ACO311 ISSUES IN FINANCIAL ACCOUTNING

LECTURE 1: THE CONCEPTUAL FRAMEWORK OF THE IASB

The International Accounting Standards Board (IASB)

International Accounting Standards Committee (IASC) Foundation was established in 1973 and
oversees IASB.

However, shortcoming like not representative as standard setters were not part of standard
setting body rather national professional accounting bodies.

Lack of convergence between IASC standards and those adopted in major countries.

The board was only part time and lacked resources and technical support.

The committee overseeing IASC reviewed its operations in 1998 and recommended to replaced
IASC with IASB.
• IASB is an independent standard-setting board.
• Accountable for public interest.
• Supported by the following:
• Standard Advisory Committee (SAC)
• International Financial Interpretations Committee (IFRIC)
• Previously International Accounting Standards Committee (IASC) – issued International
Accounting Standards (IASs)

Key objectives of the IASC

✓ The development of a single set of high quality understandable and enforceable global
accounting standards that require high quality, transparent and comparable information in
financial statements and other financial reporting to help participants in the world’s capital
markets and other users make economic decisions

✓ To promote the use and application of these standards

✓ To take into account the needs of small and medium sized entities and emerging economies

✓ To bring abound convergence of accounting standards

Roles of IASB, SAC and IFRIC

• IASB
The IASB has complete responsibility for issuing International Financial Reporting Standards
(IFRS), including preparing exposure drafts (EDs), discussion papers, dealing with dissenting
opinions etc.

Also required to liaise with national standards setters to promote the convergence of national
accounting standards and IFRSs

1
ACO311 ISSUES IN FINANCIAL ACCOUTNING

• SAC
The objective of the SAC is to provide advice to the IASB on agenda decisions and priorities in
the IASB’s work.

• IFRIC
The role of the IFRIC is to interpret the application of IFRSs and provide guidance on issues not
specifically addressed in IASs and IFRSs

The IASB conceptual framework (the Framework)

• Describes the objective and basic qualitative concepts underlying IFRS financial statements

• Is the priority source for preparers or auditors seeking a standard or interpretation.

The Framework is NOT

➢ An IFRS standard
➢ A principle to be applied.
➢ The Framework was adopted by IASB in 2001.

The purposes of Conceptual Framework.

To provide coherent set of principles:

To assist standard setters to develop a consistent set of accounting standards for the
preparation of financial statements.

To assist preparers of financial statements in the application of accounting standards and

dealing with the topics that are not related to applicable accounting standard.

To assist auditors in forming an opinion about compliance with accounting standards.

To assist users in interpretations of information in financial statement.

General purpose Financial Statements (GPFS)

A report intended to meet the information needs common to users who are unable to
commend the preparation of reports tailored to as to satisfy, specifically, all their information
needs

Produced at least annually

Any reports which are specifically tailored to meet the needs of users are referred to as Special
Purpose Financial Reports (SPFR)

GPFS = MUST comply with all IFRSs

SPFR = MAY comply with IFRSs

2
ACO311 ISSUES IN FINANCIAL ACCOUTNING

The Objective of Financial Reporting.

The 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
creditors in making decisions about providing resources to the entity. Those decisions involve
buying, selling or holding equity and debt instruments, and providing or settling loans and other
forms of credit.”

Financial statements should reflect the perspective of the entity rather than the perspective of
the entity’s equity investors.

The key users of financial statements are capital providers

FINANCIAL POSITION
Presented in a Statement of Financial Position

Addresses assets owned, amounts owed, residual equity interests in net assets

Is affected by resources controlled, financial structure, liquidity/solvency and adaptability

PERFORMANCE
Presented in a Statement of Comprehensive Income

Summaries the entity’s ability to earn a profit on the resources invested in it

Includes profit/(loss) for the period and all items reported directly in equity. Examples include:

Fair value changes in assets

Foreign currency translation adjustments

Helps forecasting cash flows

CHANGES IN FINANCIAL POSITION

Presented in a Statement of Cash Flows

Summaries financial position changes involving cash (and cash equivalents) flowing through its
✓ Operations
✓ Investments
✓ Financing

Qualitative characteristics of useful Financial Information.

Fundamental qualitative characteristics:
Relevance (QC6 – QC11, IASB’s Conceptual Framework).

3
ACO311 ISSUES IN FINANCIAL ACCOUTNING

Capable of making a difference in the decisions made by the capital providers as users of
financial information.

It has predictive value, confirmatory value of both.

It is capable of making a difference whether the users use it or not.

Relevant information influences users’ decisions by

➢ Helping them form predictions about the outcomes of past, present of future events; or
➢ Confirming or correcting their past evaluations

Relevance includes consideration of materiality

Materiality
Information is material if its omission or misstatements could influence the economic decisions
of users.

Faithful representation (QC12-16, IASB’s Conceptual Framework).

➢ A depiction is complete if it includes all information necessary for faithful representation.

➢ Neutrality is the absent of bias intended to attain a predetermined result.

➢ A provided information is subject to judgement due to conditions of uncertainty and

judgment to achieve a predetermined result.

Enhancing Qualitative Characteristics

Comparability – quality of information that enables users identify similarities in and differences
between
two sets of economic phenomena.

Verifiability – quality of information that helps assure users that information faithfully
represents the economic phenomena that its purports to represent.

Timeliness – having information available to decision makers before it loses its usefulness.

Understandability – quality of information enables users to comprehend its meaning.

COST CONSTRAINTS ON USEFUL FINANCIAL REPORTING (QC35-QC37).

Costs is the constraint that limits the information provided by financial reporting.

Financial information is provided at the cost of the business.

The benefits should be greater than incurrence of costs in any financial decision-making.

4
ACO311 ISSUES IN FINANCIAL ACCOUTNING

Costs involved in providing financial information include the following; collecting and
processing of information, verifying information, and disseminating information.
Provision of less or non-financial information cost users seeking alternative services.

Going Concern Assumption.

Financial statements are prepared under the assumption that the entity will continue to
operate for the foreseeable future.

Adoption of this assumption has important implication in accounting. For example, justify the
use of historical cost for non-current assets and the systematic allocation of the expired cost
(depreciation) over time.

However, it is only set aside if management wish to liquidate the entity’s operations.

DEFINITION OF ELEMENTS IN FINANCIAL STATEMENTS

• Assets
Economic resources controlled by the entity due to past economic activities and from which
future economic benefits are expected flow to the entity (4.4.a, Conceptual Framework).

The resource must contain future economic benefits.

The entity must have control over the future economic benefits in its pursuits of business
objectives.

The existence of the resources is the result of the past events.

• Liabilities
A present obligation arising from a past event requiring resources to settle (4.4b, Conceptual
Framework).

Legal debt that constitutes liability.

Liability must result in giving up of economic resources for the business resources that demand
payment expected in the future.

Liabilities must have resulted from the past economic events undertaken by the entity.

• Equity
The residual interest after liabilities is subtracted from the assets (4.4c, Conceptual
Framework).

5
ACO311 ISSUES IN FINANCIAL ACCOUTNING

• Income
Increases in economic benefits from inflows, asset enhancements, or decreased liabilities

• Expenses
Decreases in economic benefits from outflows, asset depletions, increased liabilities

RECOGNITION OF THE ELEMENT OF FINANCIAL STATEMENTS

Once a transaction has met the definition criteria it must meet the recognition criteria before
being recorded in the financial statements

Assets and liabilities are recognized when they are probable and can be measured reliably.

Income/expenses are recognized when there is an increase/decrease in economic benefits with

a resulting increase/decrease in equity arising from a non-owner transaction.

Any changes to the qualitative characteristics will result in modifications to the recognition
criteria.

Measurement of the elements of financial statements

Measurement involves assigning monetary amounts where elements are recognized and
reported. Measurement bases include
✓ Historical cost
✓ Fair value
✓ Net realizable value
✓ Present value