IFRS

IASB Conceptual Framework (2010)

The IASB Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. It’s used by the IASB to develop new accounting standards, and provides the reasoning current accounting standards.

You’ll have to know about the IASB Conceptual Framework for both ACCA F7 Financial Reporting and the ACCA P2 Corporate Reporting exams. Here’s a little bit that might help.

Chapter 1 – The Objective of General Purpose Financial Reporting

Objective

The objective of general purpose financial reporting is ‘to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.’

Chapter 2 – The Reporting Entity

To chapter is to be added

metal construction

The Conceptual Framework is a bit like the framework of a building, where the accounting standards are built upon.

Chapter 3 – Qualitative Characteristics of Useful Financial Information

Fundamental Qualitative Characteristics

The ACCA F7 Financial Reporting (INT) syllabus notes you should be able to discuss what is meant by relevance and faithful representation and describe the qualities that enhance these characteristics.

Relevance
Capable of making a difference in the decisions made by users.

  • Predictive value (input to predict future outcomes)
  • Confirmatory value (feedback about previous evaluations)

Materiality

An item is ‘material’ if its omission or misstatement could influence the decisions made by users.

  • Entity specific
  • No quantitative threshold.

Faithful Representation

  • Free from Error
  • Neutral (without bias)
  • Complete

Constraint – Cost/Benefit

Enhancing Qualitative Characteristics

You should be able to discuss what is meant by understandability and verifiability in relation to the provision of financial information. Also, be able to discuss the importance of comparability and timeliness to users of financial statements. Comparability is important for companies looking to change their accounting policies, be able to discuss the principle of comparability in accounting for changes in accounting policies.

Comparability

  • Comparability enables users of financial information to understand similarities and differences among items included in information presented by two or more entities.
  • Compare between
    • Two or more different entities
    • Same entity – different periods/dates
  • Consistency helps comparability

Understandability

  • Classifying, characterising and presenting information clearly and concisely makes it understandable.
  • Users assumed to have a reasonable knowledge of business and economic activities.

Timeliness

  • Having information available in time to influence users decisions.
  • Generally, older information is less useful.

Verifiability

  • Different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

Chapter 4 – Remaining Text from 1989 Framework

Underlying Assumption

  • Going concern

The Elements of Financial Statements

Financial Position

  • 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
    – residual interest in the assets of the entity after deducting all its liabilities.

Financial Performance

  • 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, other than those relating to contributions from equity participants.
  • Expenses
    – decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Capital Maintenance adjustments
– Asset revaluations recorded in equity.

Recognition of the Elements of Financial Statements

Criteria for recognition

  • Probability of future economic benefit
  • Reliability of measurement

Recognition of

  • Assets
  • Liabilities
  • Income
  • Expenses

Measurement of the Elements of Financial Statements

  • Historical Cost – Carry at amount paid.
  • Current Cost – Carry at amount payable to obtain same asset now.
  • Realisable Value – Settlement value. Carry at cost asset could sell for in an orderly disposal.
  • Present Value – Carry at present discounted value of future cash inflows.

Concepts of Capital and Capital Maintenance

Concepts of Capital

  • Financial Concept of Capital – Monetary Units or Purchasing Power
  • Physical Concept of Capital – Operating capability

 

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