WY) WY) WX ANY WY) \ \) XY \ YY \ N XX) NY XN BPP LEARNING MEDIA \ Diploma in International Financial Reporting For exams in December 2021 and June 2022 Study TextACCA DIPLOMA IN INTERNATIONAL FINANCIAL REPORTING x Appoints IFRS Interpretations > Reports to Cant -> Advises ‘Trustees, The Trustees comprise a group of individuals with diverse geographic and functional backgrounds. ‘The Trustees appoint the Members ofthe Board, the IFRS Interpretations Committee andthe IFRS Advisory Council In addition to monitoring the Foundations effectiveness and raising its funds, the Trustees will ‘approve the budget and have responsibilty for constitutional changes. IFRS Advisory Council. The IFRS Advisory Council provides a formal vehicle for further groups and individuals with diverse geographic and functional backgrounds to give advice to the Board and, a times, to advise the Trustees. Its consulted by the IASB on all major projects and its meetings are open to the public. ltadvises the IASB on priortsation of its work and on the implications of proposed standards for users and preparers of financial statements. IFRS Interpretations Committee. The Interpretation Committee provides timely guidance on the ‘application and interpretation of IFRS Standards. It deals with newly identified financial reporting issues not specifically addressed in IFRS Standards or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop. 3 Developing IFRS Standards 3.1 Due process IFRS Standards are developed through a formal system of due process and broad international ‘consultation involving accountants, financial analysts and other users and regulatory bodies from around the world, ‘The overall agenda of the IASB will initially be set by discussion with the IFRS Advisory Council. The process for developing an individual standard would involve the following steps. Step 1 During th early stages ofa project, the IASB may establish an AGvisory Committee to ave advice on issues arising in the project. Consultation with the Advisory Commitee and the IFRS Advisory Council occurs throughout the project. Step 2 _ 1ASB may develop and publish Discussion Papers for public comment. this | Part tea sources fax "@Step 3 Following the receipt and review of comments, the IASB would develop and publish an Exposure Draft for public comment. Step 4 Following the receipt and review of comments, the |ASB would issue 2 final International Financial Reporting Standard ‘The steps are underpinned by the following principles: (2) transparency—the IASB conducts its standard-setting process ina transparent mann (b) full and fair consuttation—considering the perspectives of those affected by IFRS globally: and (c) _accountabilty—the IASB analyses the potential effects of its proposals on affected partias and explains the rationale for why it made the decisions it reached in developing or changing @ Standard, ‘The period of exposure for public comment is normally 120 days. However, in exceptional circumstances, proposals may be issued with a comment period of 30 days. Draft IFRS Interpretations are normally ‘exposed for a 90-day comment period, (Due Process Handbook, 2016: para. 6.7) 3.2 Consultation ‘The development of an IFAS Standard involves a full and fair consultation which includes an open, public process of debating technical issues and evaluating input sought through several mechanisms, Opportunities for interested parties to participate in the development of an IFRS Standard would include, depending on the nature ofthe project (2) Participation inthe development of views as a member ofthe IFRS Advisory Council, (b) Participation in advisory groups (c)__ Submission of a comment letter in response to a discussion document (@) Submission of a comment letter in response to an Exposure Draft (e) Participation in public hearings () Participation in field visits and field tests, ‘The IASB publishes an annual report on its activities during the past year and priorities for next year. This report provides a basis and opportunity for comment by interested partes. In addition, itis required to undertake a public consultation on its future technical agenda every five years. ‘The IASB reports on its technical projects on its Website. I also publishes a report on 1AS@ decisions. immediately after each IASB meeting in its newsletter /ASB Update 3.3 Scope of IFRS Standards ‘Any limitation ofthe applicability of @ specific IFAS Standard is made clear within that standard, IFRS Standards are not intended to be applied to immaterial items, nor are they retrospective. Each individual IFRS Standard lays out its scope atthe beginning ofthe standard, 3.4 Interpretation of IFRS Standards ‘The IFRS Interpretations Commitee assists the IASB by improving existing Standards. ‘The IFRS Interpretations Committee has two main responsibilities: © Review, on a timely basis, newly identified financial reporting issues not specifically addressed in IFRS Standards. + Clarify issues where unsatisfactory or conflicting interpretations have developad or seem likely to develop in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate treatment, mg reckinnocvesasty |: Mampi meet is ER3.4.1 Authority and application of IFRS Interpretations Committee Interpretations ‘The IFRS Interpretations Committee issues ‘Interpretations’ which carry the same authority as IFAS Standards, in the sense that they set out consensus views that entities must adhere to if they describe their financial statements as being prepared in accordance with IFAS Standards. Interpretations are applicable trom the date of issue or if they specify one, from their effective date. Some Interpretations may contain ‘transitional provisions’ that apply to their frst application. ‘An Interpretation then ceases to apply when i is overridden by a new IFRS Standard (or other authoritative IASB document). When this happens, this would be mentioned inthe Exposure Draft of the new, overriding IFRS Standard (or oer document) The IASB would then inform the IFRS Interpretations Committee when this happens, 3.5 IFRS Interpretations Committee due process ‘The IFRS Interpretations Committee discusses technical matters in meetings that are open to public observation. The due process for each project normally, but not necessarily, involves the following steps (the steps that are required under the termes of the Constitution are indicated by an asterisk); (2) Staff work to identify and review all the issues associated with the topic and to consider the application of the IASB's Conceptual Framework'to the issues (b) Study of national accounting requirements and practice and an exchange of views about the issues with national standard setters, including national committees that have responsibilty for interpretations of national standards (c) Publication of a draft Interpretation for public comment if no mare than four of the IFRS Interpretations Committeo's members have voted against the proposal” (6) Consideration of al comments received ona draft Interpretation within 2 reasonable period of tme* (©) Approval by the IFRS Interpretations Committee of an interpretation if no more than four of the IFAS Interpretations Committee's members have voted against the Interpretation after considering ‘public comments on the draft Interpretation (f) Approval of the Interpretation by at least nine votes of the Board 4 Managing the change to IFRS Standards 4.1 IFRS 1 First-time Adoption of International Financial Reporting Standards ESI) - FAS 1 gives guidance to entities applying IFAS Standards for the fist time + The change to IFRS Standards must be carefully managed. ‘The adoption ofa new body of accounting standards will inevitably have a significant effect on the ‘accounting treatments used by an entity and on the related systems and procedures. IFRS 1 First-time Adoption of International Financial Reporting Standards was issued to ensure that an entity’ frst IFRS financial statements contain high quality information that: (2) Is transparent for users and comparable over all periods presented (b) Provides a suttable starting point for accounting under International Financial Reporting Standards (IFRSs) (c) Can be generated ata cost that does not exceed the benefits to users (IFRS 1: para. 1) PIE) sented ti | tin tty "@4.1.4 General principles ‘An entity applies IFRS 1 in its first IFAS financial statements. ‘An entity's frst IFRS financial statements ae the first annual financial statements in which the entity adopts IFAS Standards by an explicit and unreserved statement of compliance with IFRS. ‘Any other financial statements (including fully compliant financial statements that did not state so) are not the first set of financial statements under IFRS, (IFRS 1: para. 3) 4.1.2 Opening IFRS statement of financial position ‘An entity prepares and presents an opening IFRS statement of financial position at the date of transition to IFRS Standards as a starting point for IFRS accounting (IFRS 1: para. 6). Generally, this will be the beginning ofthe earliest comparative period shown (ie ful retrospective application) Given thatthe ent is applying a change in accounting policy on adoption of IFRS, IAS 1 resentation of Financial Statements requires the presentation of at least three statements of financial position (SOFP) (and wo of each of the other statements). Illustration: Opening IFRS SOFP Comparative year ‘st year of adoption 1.4.20%8 31.12.20x8 31.12.20%9 t Transition date Preparation of an opening IFRS statement of financial position typically involves adjusting the amounts reported at the same date under previous GAAP. All adjustments are recognised directly in retained earnings (or, if appropriate, another category of equity) nat in profit o loss. 4.1.3 Estimates Estimates in the opening IFRS statement of financial position must be consistent with estimates made at ‘the same date under previous GAAP even if further information is now available (in ordar to comply with IAS 10 Events After the Reporting Period) 4.1.4 Transition process (2) Accounting policies ‘The entity should select accounting policies that comply with IFRS Standards effective at the end of the first IFRS reporting period These accounting policies are used in the opening IFRS statement of financial postion and throughout all periods presented, The entity does not apply different versions of IFRS Standards effective at earlier dates. (b) Derecognition of assets and liabilities Previous GAAP statement of financial position may contain items that do not quality for recognition under IFRS Standards, For example, IAS 38 intangible Assets explicitly does not permit the capitalisation of research, staff training and relocation costs. (c) Recognition of new assets and liabilities ‘New assets and liabilities may need to be recognised, for example deferred tax balances and certain provisions such as environmental and decommissioning costs, mg reckons acety |: tempt mes EI(@) Reclassification of assets and liabilities For example, compound financial instruments need to be spit into their lablity and equity components (e) Measurement Value at which asset or liability is measured may differ under IFRS Standards, For example, discounting of deferred tax assets/liailties not allowed under IFRS Standards, 4.1.5 Main exemptions from applying IFRS Standards in the opening IFRS statement of financial position (2) Property, plant and equipment, investment properties and intangible assets (i) Fairvalue/previous GAAP revaluation may be used as a substitute for cost at date of transition to IFRS Standards. (b) Business combinations For business combinations prior tothe date of transition to IFRS Standards: () The same classification (acquisition or uniting of interests) is retained as under previous Game, (i) For items requiring a cost measure for IFRS Standards, the carying amount atthe date of ‘the business combination is treated as deemed cost and IFAS rules are applied from thereon, (ii) tems requiring a fair value measure for IFRS Standards are revalued atthe date of transition to IFRS Standards. (iv) The cartying amount of goodwill tthe date of transition to IFRS Standards is the amount a reported under previous GAAP. (©) Cumulative translation difterences on foreign operations (i) Translation differences (which must be disclosed ina separate translation reserve under IFRS) may be deemed zero atthe date of transition to IFRS. IAS 21 The Etfects of Changes in Foreign Exchange Rates is applied from then on (i) Ha subsidiary (or associate or joint venture) applies the exemption in (¢)() below, then the subsidiary can instead choose to measure cumulative translation differences at the carrying amount that would be included inthe parent's consolidated financial statements atthe parents date of transition (0) Adoption of IFRS by subs Ifa subsidiary, associate or joint venture adopts IFRS Standards later than its parent then It measures its assets and liabilities ies, associates and joint ventures Either: ())__ At the amount that would be included in the parent's consolidated financtal statements, based on the parent's date of transition, Or {i)_Atthe amount based on the subsidiay's (associate or joint venture) date of transition 4.1.6 Disclosure (2) _Areconciliation of previous GAAP equity to IFAS Standards is required at the date of transition to IFRS Standards and forthe most recent financial statements presented under previous GAAP. (b) Areconciliation of profit for the most recent financial statements presented under previous GAAP. this | Part tea sources fax ®Exam focus 4 ‘The transition to IFRS was tested in June 2017 for 7 marks. In the examiner's report, the examining team point stated that ‘only a few candidates specifically stated the need for an ‘opening IFRS statement of financial position’ and for reconciliations from previously reported figures to IFRS in the opening set of IFRS financial statements’ (Examiner's Report, June 2017: p. 4. 4.2 Practical issues ‘The implementation ofthe change to IFRS Standards is likely to entail careful management in most ‘companies. Here are some of the change management considerations that should be addressed, (a) Accurate assessment of the task involved. Underestimation or wishtul thinking may hamper the effectiveness of the conversion and may ultimately prove inefficient. (b) Proper planning This should take place atthe overall project lve, but a detailed task analysis ‘could be drawn up to control work performed. (©) Human resource management. The project must be property structured and stated (6) Training. Where there are skills gaps, remedial training should be provided (€) Monitoring and accountability. An overly relaxed attitude could spell danger. Implementation progress should be monitored and regular meetings set up so that participants can personally account for what they are doing as well as flag up any problems as early as possible. Project drift should be avoided () Achieving milestones. Successful completion of key steps and tasks should be appropriately acknowledged, ie what managers call ‘celebrating success’, so as to sustain motivation and performance, (g) Physical resourcing. The need for IT equipment and office space should be properly assessed. (h) Process review. Gare shouldbe taken not to perceive the change as a one-off quick fix. Any change in future systems and processes should be assessed and property implemented (i) Follow-up procedures. As with general good management practice, the follow up procedures shoul be planned in to make sure that the changes stick and that any further changes are Identified and addressed. 4.2.1 Financi eporting infrastructure ‘As well as sound management judgement, implementation of IFRS Standards requires @ sound financial reporting infrastructure. Key aspects of this include the following: (2) Arobust regulatory framework. For IFRS Standards to be successful, they must be rigorously enforced (b) Trained and qualified stat. Many preparers of financial statements will have been trained in local GAAP and not be familiar withthe principles underlying IFRS, let alone the detail. Some professional bodies provide conversion qualifications ~ for example, the ACCA’s Diploma in International Financial Reporting ~ but the availablity of such qualifications and courses may vary from country o country. (c) Availability and transparency of market information. Ths is particularly important in the determination of fair values, which are such a key component of many IFRS Standards. (G) High standards of corporate governance and audit. This is all the more important in the transition period, especially where there is resistance to change. Overall there are significant advantages to the widespread adoption of IFRS Standards, but i the transition isto go well, there must be a realistic assessment of potential challenges. mg reckinnodceesacty |: tempi me is ET=) Important 5 Ethical and professional principles Professional accountants should comply with the five fundamental ethical principles given in the IESBA Code: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. 5.1 Handbook of the Interna’ Accountants ‘The DipIFR syllabus requires you to be able to appraise and discuss the ethical and professional issues in ‘complying with accounting standards. The examinable documents require you to understand and be able apply Part 1 Sections 100, 110 - 116 and 120 of the Handbook ofthe International Code of Ethics for Professional Accountants (‘the Code’). The Code is issued by the International Ethics Standards Board for ‘Accountants (|ESBA), 2 committee ofthe International Federation of Accounts (IFAC). for Professional ‘You can access the IESBA the Hanabook ofthe International Code of Ethics for Professianal Accountants (2018 Edition) from the IESBA website: www.ethicsboard.org ‘You should read Part 1 Sections 100, 110 - 115 and 120 5.1.1 Section 100: -omplying with the Code ‘The content of Section 100 can be summarised as follows. + Professional accountants must ac inthe public intrest (para, 100.1 At) + Professional accountants must comply wit the Code If laws or regulations prevent an accountant from complying with some parts ofthe Code, then the laws and regulations prevall bu the accountant should comply with all other pats ofthe Code (para. 100.3) + Aprofessional accountant who identifies a breach of the Code should evaluate the significance of the breach and impact on the accountant'sabilty to comply with the fundamental ethical principles (see next section). They should also take actions to address the consequences ofthe breach and determine whether to report the breach to relevant parties (para. R100.4) 5.1.2 Section 110 - 115: The fundamental principles ‘There are five fundamental ethical principles which a professional accountant should comply with (para. 110.1 At) Integrity “To be straightforward and honest in all professional and business relationships. ‘Objectivity "Not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others.” Professional To: ‘competence and due (i) Attain and maintain professional knowledge and skill tthe level required to care ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation; and (il) Act diligently and in accordance with applicable technical and professional |___ standards” Confidentiality “To respect the confidentiality of information acquired as a result of professional and business relationships.” Professional “To comply with relevant laws and regulations and avoid any conduct that the behaviour professional accountant knows or should know might discredit the profession. this | Part tea sources fax @5.1.3 Section 120: The conceptual framework ‘The standard of behaviour fora professional accountant is set by the fundamental ethical principles (para. 1102 At). The conceptual framework establishes the approach a professional accountant shoud take in order to comply with those principles and to meet their responsibility to actin the public interest (para. 120.1) ‘The approach a professional accountant should take is to (para 120.2); (1) Identity threats to compliance with the fundamental ethical principles (2) Evaluate the threats identified, and (3) Address the threats by eliminating or reducing them to an acceptable level. “@ ‘The Code identities the following categories of threats to compliance with the fundamental ethical Principles (para. 120.6 A3): Self-interest “The threat that a financial or other interest will inappropriately influence a professional accountant's judgement or behavior.” Self-review “The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the accountant, or by another vidual within the accountants firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity” Advocacy “The threat that a professional accountant will promote a client's or employing ‘organization's postion to the point that the accountants objectivity is compromised” Familiarity | “The threat that due toa ong or close relationship witha client or employing ‘organization, a professional accountant willbe too sympathetic to their interests or too accepting oftheir work.” Intimidation | “The threat that a professional accountant wll be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.” ‘Threats can be addressed by either eliminating them or by reducing ther to an acceptable level. This can be done by (para, R120.10): (2) Eliminating the circumstances, including interests or relationships, that are creating the threats; (b) Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or (©) Dectining or ending the specific professional activity. 5.2 Ethical considerations in financial reporting In preparing financial statements or advising on corporate reporting, a variety of ethical problems may arise: (1) Professional competence is clearly a key issue when decisions are made about accounting treatments and disclosures. Company directors and their advisers have a duty to keep up to date with developments in IFRS Standards and other relevant regulations. Circumstances that may threaten the ability of accountants in these roles to perform their duties with the appropriate degree of professional competence and due care include: Insutficient time Incomplete, restricted or inadequate information Insutficent experience, training or education Inadequate resources Puen cvs ae | apy ne(2) Objectivity and integrity may be threatened in a number of ways: ‘+ Financial interests, such as profit-related bonuses or share options ‘+ Inducements to encourage unethical behaviour (3) Accountants may be pressurised, ether externally or by the possibilty of personal gain, to become associated with misleading information. The Code (para. A111.2) clearly states that members should not be associated with reports, returns, communications or athe information where they believe that the information: ‘© Contains a materially misleading statement; + Contain statements or information furnished recklessly, + Has been prepared with bias; or . Omits or obscures information required to be included where such omission or obscurity would 5.2.1 Example ‘The Finance Director of Kershaw Co has asked an employee, Tanya, to join a team thats planning a takeover of one of Kershaw Co's supplets. An old school friend of Tanya's works as an accountant forthe ‘supplier. The Finance Director knows this and has asked Tanya to try and find out ‘anything that might help the takeover succeed, but it must remain secret Required What ethical issues could arise? Solution ‘There are three issues here, First, Tanya has a conflict of interest as the Finance Director wants Tanya to keep the takeover a secret, but she may feel that she should tell her friend what is happening as it may affect their job Second, the Finance Director is asking Tanya to deceive her fiend. Deception is unprofessional behaviour ‘ands in breach of ethical principles. The situation is presenting Tanya with two conflicting demands. Finally, the request to breach ethical principles constitutes unprofessional behaviour by the Finance Director. Tanya should weigh up whether blowing the whiste internally would prove effective: it not, she should consider reporting them to ther relevant professional body. 5.2.2 Example Kelshall is a public limited company. The current year end is 31 December 20XS. The Finance Director, a professional accountant, is remunerated with a profit-elated bonus and share options, Kelshall owns a significant number of owner-occupied properties which historically have been held under the revaluation model, Recently, due to an economic downturn, property prices have been faling. The Finance Director is proposing to switch from the revaluation model tothe cost model. Shortiy before the year end, the CEO of Kelshall, who is also a professional accountant, and who holds a large number of share options, mentioned tothe Finance Director that he was hoping to retire within the next year and was hoping to maximise Kelshal’s share price by his retirement date. Required (a) Discuss whether the Finance Director of Kelshall would be acting ethically ithe revised the accounting policy for its properties from the revaluation model to the cost model (b) Discuss whether the CEO's comment to the Finance Director is ethical and what action, i any, the Finance Director should take FEE) territory ramewor and tics | PA intent cous of ashy hh ®Solution (@)__ 1AS8 Accounting Policies, Changes in Accounting Estimates and Errors only allows 2 change in accounting policy where required by another standard or it results in financial staternents providing reliable and more relevant information. IESBA's Code of Ethics requires professional accountants to act with integrity and professional competence. Professional competence includes complying with accounting standards and the Conceptual Framework ‘There isa selt-nterest threat rising forthe Finance Director as their bonus is linked to profits. If the Finance Director is revising the accounting policy to maximise profits, then they would be acting unethically due to non-compliance with IAS 8, Infact, though, the cost madel would not ‘necessarily lead to improved profits (and improved remuneration) because under the revaluation ‘model, losses are first written off to the revaluation surplus (and reported in other comprehensive income) then to profit or loss, and so might not impact profits at all. Also, even under the cost, ‘model, assets need to be written down where there is evidence of an impairment Ifthe motivation ofthe Finance Director is that the economic downturn is causing volatility in ‘market value of properties and the more stable cost model would provide a truer and fairer view, then they could possibly be considered to have acted ethically (b) The CEO and the Finance Director are both professional accountants and are therefore bound by the principles ofthe IESBA's Code of Ethics. As directors, they should be acting inthe best interests of the shareholders, However, it appears as though the CEO is more concerned with self-interest and maximising the gains on his share options by manipulating the share price. This pressure trom the CEO isa threat to the integrity and objectivity ofthe Finance Director. The Finance Director is in a dificult position ethically as he reports directly to the CEO and the CEO has direct influence over his job security and remuneration, The Finance Director could speak directly to the CEO and seek clarification of the intent of his ‘comments, explaining that he is unable to change Kelshalls accounting policies just to maximise Kelshal’s share price in the short term and that he is bound by the IESBA's Code of Ethics to act, with professional competence. However, i he felt under too much pressure from the CEO to speak to him directly, he could raise his concerns withthe non-executive directors and/or the aut committe. ‘The problem here is thatthe threats to both the CEO's and the Finance Director's objectivity and integrity are similar so there is danger that the Finance Director reacts tothe CEO's comments by changing accounting policies to maximise profits and share price rather than acting inthe company's and stakeholders’ best long-term interests, This would defintely constitute unethical behaviour. mg reckons acy |: Mampi me ts EECe Ca TL ‘© The need fora single set of international financial reporting standards arises as a result of the globalisation of business activities and operations, ‘= The IASB develops IFRS Standards. The main objectives ofthe IFRS Foundation are to raise the standard of financial reporting and eventually bring about global harmonisation of accounting standards. ‘© IFRS Standards are developed through a formal system of due process and broad international ‘consultation involving accountants, financial analysts and other users and regulatory bodies from around the world ‘© IFRS‘ gives guidance to entities applying IFRS Standards forthe first time. ‘© The change to IFRS Standards must be carefully managed. ‘+ Professional accountants should comply withthe five fundamental ethical principles given in the IESBA Code of Ethics: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. 1 Briefly describe why a single set of global accounting standards is needed. 2 Which of the following is not an objective of the IFRS Foundation? A To enforce IFRS Standards in most countries B To develop IFRS Standards through the IASB © To bring about convergence of accounting standards and IFRS Standards D To take account of he financial reporting needs of SMES 3 Fillinthe blanks The IFRS issues which aid users interpretation of IFRS Standards. 4 The IASBis responsible forthe standard-setting process, Tue or false? 5 Which of the fllowing might or might be thought to) affect the objectivity of providers of professional accounting services? ‘A Failure to keop upto date with continuing professional development (CPD) B_—Apersonal financial interest inthe client's affairs © Being negligent or reckless with the accuracy ofthe information provided to the client PMI) sessment tis | rst sett “91 ‘The need for a single set of international financial reporting standards arises asa result ofthe globalisation of business activities and operations. A single set of international financial reporting standards will enable financial statements across the globe to be more easily compared. This will aid international business by providing + Apilatform for wider investment choice + Amore efficient capital market = Lower cost of capital + Enhanced business development ‘A The IFRS Foundation has no powers of enforcement. ‘The IFRS Interpretations Committee issues Interpretations which aid users’ interpretation of IFRS Standards, True B_Apersonal financial interest inthe client's affairs A personal financial interest in the client's affairs will atfct objectivity. Failure to keep up to date on Continuing professional development is an issue of professional competence, while providing inaccurate information reflects upon professional integrity. at Introductory nla na 2 Introductory nia ma ”@ Pan. ioral vcs faery | 1: The regula ramet and ahson ethies | Part A Intemational sources of authority BPP 9SUM TTB eA ae "Conceptual Frameworkand GAAP a 2 The ASB Conceptual Famework for Fiance mi Reporting 2 Chapt Tho obeive of sense pupese fen ro repertng “Chaper 2 Gualtatve characteris owe i nancial intoation S chape 3 —Fnancl statements and he eporing mi entity 8 Chapter 4 ~ Elements of financial statements AD 7 ohape 5 Recogiten and derecognton i ‘8 Chapter 6 - Measurement AD 9 Chaper7~Presenaton and dsosure aI 10 Chapter 8 ~ Concepts of capital and capital AD maintenance + curr IFRS Sands and te revised Gnceptl x Framenrk Introduction ‘A Conceptual Fremeworkor financial reporting can be defined as an attempt to codiy existing generally accepted accounting practice (GAAP) in order to ‘eappraie current accounting standards and to produce now standards, Under IFRS we have the IASB Conceptual Framework for Financial Reporting.Study guide ‘A1__| The international Accounting Standards Board (IASB) and the regulatory framework Understand and interpret the |ASB's Conceptual Framework for Financial Reporting Critically discuss and apply the definitions ofthe elements of financial statements and the reporting of items in the financial statements Exam focus point ACOA’s website contains many useful articles, including the following relating to topics covered inthis chapter: © Extreme makeover — IASB Eoition This article is available in the study support resources section for the Financial Reporting module of the ‘ACCA Qualification. 1 Conceptual Framework and GAAP HESIOD) There are advantages and disadvantages to having a Conceptual Framework. 1.1 The search for a Conceptual Framework A Conceptual Frameworkis a statement of generally accepted theoretical principles which form the frame of reference for financial reporting. ‘These theoretical principles provide the basis for the IASB's development of new accounting standards ‘and the evaluation of those already in existence, The financial reporting process is concerned with providing information that is useful in the business and economic decision-making process. Therefore a Conceptual Framework wil form the theoretical basis for determining which events should be accounted {or, how they should be measured and how they should be communicated to the user. Although itis theoretical in nature, a Conceptual Framework for financial reporting has highly practical final aims, 1.2 Advantages and disadvantages of a Conceptual Framework ‘Advantages (@) The situation is avoided whereby standards are developed on a haphazard basis, where a particular accounting problem is recognised as having emerged, and resources were then channelled into standardising accounting practice in that area, without regard to whether that particular issue was necessarily the most important issue remaining at that time without standardisation. (b) The development of certain standards (particulary national standards) has been subject to Considerable political interference from interested parties. Where there is conflict of interest ‘between user groups on which policies to choose, policies deriving from a Conceptual Framework will be less open to criticism thatthe standard-setter buckled to external pressure. (c) Without 2 Conceptual Framework, some standards may concentrate on profit or loss whereas. ‘some may concentrate on the valuation of net assets (statement of financial positon), so that they conflict with one anather. Disadvantages (@) Financial statements are intended for a variety of users, and itis not certain thata single Conceptual Framework can be devised which will suit all users. (b) Given the diversity of user requirements, there may be @ need for a variety of accounting standards, each produced for a different purpose (and with different concepts as a basis) (©) Itis not clear that a Conceptual Framework makes the task of preparing and then implementing standards any easier than without a framework. HEE ceeas rant | rch etn setae @2 The IASB's Conceptual Framework for Financial Reporting ‘The IASB's Conceptual Framework for Financial Reporting describes the fundamental concepts for financial reporting and is used by the IASB to guide the development of IFRS Standards. ‘The Conceptual Framework for Financial Reporting (Conceptual Framework) was revised and reissued in 2078, The revision follows criticism thatthe previous Conceptual Framework was incomplete, and out of date and unclear in some areas. ‘The revised Conceptual Framework now includes: New definitions of elements inthe financial statements Guidance on derecogrition Considerable guidance on measurement High-level concepts for presentation and disclosure ‘The purpose of the Conceptual Frameworkis to (para. SP1.1): ‘+ Assist the IASB to develop IFRS Standards that are based on consistent concepts; + Assist preparers of accounts to develop accounting policies in cases where there is no IFRS ‘Standard applicable to a particular transaction, or where a choice of accounting policy exists; and . Assist all parties to understand and interpret IFRS Standards. 2.1 Content ‘The Conceptual Frameworks divide into chapters: Chapter 1 The objective of general purpose financial reporting Chapter 2 Qualitative characteristics of useful financial information Chapter 3 Financial statements and the reporting entity Chapter 4 The elements of financial statements Chapter’ Recognition and derecognition Chapter Measurement Chapter? Presentation and disclosure Chapter 8 Concepts of capital and capital maintenance 3 Chapter 1: The objective of general purpose financial reporting ‘The Conceptual Framework states that the objective of financial reporting is 'to provide financial information about the reporting entity that is useful o existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity, ‘The Conceptual Framework detines the objective of general purpose financial reporting as being ‘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’ (para. 1.2), Existing and potential investors lenders and other creditors are refered to as the ‘primary users’ of financial statements (para, 1.5). To make decisions, the primary users needs information about: The economic resources of the entity, claims against the entity and changes in those resources and claims Management's stewardship: how efficiently and effectively the entity's management and governing ‘board have discharged their responsibilities to use the entity's economic resources (para 1.4) »@ vursiomtos setae | 2 tecuequaraneeer EE4 Chapter 2: Qualitative characteristics of useful financial information ESIC) | eievance an faithful representation are the fundamental qualtatve charcteries. ‘Comparability, verfblty, timeliness and understandebilty are the enhancing qualitative characteristics, 4.1 Fundamental qualitative characteristics (paras. 2.5-2.22) Information is useful if itis relevant and faithtully represents what it purports to represent. Key term Relevant information is capable of making a difference in decisions made by users i ithas predictive value, confirmatory value or both (Conceptual Framework: paras. 2.6-2.7) ‘The relevance of information is affected by its nature and its materiality. Key terms Materiality. Information is materia if omitting, misstating or obscuring it could reasonably be expected to influence decisions thatthe primary users of general purpose financial statements make on the basis of ‘those financial statements, which provide financial information about a specific reporting entity (Conceptual Framework. para. 2.11) Faithtul representation, Financial reports represent economic phenomena in words and numbers, To be Useful, financial information must not only represent relevant phenomena but must faithfully represent the substance of the phenomena tat it purports to represent (Conceptual Framework. para. 2.12) ‘Aaithful representation reflects economic substance rather than legal form, and is © Complete ~all information necessary for understanding = Neutral means that the information should be provided without bias, which is supported by ‘exercise of prudence. + Free from error processes and descriptions without error, does not mean perfect Key term v Prudence is the exercise of caution when making judgements under conditions of uncertainty (Conceptual Framework. para, 2.16) ‘The term prudence was removed from the 2010 Conceptual Framework as it was deemed to be implied within the depiction of neutrality, and thatthe term was being interpreted in different ways. However, i ‘was felt that the exercise of prudence, along with understanding the substance of the transactions, rather than the pure legality of them, was required to be explicitly stated in the 2018 revisions to the Conceptual Framework. Furthermore, the Conceptual Framework 2018 revision included a clear definition ofthe term in order to clarity any potential areas of confusion. 4.2 Applying the fundamental qualitative characteristics (2) Identity the economic phenomenon (b) Identity the typeof information about it that would be most relevant (©) Determine it that information is available and if it would give a fitful representation Iso, use that information. if not, then identity the next most relevant information and apply Step 3 again. ‘The previous process reflects the fact thatthe most relevant information may have such a high evel of measurement uncertainty tat, instead, the most useful information is that whichis slightly less relevant, buts subject to lower measurement uncertainty. DEY cons ranrot | rch tnt svete @4.3 Enhancing qualitative characteristics (paras. 2.23-2.38) ‘The enhancing quaitave characteristics are + Comparability . Verifiability. + Timeliness + Understandabiity Information is more useful ifthe enhancing qualitative characteristics are maximised. Enhancing (qualitative characteristics cannot make information useful ifthe information is irrelevant ori tis not a faithful representation. 4.3.1 Comparability Comparabilly Comparebily isthe qualitative characteristic that enables users to ident and understand | similarities in, and differences among, items (para, 2.25). | Key term ‘The disclosure of accounting policies is particularly important here. Users must be able to distinguish between different accounting policies in order to be able to make a valid comparison of similar items in the accounts of different entities. ‘When an entity changes an accounting policy, the change is applied retrospectively so that the results {rom one period to the next can still be usefully compared. Comparabilty is not the same as uniformity. Accounting policies should be changed ifthe change wil result in information that is reliable and more relevant, or where the change is required by an IFRS Standard 4.3.2 Verifiability Key term Verifiability. Veritiailty helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiabilty means that different knowledgeable and independent observers could reach consensus, although nat necessarily complete agreement, that a particular depiction is atathtul representation (para. 2.30) Information can be verified to a model or formula or by direct observation, such as undertaking an inventory count. Independent verification, such as a valuation by a specialists also useful 4.3.3 Timeliness Key term Timeliness. Timeliness means having information available to decision-makers in time to be capable of Influencing their decisions. Generally the older information is the less useful itis (para. 2.33) ‘There is a balance between timeliness and the provision of reliable information. It information is reported on a timely basis when not all aspects of the transaction are known, it may not be complete or free from error. Conversely, if every detal of a transaction is known, it may be too late to publish the information because it has become irelevant. The overriding consideration is how best to satisfy the economic decision-making needs of the users, 4.3.4 Understandability Key term Understandabilily. Cessitying, characterising and presenting information clearly and concisely makes it Understandable (para. 2.34) Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently (para. 2.36). mg vursomtosseeataton | 2 necueqnraneeen EERE4.3.5 Cost constraint (paras. 2.39-2.43) ‘The benefits of reporting information should justity the costs incurred in reporting it. 5 Chapter 3: Financial statements and the reporting entity Financial statements provide information about an entity's assets, labiltes, equity, income and expenses that is useful to the users of financial statements in assessing the prospects for future net cash inflows, ‘and management s stewardship of an entity's economic resources. 5.1 Objective of financial statements To provide financial information about the reporting entity's assets abilities, equity, income and expenses that is usefl to users of financial statements in assessing the prospects for future nel cash inflows tothe reporting entity and in assessing management's stewardship ofthe entity's economic resources. (para, 3.2) seul financial information is presented in (para. 33): (@) The statement of financial position (SOFP) by recognising assets, liabilities and equity (b) The statement of profit or loss and other comprehensive income (SPLOC!) by recognising income and expenses (©) Other statements and notes by presenting and disclosing information about ‘The nature of recognised items and associated risks ‘The nature of unrecognised assets and labltes and associated risks Cash flows Transactions with equity holders ‘Methods, assumptions and judgements used to estimate amounts presented or disclosed Financial statements are prepared for: = aperiod of time © with comparative information + include information about transactions after the reporting date if nacessary Financial statements are presented from: ‘perspective ofthe reporting entity as a whole not from the perspective ofa particular group of users Financial statements are normally prepared on the assumption that an entity is @ going concern and will continue in operation forthe foreseeable future. (para. 39) 5.2 The reporting entity (paras. 3.10-3.14) Key term Reporting entity. A reporting entity isan entty that is required, or chooses, to prepare financial statements. A reporting entity can be a single entity or a portion ofan entity or can comprise mare than one entity. reporting entity is not necessarily a legal entity. (para. 3.10) ‘Where a reporting entity is not a legal entity or a group linked by parent-subsidiary relationships, then the boundary ofa reporting entity is driven by the information needs of the users ofthe reporting entity's financial statements, HEE = coger ranoot | rch tnt svete @6 Chapter 4: The elements of financial statements ‘Assets ilies, equity income and expenses are the elements ofthe financial statements 6.1 Asset Key term ‘Asset: A present economic resource controlled by the entity as a result of past events. ‘An economic resource is aright that has the potential to produce economic benefits. (Conceptual Framework paras. 4.3-4.4) Economic benefits include: * Cash flows, such as returns on investment sources: + Exchange of goods, such as by trading, seling goods, provision of services + Reduction or avoidance of liabilities, such as paying loans. 6.2 Liability Key terms | Liability: A present obligation ofthe entity to transfer an economic resource as a result of past events. (Conceptual Fremework par, 4.26) Obligation: A duty or responsibilty thatthe entity has no practical ability to avoid (para. 4.29). An essential characteristic of a liability is that the entity has an obligation. “A present obligation exists as a result of past events only if: (2) the ent has already obtained economic benefits or taken an action; and (b) asa consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.’ (para. 4.43) 6.2.1 Example IRS 16 Leases requires a lessee to recognise a right-ol-use asset for each lease they enter into (with limited exceptions). A right-of-use asset is consistent with the definition of an asset inthe Conceptual Framework. a result of entering inte the lease agreement (past event) the lessee can direc the use of the leased asset (contol) in the course of business in order to directly or indirectly generate economic benefits IFRS 16 also requires the recognition ofa lease liability, equivalent tothe present value of future lease payments. The lease lability meets the Conceptual Framework definition of a liability: the lessee has a responsibilty (present obligation) as a result of entering into the lease agreement (past event) to pay the lease rentals (transfer of economic benefits) as they become due 6.3 Equity ‘The residual interest in the assets ofthe entity after deducting all its iil (ie claims that do not meet the definition of a liability) 6.4 Income and expenses Key terms | jneome Increases n assets or decreases in lates, that resut in nereass in equ, ther than those relating to contributions from holders of equity claims. Expenses ~ Decreases in assets, or increases in liabilities, that result in decreases in equity, other than ‘those relating to distributions to holders of equity claims. (Conceptual Framework para. 4.2) wg vursomtos serum | 2 tecuequaraneeer ESDitferent transactions generate income and expenses with different characteristics. Showing information ‘about income and expenses with different characteristics separately can help users to understand the entity's financial performance. Contributions from owners (eg issue of share capita) are not income and distributions to owners (eg dividends) are not expenses. f Assets and liabilities Required Consider the following situations. In each case, do we have an asset or liability within the definitions given by the Conceptual Framework? Give reasons for your answer. (@) Pat Co has purchased a patent for $20,000. The patent gives the company sole use ofa particular ‘manufacturing process which will save $3,000 a year for the next five years (b) Baldwin Co paid Don Brennan $10,000 to set up a car repair shop, on condition that privity treatment is given to cars from the company’s feet. (c) Deals on Wheels Co provides a warranty with every car sold (2) Thisis an asset, albeit an intangible one. There is a past event, control and future economic benefit (through cost savings) (b) This cannot be classified as an ascet, Baldwin Co has no control over the car repair shop and itis difficult to argue that there are ‘future economic benefits. (c) The warranty provided constitutes a liability; the business has taken on an obligation. It would be recognised when the warranty is issued rather than when a claim is made. 7 Chapter 5: Recognition and derecognition ‘An item is recognised inthe financial statements if it meets the definition of an element ofthe financial ‘statements and recognition ofthat items provides information that is useful to the users of those financial statements, ‘An Item is derecognised when control over an assets lost or an obligation no longer exists for alabily 7.1 Recognition process Key term Recognition. Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one ofthe elaments of financial statements—an asset, a liability, equity, income or expenses (para. 5.1). HEY ceees rant | rch tn svete @‘The elements and the statements of financial position and financial performance are linked by recognition, as follows: ‘Statement of financial position at beginning of reporting period ‘Assets minus liabilities equal equity ‘Statement(s) of financial performance Contributions from holders of equity claims minus distributions to holders of equity claims ‘Statement of financial position at end of reporting period ‘Assets minus liabilities equal equity Changes inequity (para. 5.4) ‘The statements are linked because of the use of double entry bookkeeping: recognising one item requires the recognition or derecognition of one or more other items, 7.1.1 Recognising an element (paras. 5.6 - 5.8) ‘An item is recognised in the financial statements it (a) The item meets the definition of an element (asset, liability, income, expense or equity), and (b) Recognition of that element provides users of the financial statements with information that is useful, i with ‘© Relevant information about the element ‘+ Afaithtul representation ofthe element Recognition is subject to cost constraints: the benefits ofthe information provided by recognising an element should justity the costs of recognising that element 7.2 Derecognition Derecognition normally occurs (para. §.26): © Foranasset—when control is lost © Fora lability — when there is no longer a present obligation ‘The requirements for derecognition aim to faithully represent both (para. 5.27): (2) Any assets and liabilities retained after derecognition; and (b) The change in the entity's assets and liabilities as a result of derecognition ‘To ensure thatthe financial statements meet the faithful representation characteristic, it may also be Necessary to provide explanatory information and/or to presant separately related income/expenses and retained components in the financial statements »@ surat sect | he oa amet