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

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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

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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

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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

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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.

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Financial Reporting Standards..

► ..\..\AG\Revised Slides\IFRS VS IPSAS.xls

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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.

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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

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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

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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

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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

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© 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

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© 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

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Constraints on Information Included in GPFR

No. IASB IPSASB

1 Cost-Benefit Cost-Benefit

2 Materiality

3 Balance between the Qualitative

Characteristics

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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

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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

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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