FINANCIAL REPORTING
THE CONCEPTUAL AND REGULATORY FRAMEWORK FOR FINANCIAL REPORTING
REKPENE ETTA-OGAR, ACA -09011017820
CONCEPTUAL FRAMEWORK
The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial
statements for external users. A conceptual framework can be seen as a statement of generally accepted accounting
principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new
ones.
Purpose of framework
Assist in the development of future IFRS and the review of existing standards by setting out the underlying
concepts
Promote harmonisation of accounting regulation and standards
Assist the users of financial statements in the application of IFRS and dealing with accounting transactions for
which there is not (yet ) an accounting standard
Advantages of a conceptual framework
Financial statements are more consistent with each other
Avoids fire-fighting approach and a has a proactive approach in determining best policy
Less open to criticism of political/external pressure
Has a principles based approach
Some standards may concentrate on effect on statement of financial position; others on statement of profit or
loss
Disadvantages of a conceptual framework
A single conceptual framework cannot be devised which will suit all users
Need for a variety of standards for different purposes
Preparing and implementing standards may still be difficult with a framework
The purpose of financial reporting is to provide useful information as a basis for economic decision making.
Qualitative characteristics of useful financial information
They identify the types of information likely to be most useful to users in making decisions about the reporting entity
on the basis of information in its financial report.
Fundamental qualitative characteristics
Relevance
Relevant financial information is capable of making a difference in the decisions made by users if it has predictive value,
confirmatory value, or both.
Faithful representation
Information must be complete, neutral and free from material error. Materiality is an entity-specific aspect of relevance
based on the nature or magnitude (or both) of the items to which the information relates in the context of an
individual entity's financial report
Enhancing qualitative characteristics
Comparability
Comparison with similar information about other entities and with similar information about the same entity for
another period or another date.
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FINANCIAL REPORTING
THE CONCEPTUAL AND REGULATORY FRAMEWORK FOR FINANCIAL REPORTING
REKPENE ETTA-OGAR, ACA -09011017820
Verifiability
It helps to assure users that information represents faithfully the economic phenomena it purports to represent.
Verifiability means that different knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement
Timeliness
It means that information is available to decision-makers in time to be capable of influencing their decisions.
Understandability
Classifying, characterising and presenting information clearly and concisely. Information should not be excluded on the
grounds that it may be too complex/difficult for some users to understand.
The IFRS framework states that going concern assumption is the basic underlying assumption
The five elements of financial statements
Asset: 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.
Liability: 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.
Equity: Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Income: 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.
Expense: Expenses are decreases in economic benefits 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.
Recognition of the elements of financial statements
Recognition is the process of incorporating in the statement of financial position or statement of profit or loss an item
that satisfies the following criteria for recognition:
1. The item that meets the definition of an element
2. It is probable that any future economic benefit associated with the item will flow to or from the entity and
3. The item’s cost or value can be measured with reliability.
Measurements of elements in financial statements
The IFRS Framework acknowledges that a variety of measurement bases:
Historical cost
Current cost (Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same
or an equivalent asset was acquired currently)
Net realisable value (The amount of cash or cash equivalents that could currently be obtained by selling an asset
in an orderly disposal)
Present value (A current estimate of the present discounted value of the future net cash flows in the normal
course of business)
Fair value (As per IFRS 13)
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FINANCIAL REPORTING
THE CONCEPTUAL AND REGULATORY FRAMEWORK FOR FINANCIAL REPORTING
REKPENE ETTA-OGAR, ACA -09011017820
HISTORICAL COST ACCOUNTING
The application of historical cost accounting means that assets are recorded at the amount they originally cost, and
liabilities are recorded at the proceeds received in exchange for the obligation.
Advantages
1. Simple to understand
2. Figures are objective, reliable and verifiable
3. Results in comparable financial statements
4. There is less possibility for manipulation by using 'creative accounting' in asset valuation.
Disadvantages
1. The carrying value of assets is often substantially different to market value
2. No account is taken of inflation meaning that profits are overstated and assets understated
3. Financial capital is maintained but not physical capital
4. Ratios like Return on capital employed are distorted
5. It does not measure any gain/loss of inflation on monetary items arising from the impact
6. Comparability of figures is not accurate as past figures are not restated for the effects of inflation
STANDARD SETTING PROCESS
The due process for developing an IFRS comprises of six stages:
1. Setting the agenda
2. Planning the project
3. Development and publication of Discussion Paper
4. Development and publication of Exposure Draft
5. Development and publication of an IFRS Standard
6. Procedures after a Standard is issued
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