ACCOUNTING I

Shanza Siddiqi
Email: Shanzatabasum26@gmail.com
The IASB’s Framework
 Pillars of Accounting
There are two areas of the global standards that make up these pillars
of Accounting:
• The Framework and
• IAS 1: Presentation of Financial Statements.
 The Framework
The Framework is technically not a standard but the foundation
for all standards and interpretations. It therefore does not override
any of the IFRSs but should be referred to as the basic logic when
interpreting and applying a difficult IFRS (the term IFRS includes
the standards and the interpretations).
 Scope
The Framework deals with:

•The objective of financial statements.

•Underlying assumptions
•Qualitative characteristics of financial statements
•The elements of financial statements
•Recognition of the elements of financial statements
•Measurement of the elements of financial statements
•Concepts of capital and capital maintenance
 The Objectives of Financial Statements

The objective of financial statements is to provide information about the financial position
performance and changes in financial position of an entity that is useful to a wide range of
users in making economic decisions.

Such financial statements will meet the needs of most users. The information is, however,
restricted.
(a) It is based on past events not expected future events.
(b) It does not necessarily contain non-financial information.
The statements also show the results of the management's stewardship.
 The Concept of stewardship
Stewardship is a relationship of accountability by one person or group for their
management of resources and decision-making on behalf of another person or
group (sometimes referred to as a principal).

In a financial accounting context, employees (whether managers or directors) are

ultimately accountable to the owners of that business (such as shareholders in a
corporate entity) for the use of resources under their control and for the outcome
of decisions they make in the use of those resources.
 Underlying Assumptions

The Framework lists two underlying assumptions:

• Going concern; and
• Accrual basis.
 Going concern
The entity will remain in business for an indefinite period of time.
Financial statements should be prepared on the going concern
basis unless management:
• voluntarily or
• involuntarily (i.e. where there is no realistic alternative) plans
to:
- liquidate the entity; or
- simply terminate trading.
 Accrual basis.

The effects of transactions and other events are recognized when they
occur (and not as cash or its equivalent is received or paid) and they
are recorded in the accounting records and reported in the financial
statements of the periods to which they relate.
 Qualitative Characteristics

The Framework requires that financial information should have certain

qualitative characteristics to ensure that it meets the needs of users.

The Framework identifies two fundamental qualitative characteristics

and four enhancing qualitative characteristics.
 Fundamental Qualitative Characteristics

1. Relevance
2. Faithful representation
 Enhancing Qualitative Characteristics

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability.
Fundamental Quality—Relevance

To be relevant, accounting information must be capable of

making a difference in a decision.
Fundamental Quality—Relevance

Financial information has predictive value if it has value as an

input to predictive processes used by investors to form their own
expectations about the future.
Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.
Fundamental Quality—Relevance

Information is material if omitting it or misstating it could

influence decisions that users make on the basis of the reported
financial information.
Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and

descriptions match what really existed or happened.
Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary

for faithful representation is provided.
Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to

favor one set of interested parties over another.
Fundamental Quality—Faithful Representation

An information item that is free from error will be a more

accurate (faithful) representation of a financial item.
Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.
Enhancing Qualities

Verifiability occurs when independent measurers, using the

same methods, obtain similar results.
Enhancing Qualities

Timeliness means having information available to decision-

makers before it loses its capacity to influence decisions.
Enhancing Qualities

Understandability is the quality of information that lets

reasonably informed users see its significance.
The Elements of Financial Statements

1.Assets
2.Liabilities
3.Capital
4.Income
5.Expenses
 Assets

• a resource
• controlled by the entity
• as a result of past events
• from which future economic benefits are expected to flow to the entity.
 Liability

• a present obligation (not a future commitment!)

• of the entity
• as a result of past events
• the settlement of which is expected to result in an outflow from the entity of
economic benefits..
 Equity

• The residual interest in the assets

• after deducting all liabilities.
 Income

• An increase in economic benefits

• during the accounting period
• in the form of inflows or enhancements of assets or decreases in liabilities
• resulting in increases in equity (other than contributions from equity
participants).
 Expense

• A decrease in economic benefits

• during the accounting period
• in the form of outflows or depletions of assets or an increase in liabilities
• resulting in decreases in equity (other than distributions to equity participants).
Recognition Of The Elements Of Financial Statements

• The term ‘recognition’ means the actual recording (journalising) of a transaction

or event.

An item may only be recognized when it:

• meets the relevant definitions (i.e. is an element as defined); and
• meets the recognition criteria.
 Recognition Criteria

The basic recognition criteria are as follows:

• The flow of future economic benefits caused by this element are probable; and
• The element has a cost/value that can be reliably measured.
 Measurement of the elements of financial statements
The term ‘measurement’ refers to the process of deciding or calculating the amount to use
in the journal entry.
A number of different measurement bases are used in financial statements. They include
 Historical cost
 Current cost
 Realisable (settlement) value
 Present value of future cash flows
Historical Cost

 Measures an asset at the actual amount paid for it at the time of the
acquisition; and
 Measures the liability at the amount of cash (or other asset) received as a
loan or at the actual amount to be paid to settle the obligation in the
normal course of business.
The Current Cost Method
 Measures an asset at the amount that would currently have to be paid if a
similar asset were to be acquired today; and
 Measures liabilities at the actual amount of cash (undiscounted) that
would be required to settle the liability today.
The Realizable Value Method

 Measures an asset at the cash amount for which it can be currently sold in
an orderly disposal; and
 Measures liabilities at the actual amount of cash (undiscounted) that
would be required to settle the liability during the normal course of
business.
The Present Value Method
 Measures an asset at the present value of the future cash inflows (i.e.
discounted) to be derived from it through the normal course of business;
and
 Measures liabilities at the present value of the future cash outflows (i.e.
discounted) expected to be paid to settle the obligation during the normal
course of business.
Capital And Capital Maintenance

The main two concepts are:

(a) financial capital maintenance; and
(b) physical (or operating) capital maintenance.
IAS 1: Presentation of Financial Statements.
1. Statement of profit and loss
2. Statement of changes in Owner’s Equity
3. Statement of financial position
4. Statement of cash flows
5. Notes to the financial statements
Any Question?
Thank
You .