economic benefits will flow to the entity and the asset has a cost orwill flow to the entity and the asset has a cost or value that can be measured reliably.value that can be measured reliably.  A liability is recognised in the balance sheetA liability is recognised in the balance sheet when it is probable that an outflow of resourceswhen it is probable that an outflow of resources embodying economic benefits will result from theembodying economic benefits will result from the settlement of a present obligation and the amount atsettlement of a present obligation and the amount at which the settlement will take place can bewhich the settlement will take place can be measured reliably.measured reliably.
  41. 41. 2-41 Recognition of the elements of FinancialRecognition of the elements of Financial statementsstatements Recognition of the elements of FinancialRecognition of the elements of Financial statementsstatements  oo Income is recognised in the income statement when anIncome is recognised in the income statement when an increase in future economic benefits related to an increaseincrease in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can bein an asset or a decrease of a liability has arisen that can be measured reliably.measured reliably.  oo Expenses are recognised when a decrease in futureExpenses are recognised when a decrease in future economic benefits related to a decrease in an asset or aneconomic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measuredincrease of a liability has arisen that can be measured reliably.reliably.
  42. 42. 2-42 Measurement Principle – Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported. Issues:  Historical cost provides a reliable benchmark for measuring historical trends.  NRV  Present Value (Discounted)  Current Cost Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles
  43. 43. 2-43 Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles Illustration 2-5 Timing of Revenue Recognition Revenue Recognition - generally occurs (1) when realized or realizable and (2) when earned. Exceptions:
  44. 44. 2-44 Expense Recognition - “Let the expense follow the revenues.” Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles Illustration 2-6 Expense Recognition
  45. 45. 2-45 Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles Full Disclosure – providing information that is of sufficient importance to influence the judgment and decisions of an informed user. Provided through:  Financial Statements  Notes to the Financial Statements  Supplementary information
  46. 46. 2-46 Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles Brief Exercise 2-8: Identify which basic principle of accounting is best described in each item below. (a) KFC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected. (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater. RevenueRevenue RecognitionRecognition ExpenseExpense RecognitionRecognition FullFull DisclosureDisclosure MeasurementMeasurement
  47. 47. 2-47 Cost Constraint – cost of providing information must be weighed against the benefits that can be derived from using it. Industry Practice - the peculiar nature of some industries and business concerns sometimes requires departure from basic accounting theory. Third Level: ConstraintsThird Level: ConstraintsThird Level: ConstraintsThird Level: Constraints
  48. 48. 2-48 Illustration 2-7 Conceptual Framework for Financial Reporting SummarySummary of theof the StructureStructure SummarySummary of theof the StructureStructure

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