Conceptual Framework for Financial Reporting

&
IAS-1: Presentation of Financial Statements

Presented by:
Md Mashiur Rahaman ACA
IAS 1Conceptual
– A brief over-view
Framework for Financial Reporting

Chapter Topic
Status and purpose of the Conceptual Framework

1 The objective of general-purpose financial reporting

2 Qualitative characteristics of useful financial information

3 Financial statements and the reporting entity

4 The elements of financial statements
5 Recognition and derecognition
6 Measurement
7 Presentation and disclosure
8 Concepts of capital and capital maintenance
Chapter-1: The objective of financial reporting

Summary of changes
Objective of financial reporting
This chapter was issued in 2010 and
To provide financial information that is useful to users in making decisions relating went through extensive due process
to providing resources to the entity at that time. Therefore, in revising
the Conceptual Framework, the Board
Users’ decisions involve decisions about did not fundamentally reconsider
this chapter. However, it clarified
voting, or why information used in assessing
buying, selling or providing or settling
otherwise stewardship is needed to achieve the
holding equity or debt loans and other forms
influencing objective of financial reporting.
instruments of credit
management’s Stewardship
actions
Users of financial reports need
To make these decisions, users assess information to help them assess
management’s stewardship. The
Conceptual Framework explicitly
prospects for future management’s discusses this need
net cash inflows to the entity stewardship of the as well as the need for information
entity’s economic that helps users assess the prospects
resources for future net cash inflows to the
entity.
To make both these assessments, users need information about both
Users of financial reports
the entity’s economic resources, claims against the entity and changes in those
Users of financial reports are an
resources and claims
entity’s existing and potential
investors, lenders and other
how efficiently and effectively management has
creditors. Those users must rely on
discharged its responsibilities to use the
financial reports for much of the
entity’s economic resources
financial information they need.
Chapter 2—Qualitative characteristics of useful financial
information
For information to be useful it must both be relevant and provide a faithful representation of what it purports to represent. Relevance
and faithful representation
are the fundamental qualitative characteristics of useful financial information, and the guiding concepts that apply throughout
the revised Conceptual Framework.

Fundamental qualitative characteristics Summary of changes

Relevance Faithful representation This chapter was issued in 2010 and went through
extensive due process at that time. Therefore,
• information is relevant if it is capable • information must faithfully
in revising the Conceptual Framework the Board
of making a difference to the represent the substance of
did not fundamentally reconsider this chapter.
decisions made by users what it purports to represent However, the Board clarified the roles of prudence,
• financial information is capable of • a faithful representation is, to the measurement uncertainty and substance over form
making a difference in decisions if it maximum extent possible, complete, in assessing whether information is useful.
has predictive value or confirmatory neutral and free from error
Prudence
value • a faithful representation is
Neutrality is supported by the exercise of prudence.
affected by level of measurement Prudence is the exercise of caution when making
uncertainty judgements under conditions of uncertainty.
Prudence does not allow for overstatement or
Enhancing qualitative characteristics
understatement of assets, liabilities, income or
Comparability Verifiability Timeliness Understandability expenses.
• these four qualitative characteristics enhance the usefulness of information Measurement uncertainty
• but they cannot make non-useful information useful Measurement uncertainty does not prevent
information from being useful. However, in some
cases the most relevant information may have such
a high level of measurement uncertainty that the
Cost constraint
most useful information is information that is
• the benefit of providing the information needs to justify the cost of providing slightly less relevant but is subject to lower
and using the information measurement uncertainty.
IAS 1 – A brief over-view
Chapter 3 – Financial statements and the reporting entity

Reporting • an entity that is required, or chooses, to prepare financial

entity statements Summary of changes
• not necessarily a legal entity—could be a portion of an entity This chapter is new.
or comprise more than one entity
Boundary of a reporting entity
Determining the appropriate
Financial a particular form of financial reports that provide information boundary of a reporting entity
statements about the reporting entity’s assets, liabilities, equity, income and can be difficult if, for example,
expenses the entity is not a legal entity.
In such cases, the boundary is
determined by considering the
Consolidated Unconsolidated Combined information needs
financial financial financial of the users of the entity’s
statements statements statements
financial statements. Those
users need information that
provide information about provide information about provide information about
is relevant and that
assets, liabilities, equity, assets, liabilities, equity, assets, liabilities, equity,
faithfully represents what it
income and expenses of income and expenses of the income and expenses of
purports to represent. A
both the parent parent only two or more entities that
reporting entity does not
and its subsidiaries as a are not all linked by a
comprise an arbitrary or
single reporting entity parent-subsidiary
incomplete collection of
relationship
assets, liabilities, equity,
income and expenses.
IAS 1 – A brief over-view
Chapter-4: The Elements of Financial Statements

Asset: a present economic resource* controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.

Liabilities are present obligations** of the entity, which are expected to result in an outflow from
the entity of resources embodying economic benefits.

Equity is the residual interest in the assets of the entity after deducting liabilities. In other words,
equity represents what's left for the owners after the company's debts are paid off.

Income encompasses both revenue and gains. Revenue arises in the course of the ordinary
activities of an entity whereas gains may or may not arise in the course of the ordinary activities
and are usually infrequent or irregular.

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.

*Economic Resource A right that has the potential to produce economic benefits
**Obligations A duty of responsibility that an entity has no practical ability to avoid.
Chapter-5: Recognition and derecognition of the elements of
financial statements

Asset of liability recognize when:

• relevant information about the asset or the liability and about any income, expense or changes
in equity
• a faithful representation of the asset or liability and of any income, expenses or changes in
equity, and
• information that results in benefits exceeding the cost of providing that information.

Asset of liability derecognize when:

(a)Loss of control of all or part of the assets
(b) The entity no longer has an obligation for a liability

A key change to this is the removal of a ‘probability criterion’. This has been removed as different
financial reporting standards apply different criterion; for example, some apply probable, some
virtually certain and some reasonably possible. This also means that it will not specifically prohibit
the recognition of assets or liabilities with a low probability of an inflow or outflow of economic
resources.
Chapter-6: Measurement of the elements of financial statements

HISTORICAL VALUE TO THE FAIR VALUE; REALIZABLE VALUE IN USE

COST; BUSINESS VALUE;
(ALSO KNOWN
AS DEPRIVAL
VALUE OR
CURRENT COST);
Chapter 7—Presentation and disclosure
The statement of profit or loss
• The statement of profit or loss is the primary source of information about
an entity’s financial performance for the reporting period Summary of changes
This chapter is new.
• Profit or loss could be a section of a single statement of financial performance or a
separate statement
Better Communication
• The statement(s) of financial performance include(s) a total (subtotal) for profit or loss
Information about assets, liabilities, equity,
• In principle, all income and expenses are classified and included in the statement of
income and expenses is communicated
profit or loss
through presentation and disclosure in the
Other comprehensive income financial statements.
• In exceptional circumstances, the Board may decide to exclude from the Effective communication of information in
statement of profit or loss income or expenses arising from a change in current financial statements makes that information
value of an asset or liability and include those income and expenses in other more relevant and contributes to a faithful
comprehensive income representation of an entity’s assets, liabilities,
• The Board may make such a decision when doing so would result in the equity, income and expenses.
statement of profit or loss providing more relevant information or a more The revised Conceptual Framework
faithful representation includes concepts that describe how
information should
Recycling
be presented and disclosed in financial
• In principle, income and expenses included in other comprehensive income in one statements.
period are recycled to the statement of profit or loss in a future period when doing so
The Board is also working on several projects
results in the statement of profit or loss providing more relevant information or a more
on the theme of Better Communication to
faithful representation
make financial information more useful to
• When recycling does not result in the statement of profit or loss providing more investors, lenders and other creditors and to
relevant information or a more faithful representation, the Board may decide income improve the communication of that
and expenses included in other comprehensive income are not to be subsequently information.
recycled
Chapter-8: Concept of capital and capital maintenance

Financial capital maintenance

o a profit is earned only if the financial amount of the net assets at the and of the period is greater than
the net assets at the beginning of the period, adjusted of course for any distributions paid to the
owners during the period, or any equity capital raised.
Assets – Liabilities = Equity
Opening equity (net assets) + Profit – Distributions = Closing equity (net assets)
Two way of measurement:
• Money financial capital maintenance (Historical cost),
• Real financial capital maintenance (Constant purchasing power)
A financial concept of capital should be used if the users of the financial statements are mostly concerned
with the maintenance of their invested capital, or the purchasing power of the invested capital.
Physical capital maintenance
• profit is earned only if Production or operating capability of the entity at the end of the period is greater
than the physical production capacity at the beginning of the period, adjusted for any distributions paid
to the owners during the period, or any equity capital raised.
• A physical concept of capital should be used if the users of the financial statements are mostly
concerned with the operating capacity of the entity, and current value accounting

Profits will usually be higher when the financial concept of capital is used compared to the physical concept
of capital. This is due to the inflation adjustment.
Chapter-8: Concept of capital and capital maintenance

Example:

• An entity is established on 1 January 20X1 with 20,000 ordinary shares at €1 each.

• It then buys €20,000 worth of stock, which is sells during the year for €25,000.
• At the end of the year the purchase price of the stock increased on €23,000.

Answer:

• Using the physical maintenance concept, the profit for the reporting period is €2,000
(€25,000-23,000).
• If the financial capital maintenance concept is used, the profit for the year is €5,000,
but if the company paid out the €5,000 profit to shareholders, it would be unable to
buy the same stock again as the purchase price has risen.

To keep the operating capability of the entity the same, profit is measured as sales less the
replacement cost of the goods sold.
IAS-1: Presentation of Financial Statements

Md Mashiur Rahaman ACA

IASIAS
1 – A1brief
– A over-view
brief over-view

♦ Objective : Basic for consistent preparation of a set of FS

♦ Mission : ensure inter period and inter entity comparability in FS
preparations practices
♦ Content : Overall structure of FS with requirements and guidelines (what
needs to be included and how it is to be framed, fundamental concepts
such as materiality and aggregation) and minimum requirements for its
content (line items, notes, disclosures etc.).

♦ Scope : applies to all General purpose (GP) FS (users not in

a position to have tailored FS information)
♦ Primary GP users in BD : Shareholders of PLC’s, Lending
institutions, Tax and VAT authorities, BOI, Future strategic
investment partners etc..
 1 –1A–brief
IASIAS over-view
A brief over-view

♦ Objective analyzed: Provide information on performance, position and cash

flows in order to facilitate economic decisions.
– assets
– liabilities
– equity
– income and expenses, including gains and losses
– contributions by and distributions to owners (in their capacity as
owners)
– cash flows.
– That information, along with other information in the notes, assists users
of financial statements in predicting the entity's future cash
flows and, in particular, their timing and certainty.
 1 –1A–brief
IASIAS A brief over-view
over-view
♦ Fair presentation :
−faithful representation in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Framework.
– The application of IFRSs, with additional disclosure when necessary, is presumed to
result in financial statements that achieve a fair presentation
♦ Unreserved compliance in terms of basis of preparation.

♦ Entity is required to depart from the IFRS requirement, with detailed disclosure of the
nature, reasons, and impact of the departure in extremely rare circumstances where it
has concluded that after all reasonable efforts compliance with IFRS would cause
conflict with the Framework.

IAS 1 acknowledges that, in extremely rare circumstances, management may

conclude that compliance with an IFRS requirement would be so misleading that it
would conflict with the objective of financial statements set out in the Framework. In
such a case, the entity is required to depart from the IFRS requirement, with
detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.19-
21]
Types & Components of complete
Types
set of FS& Components of complete set of FSs
o Consolidated financial statements
o Separate financial statements
o Interim financial statements (IAS 34)

Statement of Statement of
Profit or Loss changes in
and OCI • Comparative equity
information
required by the
Statement of standard.
Significant
financial • Titles flexible. accounting
position • Equal policies
prominence of all
statements.

Statement of Other notes

cash flows
Structure - identification
the name of the reporting entity and any information about the reporting period
change in the name and whether the For the year ended 31
financial statements are a group of December 2011
entities or an individual entity
Lila-Tech
Consolidated financial statements

the level of rounding used Rounded to the presentation currency

the nearest thousand ’000s Presented in BDT/ USD etc.
Structure – Reporting period

Financial statements presented at least

No prohibition on 52-week period
annually for practicality

Financial year in accordance with If shorter or longer period:

Company Act. ♦ Reason
Can exceed 12 months but not more ♦ Fact that amounts may not be
than 15 months. Can be 18, subject to comparable
special permissions from RJSC.
 Going concern
Going concern basis unless: Management assesses ability to
♦ Business expected to cease continue as going concern
♦ No realistic alternative but to
liquidate

Disclosures if not prepared on

Disclosures if significant uncertainties going concern basis:
regarding ability to continue as going ♦ Basis on which prepared
concern. ♦ Reason for such basis
Materiality, aggregation and offsetting
Materiality and aggregation
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions
that the primary users of general purpose financial statements make on the basis of those financial statements,
which provide financial information about a specific reporting entity. [IAS 1.7]*
Each material class of similar items must be presented separately in the financial statements. Dissimilar items
may be aggregated only if they are individually immaterial. [IAS 1.29]
However, information should not be obscured by aggregating or by providing immaterial information, materiality
considerations apply to the all parts of the financial statements, and even when a standard requires a specific
disclosure, materiality considerations do apply. [IAS 1.30A-31]

Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS. [IAS
1.32]

Material if omitting, misstating or obscuring

Reasonably expected to influence decisions of
Changes - 2020
primary users of general purpose financial
statements

Material class of similar items must be Assets and liabilities, and income
presented separately. and expenses, may not be offset unless required
or
Dissimilar items may be aggregated only permitted by an IFRS.
if they are individually immaterial.
Consistency
Consistencyofof
presentation
presentation

unless change gives more

Retain same presentation and appropriate presentation / is
classification of required by an IFRS
items…
Comparative information for 1 year
Numerical comparatives unless an IFRS permits
otherwise
EXCEPTION: statement of financial position at
beginning of comparative period in some cases
Change in accounting policy
Correction of an error
Reclassification
Narrative comparatives if relevant to understanding
current period
Comparatives restated / adjusted
in some cases
Restate / adjust comparatives unless
impracticable
Statement of financial position at beginning of
comparative period if impact material
Fair presentation

Achieved by appropriate Requires faithful representation of effects

application of IFRSs of transactions, events and
conditions

If compliance with an IFRS is

misleading, departure requires
comprehensive disclosures (if regulator If conflict between Framework and a
allows) and requires consultation: Standard / Interpretation, the Standard /
EXTREMELY RARE Interpretation is applied
Statement of financial position presentation
Present assets and liabilities in the
statement of financial position as:
♦ Current / non-current (for
companies with definitive
operating cycle)
♦ Broadly in order of liquidity when
reliable and more relevant
Disclose amounts due for recovery
/ settlement > 12 months from
reporting date
(for FI’s)
Exceptions:
♦ Deferred tax assets /
liabilities always non-current
♦ Post-employment benefits
may be non-current
Current vs non-current

Assets current if: Liabilities current if:

♦ Used in normal operating cycle ♦ To be settled in normal

operating cycle
♦ Held primarily for trading
purposes ♦ Held primarily for trading
purposes
♦ Expected to be realised
within 12 months ♦ Due to be settled within
12 months
♦ Cash or cash equivalent
♦ No unconditional right to
defer settlement for at least
12 months

All other assets and liabilities are non-current

 Statement of comprehensive income

Income statement

Statement of
or &
comprehensive income
Statement of
comprehensive income

Examples:
• Revaluation of property, plant and equipment
• Foreign exchange differences on translation of foreign operations
• Cash flow hedging
• IFRS 09 – Own credit risk changes, FVOCI classification for certain financial assets
etc.
 Statementofof
Disclosure comprehensive income
expenses

On the face By nature

OR OR
In the notes By function

What about
If by function, also disclose
exceptional information on nature of
expenses ?? Can expenses, including:
these be ⧫ Depreciation / amortisation
presented ⧫ Employee benefits expense
separately or as
extra-ordinary
items?
Alternative earnings measures

EBITDA Not prohibited but…

EBIT
Regulator may restrict or
prohibit
Adjusted operating profit

Adjusted gross profit Define and reconcile

Statement of changes in equity

Opening balance

Each item of
other Transactions
Profit or loss
comprehensive with owners
income

Closing balance
Notes to the financial statements

o Systematic presentation with cross-references

o Reporting entity (Legal form, place of domicile and incorporation,
registered address, principal operation activities, name of
parent/group if applicable.
o Significant accounting policies and significant judgement and
assumptions used.
o Basis of preparation(Statement of compliance, Basis of measurement,
Currency, period, comparative information, Going concern assumption)

o Judgements in applying accounting policies with significant effects on

amounts recognized. For example: Lease classification, Commission
revenue, Classification of investment property etc..
o Key assumptions about the future and key sources of estimation
uncertainty. For example: Provisions and contingencies, Utilisation of tax
losses, Assumptions used in discounted cash flow models etc.
Judgements and estimation uncertainty

Judgements in applying
Key assumptions about
accounting policies with
the future and key sources
significant effects on
of estimation uncertainty
amounts recognised

For example: For example:

♦ Lease classification ♦ Provisions and contingencies
♦ Commission revenue ♦ Utilisation of tax losses
♦ Classification of investment ♦ Assumptions used in discounted
property cash flow models
Key changes through IFRS-18
1. Structure of the statement of profit or loss
o Categories
IFRS 18 includes additional requirements for entities that provide financing to customers (for
example, banks) or that invest in assets with specific characteristics (for example, an investment
entity) as a main business activity. Some income and expenses that might ordinarily have been
classified in the investing or financing category, when applying the general principles, will be
presented in the operating category for these entities. The result of this is that operating profit
will include the results of an entity's main business activities.

o Required subtotals:
IFRS 18 requires entities to present specified totals and subtotals: the main change relates to the
mandatory inclusion of ‘Operating profit or loss’. The other required subtotals are ‘Profit or loss’
and ‘Profit or loss before financing and income taxes’, with some exceptions (for example, where
a bank has financing as a main business activity and has made specific presentation choices).
Key changes through IFRS-18
2. Disclosures related to the statement of profit or loss
IFRS 18 introduces specific disclosure requirements related to the statement of profit or loss:
o Management-defined performance measures: Management might define its own measures of
performance, sometimes referred to as ‘alternative performance measures’ or ‘non-GAAP
measures’. IFRS 18 defines a subset of these measures which relate to an entity’s financial
performance as management-defined performance measures (‘MPMs’). Information related to
these measures should be disclosed in the financial statements in a single note, including a
reconciliation between the MPM and the most similar specified subtotal in IFRS® Accounting
Standards. This will effectively bring a portion of non-GAAP measures into the financial
statements.
o Disclosure of expenses by nature, for entities that present the statement of profit or loss by
function: Entities will present expenses in the operating category by nature, function or a mix of
both. IFRS 18 includes guidance for entities to assess and determine which approach is most
appropriate, based on the facts and circumstances. Where items are presented by function, an
entity is required to disclose information by nature for specific expenses.
Key changes through IFRS-18
3. Aggregation and disaggregation (impacting all primary financial statements
and notes)
IFRS 18 provides enhanced guidance on the principles of aggregation and disaggregation
which focus on grouping items based on their shared characteristics. These principles
are applied across the financial statements, and they are used in defining which line
items are presented in the primary financial statements and what information is
disclosed in the notes.

4. Other limited changes

IFRS 18 will make some other limited changes to presentation and disclosure in the
financial statements. For example, IAS 7, ‘Statement of cash flows’, is amended to:
❖ specify ‘operating profit or loss’ as the starting point for reconciling cash flows from
operating activities; and
❖ remove the existing options for the presentation of interest and dividends paid and
received.
Previous questions
March April-2024
1 (a) The process of setting IFRSs is an open dialogue involving co-operation between national and
international standard setters - briefly outline the standard setting process. 3
(b) Explain the circumstances in which non-compliance with the detailed provision of an accounting
standard is justified. 3
Nov-Dec 2023
1. a) Professional accountants are expected to follow the guidance contained in the fundamental principles
in all of their professional and business activities - briefly explain all the five fundamental principles. 5
b) An entity supplies seasoned timber to furniture manufacturers. The operating cycle is clearly defined and
timber is matured over a three to five year period. State how the timber inventories would be classified in
the statement of financial position and any additional disclosures which would be required. 5

July- Aug 2023

1 a) Explain the concept of 'fair presentation' and compare it with 'true and fair view’. 5
b) Explain the concept of 'substance over form' and its relationship to 'fair presentation’. 5

March- April 2023

1. a) The move towards global accounting standards has been successful - do you agree? Please justify your
answer? 5
b) What are the financial accounting and ethical issues you would consider when selecting or changing an
accounting policy? 5

Nov-Dec 2021
(b) Explain the qualitative characteristics of relevance and reliability and the potential for conflict between
them, giving an appropriate example. 4
Previous questions
March- April 2021
1. (a) The presentation and classification of items in the Financial Statements should be the same from one
period to the next - what are the exceptions of this statement? 4
2. (b) IAS 1 ends by listing some specific disclosures which will always be required if they are not shown
elsewhere in the financial statements - explain those specific disclosures. 4

Nov- Dec 2020

1. Briefly explain the following statements:
(a) Profit is only earned in an accounting period if the equity at the end of the period is greater than it was at the
beginning. 4
(b) 'Backward-looking' is called one of the inherent limitations of financial statements. 4
(c) Within each individual country local regulations govern, to a greater or lesser degree, in preparing and
presenting financial statements. 4
May June-2019
1. (a) “For an item or transaction to be recognised in an entity's financial statements it needs to be measured as
a monetary amount. IFRSs use several different measurement bases but the Conceptual Framework refers to just
four.” Explain the four measurement bases referred to in Conceptual Framework. 4
(b) “This Conceptual Framework is not an IFRS and hence does not define standards for any particular
measurement or disclosure issue. Nothing in this Conceptual Framework overrides any specific IFRS.”
i) Discuss general guideline in the Conceptual Framework in case of conflict between conceptual framework
and IFRSs 3
ii) ii) What would be your suggestion in case you encounter circumstances where compliance with a
requirement in an IFRS would be so misleading that it would conflict with the objective of financial
statements set out in the Framework. 3
Previous questions
Mar Apr-2022
Top strategists of Sonar Bangla Investment Alliance (SBIA) are about to finalize their recommendation to its Board
of Directors on the acquisition plan of South Asian Heritage Ltd. (SAHL). They are evaluating the finding of the
Financial Analysis Team that; they (Financial Analysis Team) are not sure whether SAHL audited financial
statements exhibit a true and fair view as required by the Companies Act 1994. The Financial Analysis Team
identified that SAHL practices relevant Income Provisions for recognition & measurement of certain items (as it
differs from IFRS) and thus to prepare and present general purpose financial statements. That might cause a
significant departure from the present economic position of the SAHL. The concerned Management Team
responsible for the formulation of appropriate accounting policies believe compliance to legal form (TAX
Provisions) are more significant than economic substances. Application of country statute (Law/Regulations) for
accounting results in single set of FS, thus facilitates less complex scenario where no difference (whether
adjustable or not) arises, e.g. for PPE. The FS of SAHL were prepared back calculating of withholding INCOME TAX
deducted by the customers of SAHL. Revenue and cost of services are estimated in order to match the advance TAX
through TDS under section 82C minimum payment of TAX as the deducted TAX almost results in 10- 15% higher
than that leviable income tax on accounting profit if calculated applying IFRS.
Requirements:
a) In view of the above explain the difference between – a true fair view vs the true fair view. 5
b) Advise briefly whether the true fair view had been achieved by preparing and presenting FS applying income tax
provision for recognition & measurement of a few items as indicated above? 2
c) Exhibit the state of “substance over form” with hypothetical example in the scenario of SAHL. 2
d) Advise whether the purpose of FS (assumed general purpose FS) had been achieved through the adoption of
TAX based accounting treatment. If not, why? 3
e) How do you interpret auditor’s ethics certifying SAHL FS? 2
Thank you