Conceptual Frame Worrk

Regulatory & Conseptual Framework 8/14/2014

Compiled by Nsama Musawa Njebele 1

8/14/2014 1Regulatory & Conseptual Framework Compiled by Nsama Musawa Njebele

IntroductionLearning out comeExplain the Conceptual Framework

for Financial AccountingExplain the Regulatory

FrameworkExplain the Recogonition and

Measurement of elements offinancial statements


Definition of Financial Accounting & Reporting

It is the process of identifying, measuring and communicating economic information to

Others for decisions making on the basis of that information and assess the stewardship of the entity’s management.


Framework for financial reportingDivided in 21. the regulatory and the 2. conceptual frame work.


The regulatory frameworkRefers to the Laws and

regulations that outline thelegal requirements to be met inreporting accountinginformation.


QuestionWhy are Laws and regulations

needed in reporting accounting information




Solutionto ensure that relevant and

reliable financial reporting is achieved to meet the needs of shareholders and other users


Harmonization of Accounting standards

Accounting standard havebeen harmonized to applyinternationally.This means that all

Accountants should begoverned by same standards


Benefits of HarmonizationEasy to prepare and consolidate

accounts for multinational entitiesEasy for Investors to compare

results of entities internationallytax liabilities of investor’s are easier

to calculateEasy to audit


Disadvantages of harmonization (1)It is difficult to introduce, apply and

maintain or enforce in different countries, as each has a range of social, political, economic and business factors to consider;

(ii) Different legal systems may prevent the application of certain accounting practices and restrict the options available;


Disadvantages of harmonization(iii)Different purposes of financial

reporting between countries. (iv) Countries may be unwilling to

accept another country’s standards (i.e. nationalism);

(v) Its Costly to develop a fully detailed set of accounting standards.


National standard settersEach country has a national accounting

standard setter . It deals with domestic barriers to

adopting or converging with IFRS. In Zambia, the national standard setter

is the Zambia Institute of Chartered Accountants (ZICA)

ZICA is committed to a framework of accounting standards based on IFRS.




The standard setting processStructure of the International Regulatory System The IFRS refers to the International Financial Reporting Standard IASB refers to the International Accounting standards Board IFRS AC refers to the International Financial Reporting Standard Advisory Council IFRS IC refers to the International Financial Reporting Standard Interpretations Committee

THE IFRS

FOUNDATION

IASB

IFRS IC

IFRS AC


IFRS Foundation is the supervisory body for the

IASB and is responsible forgovernance issuesdevelop a set of global

accounting standards


International Accounting Standards Board (IASB)

solely responsible for issuingInternational Accounting Standards (IASs) now called International Financial Reporting Standards (IFRSs)


IFRS Interpretations Committee (IFRS IC)

Issues rapid guidance on accountingmatters where divergentinterpretations of IFRSs have arisen.

The interpretations cover both:Newly identified financial reporting issues; or Issues where unsatisfactory or

conflicting interpretations have developed,


The IFRS Advisory Council (IFRS IC)provides a forum for the IASB toconsult a wide range ofinterested parties affected bythe IASB’s work, with theobjective of advising the Boardon agenda


Development of an IFRS

IASB identifies a subject

IASB publishes an exposure draft for public comment

final IFRS




List of IFRSs and IASsDate of issue

IAS 1 Presentation of Financial Statements 2007 IAS 2 Inventories 2003 IAS 7 Statement of cash flow 1992 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003 IAS 10 Events after the Reporting Period 2007 IAS 11Construction Contracts 1993 IAS 12 Income Taxes 2000 IAS 16 Properties, Plant and Equipment 2003 IAS 17 Leases 2003


List of IFRSs and IASsIAS 18 Revenue 1993 IAS 19 Employee Benefits 2004 1AS 20 Accounting for Government Grants and Disclosure of Government Assistance 1995 IAS 21 The Effects of Changes in Foreign Exchange Rates 2003 IAS 23 Borrowing Costs 2008 IAS 24 Related Party Disclosures 2003 IAS 26 Accounting and Reporting by Retirement Benefit Plans 1995 IAS 28 Investments in Associates 2003


List of IFRSs and IASsIAS 29 Financial Reporting in Hyperinflationary Economies 1995 IAS 32 Financial Instruments: Presentation 2003 IAS 33 Earnings per Share 2003 IAS 34 Interim Financial Reporting 1998 IAS 36 Impairment of Assets 2004 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998 IAS 38 Intangible Assets 2004 IAS 39 Financial Instruments: Recognition and Measurement 2004 IAS 40 Investment Property 2003


List of IFRSs and IASsIAS 41 Agriculture 2001 IFRS1 First-time Adoption of International Financial Reporting Standards 2003 IFRS 2 Share-based Payment 2004 IFRS 3 Business Combinations 2008 IFRS 4 Insurance Contracts 2008 IFRS5 Non-current Assets Held for Sale and Discontinued Operations 2004 IFRS 6 Explorations for and Evaluation of Mineral Resources 2004 IFRS 7 Financial Instruments: Disclosures 2005 IFRS 8 Operating Segments 2006 8/14/2014 22

Regulatory & Conseptual Framework Compiled by Nsama Musawa Njebele

List of IFRSs and IASsIFRS 9 Financial Instruments 2009 IFRS 10 Consolidated Financial Statements 2013 IFRS 11 Joint Arrangements 2013 IFRS 12 Disclosure of Interests in Other Entities 2013 IFRS 13 Fair Value Measurement 2013 IFRS 15 Revenue and Construction Contracts 2014


Approaches to accounting2 main approaches to accounting1. Rules-based approach (list of detailed

rules that must be followed whenpreparing financial statements)

2. Principles-based or conceptualframework approach (set of keyobjectives are set out to ensure goodreporting)




Approaches to accountingThe principles based is the

approach used in the UK and bythe International AccountingStandards Board (IASB).The rules based is used is the USA

by the Financial accountingstandards board (FASB)


Conceptual FrameworkIs defined as an attempt to codify

existing generally acceptedaccounting practice (GAAP) in orderto reappraise current accountingand produce new standards.This forms the frame of reference

for financial reporting andaccounting


Conceptual FrameworkIt forms a theoretical basis for

determiningwhich event should be accounted

for, (recognition)how they should be measured andhow they should be communicated

to the users (presentation)8/14/2014 27


Arguments in favour of the conceptual framework

It helps to avoids ‘fire-fighting’ ;whereby accounting standards are developed in a piecemeal way in response to specific problems or abuses

Lack of a conceptual framework maymean that certain critical issues are notaddressed, e.g. definition of basicterms such as ‘asset’ ‘liability’.


Arguments in favour of the conceptual framework

It makes it less likely that thestandard-setting process can beinfluenced by ‘vested interests’ (e.g.large companies/business sectors).Principles are harder to circumvent

and therefore preferable to a rules-based approach


Arguments against the conceptual framework

Financial statements are intended for avariety of users and it is not certainthat a single conceptual framework canbe devised which will suit all users

It is not clear that a conceptualframework makes the task of preparingand implementing standards anyeasier than without




Main Contents of Conceptual Framework for Financial Reporting

7 major contents1. The objective of financial

reporting2. The qualitative characteristics of

financial information3. The elements of financial

statements8/14/2014 31


Main Contents of Conceptual Framework for Financial Reporting4.The recognition of the elements of

financial statements5.The measurement of the elements

of financial statements6.Concepts of capital and capital

maintenance7.The underlying assumptions


1 Objective of Financial Reportingto provide financial information

about the reporting entity thatis useful to existing andpotential investors


2. Qualitative Characteristic4 principal qualitative characteristics 1. understandability, -Users must be

able to understand financial statements

2. Reliability -user must be able to depend on it being a faithful representation of affairs. free from material error


2. Qualitative Characteristic3.Relevance, it influences the

economic decisions of users

4.Comparability-Users must be ableto compare an entity's financialstatements:

(a) Through time to identify trends.(b) With other entities’ statements


3.Elements of Financial Statements

5 classes namely 1. Assets, 2. liabilities, 3. equity 4. Income 5. Expenses.





AssetsThese are resources controlled by

the entity as a result of past eventsfrom which future economicbenefits are expected to flow to theentityIt is cash or the right to cash in

future8/14/2014 37


Question1. Trade Kings plc has purchased a patent for

K80, 000. The patent gives the company sole use of a particular manufacturing process which will save K12, 000 a year for the next five years.

2. Auto world plc paid Toyota K40, 000 to set up a car repair shop, on condition that priority treatment is given to cars from the company's fleet.

State whether there is an asset or not


Solution1. This is an asset, an intangible one.

There is a past event, control and future economic benefit (through cost saving).

2. This cannot be classed as an asset. Auto world plc has no control over the car repair shop and it is difficult to argue that there are future economic benefits

8/14/2014 39



2.LiabilitiesThese are an entity’s present

obligations to transfer economicbenefits as a result of pasttransactions or eventsAn Obligation is a duty or

responsibility to act or perform in acertain way


QuestionGame plc provides a warranty

with every washing machine sold

is this a liability or not


SolutionThis is a liability. The business

has an obligation to fulfill theterms of the warranty. Theliability would be recognizedwhen the warranty is issuedrather than when a claim ismade





3.Equity interestis the residual amount found by

deducting all liabilities of the entityfrom all of the entity’s assets. It isthe residual of assets less liabilities,so the amount at which it is shownis dependent on the measurementof assets and liabilities.



4.IncomeIncome is an increase in

economic benefits during theaccounting period in theform of inflows orenhancements of assets ordecreases in liabilities8/14/2014 44



5.ExpensesDecreases in economic benefits

during the accounting period inthe form of outflows or depletionsof assets or incurrence of liabilities


4. Recognition of elements in financial statements

Recognition is the process ofincorporating in the Statement ofFinancial Position or incomestatement an item that meets thedefinition of an element andsatisfies the criteria forrecognition.It is the time when items are

recorded in the books8/14/2014 46


Summary of recognition criteriaItem Recognized in When Asset Statement Financial

Position It is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.

Liability Statement Financial Position

It is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

Income income statement An increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably.

Expenses income statement A decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.


5.Measurement in financial statements

For an item or transaction to berecognised in an entity's financialstatements it needs to bemeasured as a monetaryamount.the IASB Framework identifies

four measurement bases8/14/2014 48





1.Historical cost. Assets are recorded at the amount of

cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition.

Liabilities are recorded at the amount of proceeds received in exchange for the obligation,



2.Current cost. Assets are carried at the amount of cash

or cash equivalents that would have tobe paid if the same or an equivalentasset was acquired currently.

Liabilities are carried at theundiscounted amount of cash or cashequivalents that would be required tosettle the obligation currently.



3.Realisable (settlement) value. Realisable value is the amount of cash or

cash equivalents that could currently be obtained by selling an asset in an orderly disposal.

Settlement value is the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.



4.Present value. A current estimate of the present

discounted value of the future netcash flows in the normal course ofbusinessHistorical cost is the most

commonly adopted measurementbasis


6.Capital and capital maintenance2 types1. Financial capital maintenance2. Physical capital and capital

maintenance


6.Capital and capital maintenance Financial capital maintenance capital is synonymous with the net assets or

equity of the entity. Physical capital maintenance: Under a physical concept of capital, capital is

regarded as the productive capacity of the entity , units of output per day

The financial concept of capital is adopted by most entities




7.The underlying assumptions2 underlying assumptions1. The accrual basis of accounting 2. The going concern


7.The underlying assumptionsAccrual basis- transactions are

recognised when they occur, notwhen the related cash flows into orout of the entity are received.Cash basis - transactions are

recognised when cash is received ,not when they occur


7.The underlying assumptionsGoing concern basis - financial

statements are prepared on the assumption that the entity will continue in operation for the foreseeable future

8/14/2014 57Regulatory & Conseptual Framework Compiled by Nsama Musawa Njebele 8/14/2014 58


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Conceptual Frame Worrk