MODULE 1: THE CONCEPTUAL

FRAMEWORK

DURING THE LECTURE:

− Arrive prepared!
− Participate in classroom discussions.
− Ask questions.

AFTER THE LECTURE:

− Study the relevant chapter in your prescribed textbook.
− Understand the new concepts that are explained in the
textbook.
− Keep up and REVIEW AS YOU GO.
− Do questions in question bank.
− CONSULT

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 → Understand the objective of financial
reporting/financial statements.
→ Explain and apply the underlying assumptions
used to prepare financial statements.
→ Explain the qualitative characteristics of financial
statements.
→ Explain and apply the elements of financial
statements and their recognition criteria in respect
of the preparation of financial statements.
→ Understand and apply the appropriate
measurement bases that may be used when
measuring the elements.

International Financial Reporting Standards

• International Financial Reporting Standards (IFRS) are a set of

accounting rules for the financial statements of public
companies that are intended to make them consistent,
transparent, and easily comparable around the world.

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Conceptual Framework
• The Conceptual Framework describes the objective of, and the
concepts for, general purpose financial reporting.

• The Conceptual Framework is not a Standard. It does not

override Standards or any requirements in a Standard.

• The mission of the Conceptual Framework is to develop

Standards that bring transparency, accountability and efficiency
to financial markets around the world.

Scope of the Conceptual Framework

• 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 5: Recognition and derecognition
• CHAPTER 6: Measurement
• CHAPTER 7: Presentation and disclosure
• CHAPTER 8: Concepts of capital and capital maintenance

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Objective of Financial Reporting

To provide financial information that is useful to users in

making decisions relating to providing resources to the
entity.

• Who are the users?

• What makes information useful?

Users of Financial Reports

The users of financial reports could be anyone who has an

interest in the effects of decisions made in the business:
→ Business owners/shareholders
→ Managers
→ Employees
→ Creditors and lenders (banks)
→ South African Revenue Service (SARS)
→ Financial analysts, investors, financial advisors and
financial institutions.

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 Qualitative characteristics of useful
financial information

FUNDAMENTAL
FAITHFUL
RELEVANT
PRESENTATION

COMPARABLE ENHANCING TIMELINESS

VERIFIABLE UNDERSTANDABILITY

Qualitative characteristics of useful

financial information
Capable of making a
Predictive/ difference in decision
confirmatory Neutral (free from bias) Completeness
making
value

FUNDAMENTAL
FAITHFUL
RELEVANT
PRESENTATION Free from
Materiality
error

COMPARABLE ENHANCING TIMELINESS

VERIFIABLE UNDERSTANDABILITY

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Cost constraint on information

The benefit of providing the information needs to justify

the cost of providing and using the information.

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Financial statements

A particular form of financial reports that provide

information about the reporting entity’s assets, liabilities,
equity, income and expenses.

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Elements of the financial statements

Assets
Statement of financial position –
→

→ Liabilities measures entity’s financial position

→ Equity
→ Income Statement of profit or loss –
measures entity’s financial
→ Expenses
performance

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Assets
An asset of an entity is:
• A present economic resource
(which is a right that has the potential to provide economic
benefits);
• That is under the control of the entity;
• As a result of a past event.

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Liability
A liability of an entity is:
• A present obligation of the entity
(which is a duty or responsibility that the entity has no
practical ability to avoid)
• To transfer an economic resource
• As a result of a past event.

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Equity
Equity is defined as the residual interest in the assets after
deducting all its liabilities.

Equity is the difference between the assets and liabilities of

the entity.

Accounting equation:
E=A-L

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Income
Income is described as:
• Increases of assets
• Or decreases in liabilities
• That result in increases in equity
• other than those relating to contributions from equity
participants.

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Expenses
Expenses are defined as:
• Decreases in assets
• Or increases in liabilities
• That result in decreases in equity
• Other than those relating to distribution to holders of equity
claims.

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Elements
EXAMPLE 1
Alfa Ltd received R80 000 in cash on 20 December 2018
from Romeo Ltd in return for having provided financial advice
during the 2018 financial period. Alfa Ltd has a 31 December
financial year end.

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Elements
EXAMPLE 2
Alfa Ltd owe R60 000 at the end of December 2018 to
Lawyer Ltd in return for receiving legal advice during the
2018 financial period. Alfa Ltd has a 31 December financial
year end.

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Elements
EXAMPLE 3
Alfa Ltd received R90 000 in cash on 20 December 2018
from Romeo Ltd in return for providing financial advice in the
2019 financial period. Alfa Ltd has a 31 December financial
year end.

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Recognition

The process of capturing for inclusion in the statement of

financial position or the statement of financial
performance an item that meets the definition of an
asset, a liability, equity, income or expenses.

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Process of Recognition

Step 1: DEFINITION
Does the item meet the definition of an asset,
liability, equity, income or expense?

Step 2: RECOGNITION CRITERIA

Does the recognition of an item results in
information that is relevant and faithfully
represented?
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Process of Recognition

RELEVANCE FAITHFUL
REPRESENTATION

May be affected by: May be affected by:

• Measurement uncertainty
• Low probability of a flow of
economic benefits • Recognition inconsistency

• Existence uncertainty
(accounting mismatch)
• Presentation and disclosure

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Derecognition

The removal of all or part of a recognised asset, or

liability from an entity’s statement of financial position.

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Measurement

Historical cost Current value

measurement bases measurement bases

• Historic cost • Fair value

• Value in use
• Current cost

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Presentation and Disclosure

• Presentation of the financial statements

• Disclosure of additional information in the notes to the
financial statements

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Homework

• How many listed companies do you know?

• Find and download Annual Financial Statements for a

listed company in preparation for our next lecture.

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