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IASB conceptual FRAMEWORK IASB conceptual FRAMEWORK
IASB conceptual FRAMEWORK IASB conceptual FRAMEWORK
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1. Describe the usefulness of a conceptual framework.
2. Understand the objectives of financial reporting.
3. Identify the qualitative characteristics of accounting
information.
4. Define the basic elements of financial statements.
5. Describe the basic assumptions of accounting.
6. Explain the application of the basic principles of
accounting.
7. Describe the impact that constraints have on reporting
accounting information.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
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Conceptual Framework
First Level: Basic Objectives
Second Level: Fundamental
Concepts
Third Level: Recognition and
Measurement
Need
Development
Overview
Qualitative characteristics
Basic elements
Basic assumptions
Basic principles
Constraints
Summary of the structure
Conceptual Framework For Conceptual Framework For Financial AccountingFinancial Accounting
Conceptual Framework For Conceptual Framework For Financial AccountingFinancial Accounting
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The Need for a Conceptual Framework
To develop a coherent set of standards
and rules.
To solve new and emerging practical
problems.
The evaluation of existing ones.
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
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It is defined as:
A constitution, a coherent system of interrelated
objectives and fundamentals.
A conceptual framework underlying financial accounting
is important because it can lead to consistent standards
and it prescribes the nature, function, and limits of
financial accounting and financial statements.
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
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A conceptual framework underlying financial
accounting is necessary because future
accounting practice problems can be solved by
reference to the conceptual framework.
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
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Advantages and DisadvantagesAdvantages and DisadvantagesAdvantages and DisadvantagesAdvantages and Disadvantages
AdvantagesAdvantages A consistent conceptual base.A consistent conceptual base. A consistent approach for financial A consistent approach for financial
statements.statements. Avoids fire-fighting approach to setting Avoids fire-fighting approach to setting
standards.standards.
DisadvantagesDisadvantages Different users have different needs.Different users have different needs. Different users may require different Different users may require different
conceptual bases.conceptual bases. It may hamper the development for It may hamper the development for
preparation of standards.preparation of standards.
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The framework is broken down into seven sections as follows.
Development of Conceptual FrameworkDevelopment of Conceptual FrameworkDevelopment of Conceptual FrameworkDevelopment of Conceptual Framework
No.1 - Objectives of Financial Reporting.
No.2 - Qualitative Characteristics of Accounting Information.
No.3 - Elements of Financial Statements.
No.4- Underlying Assumptions.
No.5 - Recognition of the elements of Financial Statements.
No.6 - Measurements of the elements of Financial Statements.
No.7 - Concepts of Capital and Capital Maintenance.
.
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First Level = Basic Objectives
Second Level = Qualitative
Characteristics and Elements
Third Level = Recognition,
Measurement, and Disclosure
Concepts.
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
Overview of the Conceptual Framework
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Illustration 2-7 Conceptual Framework for Financial Reporting
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What are the Statements of Financial Accounting Concepts intended to
establish?
a. Generally accepted accounting principles in financial reporting
by business enterprises.
b. The meaning of “Present fairly in accordance with generally
accepted accounting principles.”
c. The objectives and concepts for use in developing standards of
financial accounting and reporting.
d. The hierarchy of sources of generally accepted accounting
principles.
Conceptual FrameworkConceptual FrameworkConceptual FrameworkConceptual Framework
Review
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First Level: Basic Objective of Financial First Level: Basic Objective of Financial StatementsStatements
First Level: Basic Objective of Financial First Level: Basic Objective of Financial StatementsStatements
Objective of general-purpose financial
reporting is:
To provide financial information about the
reporting entity that is useful to present and
potential equity investors, lenders, and other
creditors in making decisions about
providing resources to the entity.
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According to the IASB conceptual framework, the objectives
of financial reporting for business enterprises are based on?
a. Generally accepted accounting principles
b. Reporting on management’s stewardship.
c. The need for conservatism.
d. The needs of the users of the information.
First Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic ObjectivesFirst Level: Basic Objectives
Review
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“The IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.”
Second Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental ConceptsSecond Level: Fundamental Concepts
Qualitative Characteristics
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Illustration 2-2 Hierarchy of Accounting Qualities
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Illustration 2-7 Conceptual Framework for Financial Reporting
RelevanceRelevanceRelevanceRelevance
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Fundamental Quality—Relevance
To be relevant, accounting information must be capable of
making a difference in a decision.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
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.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Fundamental Quality—Relevance
Relevant information also helps users confirm or correct prior
expectations.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
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.
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Illustration 2-7 Conceptual Framework for Financial Reporting
Faithful RepresentationFaithful RepresentationFaithful RepresentationFaithful Representation
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Fundamental Quality—Faithful Representation
Faithful representation means that the numbers and
descriptions match what really existed or happened.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Fundamental Quality—Faithful Representation
Completeness means that all the information that is necessary
for faithful representation is provided.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Fundamental Quality—Faithful Representation
Neutrality means that a company cannot select information to
favor one set of interested parties over another.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Fundamental Quality—Faithful Representation
An information item that is free from error will be a more
accurate (faithful) representation of a financial item.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Enhancing Qualities
Information that is measured and reported in a similar manner for
different companies is considered comparable.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Enhancing Qualities
Verifiability occurs when independent measurers, using the
same methods, obtain similar results.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Enhancing Qualities
Timeliness means having information available to decision-
makers before it loses its capacity to influence decisions.
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Second Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative CharacteristicsSecond Level: Qualitative Characteristics
Enhancing Qualities
Understandability is the quality of information that lets
reasonably informed users see its significance.
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Illustration 2-7 Conceptual Framework for Financial Reporting
Basic ElementsBasic ElementsBasic ElementsBasic Elements
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Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Financial statements portray the financial effects of
transactions and other events by grouping them into broad
classes according to their economic characteristics. These
broad classes are termed the elements of financial
statements.
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Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
The elements directly related to financial position (balance
sheet) are:
Assets
Liabilities
Equity
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Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
The IASB elements and their definitions are as follows.
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. Liabilities may be legally
enforceable via a contract or law, but need not be, i.e., they can arise due
to normal business practice or customs
Equity. A residual interest in the assets of the entity after deducting all its
liabilities.
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Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
The elements directly related to performance (income
statement) are:
Income
Expenses
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Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Second Level: Basic Elements of Financial Second Level: Basic Elements of Financial StatementsStatements
Income. Increases in economic benefits that result in
increases in equity (other than those related to
contributions from shareholders). Income includes both
revenues (resulting from ordinary activities) and gains.
Expenses. Decreases in economic benefits that result in
decreases in equity (other than those related to
distributions to shareholders). Expenses includes losses
that are not the result of ordinary activities
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Review:
Second Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic ElementsSecond Level: Basic Elements
According to the IASB conceptual framework, an entity’s
revenue may result from
a. A decrease in an asset from primary operations.
b. An increase in an asset from incidental transactions.
c. An increase in a liability from incidental transactions.
d. A decrease in a liability from primary operations.
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Illustration 2-7 Conceptual Framework for Financial Reporting
Third Level: Recognition and MeasurementThird Level: Recognition and MeasurementThird Level: Recognition and MeasurementThird Level: Recognition and Measurement
The FASB sets forth most of these concepts in its Statement of
Financial Accounting Concepts No. 5, “Recognition and
Measurement in Financial Statements of Business Enterprises.”
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Economic Entity – company keeps its activity separate from
its owners and other businesses.
Going Concern - company to last long enough to fulfill
objectives and commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activities into
time periods.
Accrual Basis -
Third Level: Basic AssumptionsThird Level: Basic AssumptionsThird Level: Basic AssumptionsThird Level: Basic Assumptions
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Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements
Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements
Recognition is the process of incorporating in the Recognition is the process of incorporating in the balance sheet or income statement an item that balance sheet or income statement an item that meets the definition of an element and satisfies the meets the definition of an element and satisfies the following criteria for recognition: following criteria for recognition:
It is probable that any future economic benefit It is probable that any future economic benefit associated with the item will flow to or from the associated with the item will flow to or from the entity; andentity; and
The item's cost or value can be measured with The item's cost or value can be measured with reliability.reliability.
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Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements
Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements
Based on these general criteria:Based on these general criteria: An asset is recognised in the balance sheet An asset is recognised in the balance sheet
when it is probable that the future economic benefits when it is probable that the future economic benefits will flow to the entity and the asset has a cost or will flow to the entity and the asset has a cost or value that can be measured reliably. value that can be measured reliably.
A liability is recognised in the balance sheet A liability is recognised in the balance sheet when it is probable that an outflow of resources when it is probable that an outflow of resources embodying economic benefits will result from the embodying economic benefits will result from the settlement of a present obligation and the amount at settlement of a present obligation and the amount at which the settlement will take place can be which the settlement will take place can be measured reliably. measured reliably.
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Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements
Recognition of the elements of Financial Recognition of the elements of Financial statementsstatements
oo Income is recognised in the income statement when Income is recognised in the income statement when an increase in future economic benefits related to an an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen increase in an asset or a decrease of a liability has arisen that can be measured reliably. that can be measured reliably.
oo Expenses are recognised when a decrease in future Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured increase of a liability has arisen that can be measured reliably. reliably.
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Measurement Principle – Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported.
Issues:
Historical cost provides a reliable benchmark for measuring historical trends.
NRV
Present Value (Discounted)
Current Cost
Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles
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Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles
Illustration 2-5 Timing of Revenue Recognition
Revenue Recognition - generally occurs (1) when realized
or realizable and (2) when earned.
Exceptions:
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Expense Recognition - “Let the expense follow the
revenues.”
Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles
Illustration 2-6 Expense Recognition
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Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles
Full Disclosure – providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information
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Third Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic PrinciplesThird Level: Basic Principles
Brief Exercise 2-8: Identify which basic principle of accounting is best described in each item below.
(a) KFC Corporation reports revenue in its income statement when it is earned instead of when the cash is collected.
(b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
(d) Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater.
Revenue Revenue RecognitionRecognition
Expense Expense RecognitionRecognition
Full Full DisclosureDisclosure
MeasurementMeasurement
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Cost Constraint – cost of providing information must be
weighed against the benefits that can be derived from using it.
Industry Practice - the peculiar nature of some industries
and business concerns sometimes requires departure from
basic accounting theory.
Third Level: ConstraintsThird Level: ConstraintsThird Level: ConstraintsThird Level: Constraints
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Illustration 2-7 Conceptual Framework for Financial Reporting
Summary Summary of the of the
StructureStructure
Summary Summary of the of the
StructureStructure