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Conceptual Framework for Financial Reporting
By: Neema Kiure Mssusa
Contemporary Issues in Accountancy
Page 2
Agenda
► IASB Conceptual Framework
► IPSASB Conceptual Framework
Page 3
Introduction
► The CF has been developed so that it is applicable to a
range of accounting models and concepts of capital and
capital maintenance.
► Purpose of CF
► Status of CF
Page 4
Structure – IASB
► IASCF Constitution
IASCF is responsible for:
Funding;
Appointment of members of IASB, SAC and IFRIC
IASB is completely responsible for:
All technical matters in general;
In particular, the preparation and issue of IFRS
SAC is responsible for:
Advice to IASB on agenda priorities;
Information to IASB on their views about
the standard-setting projects
IFRIC is responsible for:
Interpretation and application of IFRS
Page 5
Structure – IPSASB
Nominating
CommitteeIFAC Board
IPSASB
IPSASB
Observers
IPSAS
Task-based groups/
Task forces
Exposure
Draft
nominates
members
appoints
members
observe
prepare
approves
monitors
Consultative
Advisory
Group
provides
advice
Public Interest Committee
monitors
informs about
matters of interest
Page 6
IASB/IPSASB Conceptual Framework Chapters
Chapter No. IASB IPSASB
1 The objective of GPFR Role and Authority of the CF
2 Reporting entity concept Objectives and Users of
GPFR
3 Qualitative characteristics of
useful financial information
Qualitative Characteristics
4 The Framework (1989): the
remaining text
Reporting Entity
5 - Elements in Financial
Statements
6 - Recognition in FS
7 - Measurement of Assets and
Liabilities in FS
8 - Presentation in GPFR
Page 7
Context for Financial Reporting.
Financial Reporting
IASB/IPSASB CFFinancial
Statements
Purpose and StatusUnderlying
Assumptions
Qualitative
CharacteristicsElements Constraints
Relevance
Faithful
Representation
Understandability
Comparability &
Timeliness
Definitions
Recognition
Measurement
Verifiability
Page 8
Financial Reporting Standards
► IFRSs designed for profit-oriented entities
► IPSASs designed for public sector entities
► When claiming compliance with standards, must comply with all standards & interpretations
► Overriding requirement = FS to give a fair presentation (or true & fair view)
► When not covered by standards, look at hierarchy of alternative sources.
Page 9
Financial Reporting Standards..
► ..\..\AG\Revised Slides\IFRS VS IPSAS.xls
Page 10
Conceptual Framework
► Conceptual framework
► aid to develop and review standards
► Provide basis for reducing number of alternative methods.
► point of reference for preparers.
► IFRSs/IPSASs applies to “material” items.
►
► Transactions accounted for according to Substance, rather than only their legal form.
► Transaction with shareholders to be considered carefully in determining appropriate accounting.
Page 11
Qualitative Characteristics
► Relevance
► predictive value & confirmatory value
► includes materiality
► Faithful Representation
► complete, neutral and free from error
► Understandability
► classifying, characterising and presenting information clearly and concisely
► Timeliness
► Comparability
► consistency & disclosure of policies
► Verifiability
Application would result in a true and fair view / fair presentation
Page 12
Elements of financial statements
Element Definitions Description
►ASSET Resource controlled by
entity – future economic
benefits
►Cash, right to services
(prepayment) – can be
used to generate cash
►LIABILITY Expected to lead to outflow
of resources from entity
►Obligations – from legally
enforceable contracts or
constructive obligation
►EQUITY/NET ASSETS Residual amount:- assets -
liabilities
►Ownership interest
►Equity holders
►REVENUE Increase in economic
benefits, other than
contribution from equity
►Revenue, gains
►EXPENSES Decrease in economic
benefits, other than
distribution to equity
►Expenses, losses
Page 13
Recognition in financial statements
► An item is recognised (when it is included in the primary FS) if, but only if:
► Probable the future economic benefit will flow into or out of entity
► Cost or value can be reliably measured
► NB items which fail criteria may merit disclosure in the notes
► Probability of future benefit
► Linked with uncertainty of the environment
► No further guidance = ‘more likely than not”
► Reliability of measurement
► Permits the use of estimates
► Different degrees of accuracy = matter of judgement
► De-recognition
► When an item is removed from the primary financial statements
► Sufficient evidence that a transaction or other event has eliminated all or part of previously recognised asset or liability
Page 14
Measurement in financial statements
Several bases – used to different degrees in varying combinations
► Historical cost: Original cost or original fair value if no cash changed hands (e.g.exchange of assets)
► Current cost: Assets measured at what would have to be paid out at the reporting datefor the equivalent asset; Liabilities are measured at amounts they could be settled forat the reporting date
► Fair value: is the price that would be received to sell an asset or paid to transfer aliability (exit price) in an orderly transaction (not a forced sale) between marketparticipants (market-based view) at the measurement date (current price).
► Realisable value: Assets measured at what they could now be sold for; Liabilities aremeasured at the amounts expected to be paid out
► Present Value: Assets measured at the PV of future cash flows, discounted byreference to market interest rates over the period until they are realised; Liabilitiesmeasured at the PV of what is expected to be paid out in the future, discounted byreference to market interest rates over the period until they are settled
Page 15
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
15
ASSET TYPE MEASUREMENT AT
INITIAL RECOGNITION
MODEL BASED ON
FAIR VALUE
BASIS OF
IMPAIRMENT TEST
IFRS 9 Financial
Instruments
Fair value For specified financial
assets and for particular
business models: fair value
IAS 16 Property, Plant
and Equipment
Purchase costs + construction
costs + costs to bring to the
location and condition necessary
to be capable of operating in the
manner intended by
management.
Accounting policy choice:
revaluation model
Compare carrying amount
to recoverable amount.
Recoverable amount is
greater of value in use and
fair value less disposal
costs (IAS 36)
IAS 38 Intangible
Assets
Purchase costs + development
costs + costs to bring to the
location and condition necessary
to be capable of operating as
intended by management
Accounting policy choice:
revaluation model
IAS 40
Investment Property
Cost including transaction costs Accounting policy choice:
fair value
IAS 41 Agriculture Fair value less costs to sell Fair value less costs to sell
Page 16
© 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
16
ASSET TYPE MEASUREMENT AT INITIAL
RECOGNITION
COST MODEL BASIS OF
IMPAIRMENT
TEST
IAS 2 Inventory Cost of purchase and/or conversion
costs and costs to get the item to the
location and condition for sale
Cost unless impaired Lower of cost
(initial recognition)
and net realisable
value/current
replacement cost
IAS 16 Property, Plant
and Equipment
Purchase costs + construction costs +
costs to bring to the location and
condition necessary to be capable of
operating in the manner intended by
management.
Accounting policy choice:
cost less accumulated
depreciation and
impairment, if any
Compare carrying
amount to
recoverable
amount.
Recoverable
amount is greater
of value in use and
fair value less
disposal costs (IAS
36)
IAS 38 Intangibles
Assets
Purchase costs + development costs +
costs to bring to the location and
condition necessary to be capable of
operating as intended by management
Accounting policy choice:
cost less accumulated
amortisation (unless
indefinite life asset) and
amortisation, if any
IAS 40 Investment
Property
Cost including transaction costs Accounting policy choice:
cost less accumulated
depreciation (unless land)
and impairment (if any)
IFRS 9 Financial
Instruments
Fair value For particular business
models amortised cost
IAS 39 specifies
impairment rules
Page 17
Constraints on Information Included in GPFR
No. IASB IPSASB
1 Cost-Benefit Cost-Benefit
2 Materiality
3 Balance between the Qualitative
Characteristics
Page 18
Framework’s role in applying Standards
Does the Framework help me apply the standards?
► Yes, Framework is in IAS 8/IPSAS3 hierarchy
►Preparers use the Framework to make the judgements
that are necessary to apply standards
►Auditors and regulators assess those judgements
► Investors, lenders and others consider those
judgements when using IFRSs/IPSASs financial
information to inform their decisions
Page 19
19
If no specific IFRSs/IPSASs requirement
► Use judgement to
► develop a policy that results in relevant information that
faithfully represents (ie complete, neutral and error
free)
► Hierarchy:
1st IFRS/IPSAS dealing with similar and related issue
2nd Framework definitions, recognition crit. etc
Can also in parallel refer to GAAPs with similar
framework
Page 20
In other words, if no IFRS requirement…20
Framework-based approach would ask:
► What is the economics of the phenomenon (eg.
transaction or event)?
► What relevant information using the accrual basis of
accounting faithfully present that economic phenomenon
to inform decisions of investors and lenders (potential and
existing)?
► Is there anything in IFRSs/IPSASs that prevents me from
providing that information?
Thank you very much for listening