Conceptual Framework and 2018

Accounting Standards The objective of general purpose financial reporting is to

Module 1: Conceptual Framework for provide financial information about the reporting entity
Financial Reporting that is useful to existing and potential investors, lender
and other creditors in making decisions relating to
Learning Objectives providing resources to the entity.
1. Describe the usefulness of a conceptual framework and the
objective of financial reporting.
2. Identify the qualitative characteristics of accounting information
and the basic elements of financial statements.
3. Review the basic assumptions of accounting.
4. Explain the application of the basic principles of accounting.

Stewardship
Users of financial reports need information to help them
Conceptual Framework establishes the concepts that
assess management’s stewardship. The Conceptual
underlie financial reporting.
Framework explicitly discusses this need as well as the
Need for a Conceptual Framework need for information that helps users assess the prospects
 Rule-making should build on and relate to an for future net cash inflows to the entity.
established body of concepts.
 Enables IASB to issue more useful and consistent Second Level: Fundamental Concepts
pronouncements over time. Qualitative Characteristics of Accounting Information
Development of a Conceptual Framework  IASB identified the Qualitative Characteristics of
 IASB and FASB are working on a joint project to accounting information that distinguish better (more
develop a common conceptual framework useful) information from inferior (less useful)
 Framework are build on existing IASB and FASB information for decision-making purposes.
frameworks.
 Project has identified the objective of financial
reporting and the qualitative characteristics of
decision-useful financial reporting information.
The Revised Conceptual Framework
IASB issued the revised Conceptual Framework for
Financial Reporting in March 2018. It sets out:
 Objective of financial reporting
 Qualitative characteristics of useful financial information
 Description of the reporting entity and its boundary
 Definition of an asset, a liability, equity, income and
expenses
 Criteria for including assets and liabilities in financial NOTE: The materiality constraint is a threshold used to
statements (recognition) and guidance on when to determine whether business transactions are important to
remove them (derecognition) the financial results of a business. The cost constraint is
 Measurement bases and guidance on when to use them a GAAP constraint which stipulates that the benefits of
 Concepts and guidance on presentation and disclosure reporting financial information should justify and be
Overview of the Conceptual Framework greater than the costs imposed on supplying it.
 First Level = Basic objective
Fundamental Quality - Relevance
 Second Level = Qualitative characteristics and  Information is relevant if it is capable of making a
elements of financial statements difference to the decisions made by users.
 Third Level = Recognition, measurement, and
disclosure concepts

2010
The objective of general purpose financial reporting is to
provide financial information about the reporting entity
that is useful to existing and potential investors, lenders,
and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying,
selling, or holding equity and debt instruments, and  Predictive value – if it can be used as an input to
providing or settling loans and other forms of credit. processes employed by users to predict future outcomes.
  Confirmatory value – if it provides feedback about
previous evaluation. The two are interrelated, for
instance revenue information for the current year that can
also be used as the basis for predicting revenues in future
years. This can also be compared with revenue
predictions for the current years that were made in the
past years. The result of these comparisons can help
users to correct and improve processes that were used to
make those previous predictions.
Fundamental Quality – Faithful Representation
 Information must faithfully represent the substance of
what it purports to represent. It is affected by level of
measurement uncertainty.
Enhancing Qualities
 Distinguish more-useful information from less-useful
information.
Cost Constraint
 The benefit of providing the information needs to
justify the cost of providing and using the information.
Materiality Constraint
 The materiality constraint is a threshold used to
determine whether business transactions are important
to the financial results of a business.
Second Level: Basic Elements
Asset – 2010
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.
Asset – 2018
A present economic resource controlled by the entity as a
result of past events. An economic resource is a right that
has the potential to produce economic benefits.
Main changes in the definition of an asset:
 Separate definition of an economic resource – to
clarify that an asset is the economic resource, not the
ultimate inflow of economic benefits.
 Deletion of “expected flow” – it does not need to be
certain, or even likely, that economic benefits will arise.
 A low probability of economic benefits might affect
recognition decision and the measurement of the asset.
Second Level: Basic Elements
Liability – 2010
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.
Liability – 2018
A present obligation of the entity to transfer an economic
resource as a result of past events. An obligation is a duty
or responsibility that the entity has no practical ability to avoid.
Main changes in the definition of a liability:
 Separate definition of an economic resource – to
clarify that a liability is the obligation to transfer the
economic resource, not the ultimate outflow of
economic benefits.
 Deletion of “expected flow” – with the same
implication as asset.
 Introduction of the “no practical ability to avoid”
criterion to the definition of obligation.
“No practical ability to avoid”
Applied to:
 If a duty or responsibility arises from the entity’s
customary practices, published policies or specific
statements – the entity has an obligation of it as no
practical ability to act in a manner inconsistent with
those practices, polices or statements.
 If a duty or responsibility is conditional on a particular
future action that the entity itself may take – the entity
has an obligation if it has no practical ability to avoid
taking that action.
 Third Level: Recognition, Measurement, and
Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.
Definition of Equity - IAS 32.11
Equity is defined as “any contract that evidences a
residual interest in the assets of an entity after deducting
all of its liabilities.
Definition of Revenue - IAS 18
Revenue is the gross inflow of economic benefits during
the period arising from the course of the ordinary
activities of an entity, other than increases relating to
contributions from equity participants.
Revenue arising from the following transactions and
events:
 Sale of goods
 Rendering of services; and
 Use by others of entity assets yielding interest,
royalty and dividends.
Definition of 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.
Definition of Expenses
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.
NOTE: A present economic resource controlled by the
entity as a result of past events. An economic resource is
a right that has the potential to produce economic benefits.
A present obligation of the entity to transfer an economic
resource as a result of past events. An obligation is a duty
or responsibility that the entity has no practical ability to avoid.
Measurement
Measurement uncertainty arises when a measure for an
asset or liability cannot be observed directly and must be estimated.
Impairment
Impairment describes a permanent reduction in the value
of a company's asset, typically a fixed asset or an
intangible asset.
NOTE: When testing an asset for impairment, the total profit, cash
flow, or other benefit expected to be generated by that specific asset is
periodically compared with its current book value. If it is determined
that the book value of the asset exceeds the future cash flow or benefit
of the asset, the difference between the two is written off and the value
of the asset declines on the company's balance sheet.
Key Takeaways on Impairment
 Impairment can occur as the result of an unusual or
one-time event, such as a change in legal or economic
conditions, change in consumer demands, or damage
that impacts an asset.
 Assets should be tested for impairment regularly to
prevent overstatement on the balance sheet.
 Impairment exists when an asset's fair value is less
than its carrying value on the balance sheet.
 If impairment is confirmed as a result of testing, an
impairment loss should be recorded.
 An impairment loss records an expense in the current
period which appears on the income statement and
simultaneously reduces the value of the impaired asset
on the balance sheet.
What Is Impairment Loss?
 The technical definition of impairment loss is a
decrease in net carrying value, the acquisition
cost minus depreciation, of an asset that is greater
than the future undisclosed cash flow of the same asset.
 An impairment occurs when assets are sold or
abandoned because the company no longer expects
them to benefit long-run operations.
 This is different from a write-down, though
impairment losses often result in a tax deferral for the
asset. Depending on the type of asset being impaired,
stockholders of a publicly held company may also
lose equity in their shares, which results in a
lower debt-to-equity ratio.
Why Recognition is Important
 Recognizing assets, liabilities, equity, income and
expenses depicts an entity’s financial position and
financial performance in structured summaries (FS).
 The amounts recognized in a statement are included
in the totals and, if applicable, subtotals, in the statement.
 The statements are linked because income and
expenses are linked to changes in assets and liabilities.
Value in use is the net present value of a cash flow or
other benefits that an asset generates for a specific owner
under a specific use. This is generally lower than market value.
Expense Recognition - outflows or “using up” of assets
or incurring of liabilities (or a combination of both) during
a period as a result of delivering or producing goods
and/or rendering services.
“Let the expense follow the revenues.”

Third Level: Principles

Full Disclosure – providing information that is of
sufficient importance to influence the judgment and
decisions of an informed user. Provided through:
 Financial Statements
Third Level: Assumptions  Notes to the Financial Statements
Basic Assumptions  Supplementary information
 Economic Entity – company keeps its activity
separate from its owners and other business unit.
 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 of Accounting – transactions are
recorded in the periods in which the events occur.
Identify which basic assumption of accounting is best
described in each item below. Third Level: Constraints
Cost – the cost of providing the information must be
weighed against the benefits that can be derived from
using it.

Materiality – an item is material if its inclusion or

omission would influence or change the judgment of a
reasonable person.
Principles:
Measurement
 Cost is generally thought to be a faithful
representation of the amount paid for a given item.
 Fair value is “the amount for which an asset could
be exchanged, a liability settled, or an equity
instrument granted could be exchanged, between
knowledgeable, willing parties in an arm’s length
transaction.”
 IASB has taken the step of giving companies the
option to use fair value as the basis for measurement
of financial assets and financial liabilities.
Fair market value is the price at which a willing seller sells a
good or service to a willing buyer. Or a layman’s definition, it
is the selling price to which a seller and buyer can agree.
Revenue Recognition - revenue is to be recognized when
it is probable that future economic benefits will flow to
the company and reliable measurement of the amount of
revenue is possible.