ACC 6201

Business Accounting & Finance

Financial Reporting Framework

Lecture 2
By
Dr. K.Shashi Kumar

K.Shashi & Associates

Definition of Accounting

......a series of processes and techniques

used to identify, measure and
communicate economic information
which users find helpful in making
decisions
Financial Reporting

 the process of reporting on financial (and other) matters

by one party (directors / managers) to others
(stakeholders)
 the objectives: to provide information … for assessing
stewardship (accountability) and for making economic
decisions
 the ‘User-Needs’ Model
 Uses of Accounting Information
Shall I invest in this Do I want to buy
company? from this company?

Should I sell my Will my money be

shares? safe if I lend it?

The company wants

Will I receive a bonus this
to fire me - what
year?
compensation is likely?

How much tax is due?

This firm is polluting
our environment
Is it safe to supply
goods?
Users of accounting information
Employees
Employees
Shareholders
Shareholders Tradecreditors
Trade creditors

Government
Government Management
Management Customers
Customers

Loanproviders
Loan providers Public
Public
Potential
Potential
Investors
Investors
Features of present-day
Financial Reporting
 based, with some exceptions, on historic costs, rather than
current values or adjustments for inflation
 the balance sheet and profit and loss account are ‘accrual-
based’, not ‘cash-based’ statements
• the formats used in financial reporting are determined by
legal and professional regulation.
• specifies the qualities that make financial information useful.
• defines elements of FSs and discuss the criteria for
recognising and measuring them.
Primary Financial Statements
• the Profit and Loss Account
– period statement
– ‘how well have we done this year?’

• the Balance Sheet

– position statement
– ‘where are we now?’

• the Cash Flow Statements

– ‘where did the money come from and go to?’
Annual Report
• Chairman’s report
• Director’s report
• Operating and Financial Review
• Corporate Governance
• Audit Report
• Accounts – BS, P&L & CFS
• Notes to the accounts
• (Others – CSR, Internal control etc)
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Accounting Standards
• What is accounting standard ?
• The benefits of having standards &
drawbacks ?
• What is GAAP, IAS and FRS ?

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IASC Framework
• Underlying Assumptions
• Qualitative Characteristics of financial
statements
• The elements of financial statements
• The recognition of the elements of Financial
statement.

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1. Underlying Assumptions

1. Accrual basis
- Recognising the effects of transactions and other
events when they occur rather than only when cash or
its equivalent is received or paid
- Accounting reports these effects in the financial
statements of the period to which they relate.
2. Going concern
- An entity will continue in operation indefinitely

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 2. Qualitative characteristics of financial
statements
1. Understandability
- Aggregation & classification
2. Relevance
- Materiality
- Timeliness
3. Reliability
- Representational faithfulness
- Substance over form
- Neutrality
- Prudence
- Completeness
4. Comparability
- Consistency
- Disclosure
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3. The elements of financial statements

The elements relating to financial position (BS) are:

• Assets - a resource controlled by the entity as a result
of past events and from which future economic
benefits are expected to flow to the entity
• Liabilities - a present obligation of the entity arising
from past events, the settlement of which is expected
to result in an outflow from the entity of resources
embodying economic benefits
• Equity - the residual interest in the assets of the entity
after deducting all its liabilities.

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Elements of financial statements(con’t)

The elements relating to performance (IS) are:

• Income - increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases of
liabilities that result in increases in equity.
• Expense - decreases in economic benefits
during the accounting period in the form of
outflows or depletions of assets, or the
incurrence of liabilities that result in decreases
in equity.

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4. Recognition of the elements of FS

Recognition is the process of incorporating the BS

or IS an item that meets the definition of an
element and satisfies both the following criteria for
recognition:
• Probable economic benefits
• Measurement reliability

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Conclusion:

The IASC framework:

• describes the basic concepts that underlie financial
statements prepared in conformity with the IFRSs
• identifies principal classes of users of an entity’s FSs
• states that the objective of FSs is to provide information –
about the financial position, performance and changes in
financial position of an entity – that is useful in making
economic decisions.

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Q & A / Discussion

--THE END--

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