slide 2.1 alan melville, international financial reporting, 3rd edition, © pearson education...

1

Alan Melville, International Financial Reporting, 3rd Edition, © Pearson Education Limited 2011

THE IASB CONCEPTUAL FRAMEWORK

ACTG 6580 -CHAPTER 2

2


Scope of the IASB Conceptual Framework

The IASB Conceptual Framework identifies the concepts that underlie general purpose financial statements prepared and presented for the benefit of external users.

3


Purpose of the IASB Conceptual Framework

• To assist in development of IFRS/IAS• To provide a basis for reducing alternatives• To assist national standard-setters in

developing national standards• To assist preparers of financial statements in

applying international standards• To assist auditors in forming an opinion as to

whether international standards have been complied with

• To assist users in interpreting financial statements

4


Evolution of the Conceptual Framework1970s

1970 1972 1974 1976 1978

1971: Trueblood Study

FASB

IASB

1972: Wheat Report

1973: FASB formed

1974: Discussion memorandum, Objectives of

Financial Reporting by Business Enterprises

1976: Tentative conclusions on Objectives of Financial Reporting by

Business Enterprises

1978: SFAC No. 1, Objectives of Financial Reporting by Business

Enterprises

1973: IASC formed

1973-88: Countries joining IASC

5


1980: SFAC No. 3, Elements of Financial

Statements of Business

Enterprises

Evolution of the Conceptual Framework1980s

1980 1982 1984 1986 1988

1980: SFAC No. 2, Qualitative Characteristics of Accounting

Information

1984: SFAC No. 5, Recognition and Measurement

in Financial Statements of

Business Enterprises

1985: SFAC No. 6, Elements of Financial Statements

(supersedes SFAC No. 3)

1989: Final Statement, Framework for the Preparation and Presentation of Financial

Statements

FASB

IASB

6


Evolution of the Conceptual Framework 1990s and 2000s

1998 2000 2002 2006 2010

2000: SFAC No. 7, Using Cash Flow Information and

Present Value in Accounting Measure

2002: Norwalk Agreement to converge

2006: Norwalk Agreement reaffirmed

1997: Decision to re-examine

structure

1999: IASC restructured to form IASB

2002: Norwalk Agreement to converge

2006: Norwalk Agreement reaffirmed

FASB

IASB

2010: Converged Chapters 1 and 3 of the FASB’s SFAC No. 8, Conceptual Framework for Financial Reporting

2010: Converged Chapters 1 and 3 of the IASB’s Conceptual Framework for Financial Reporting

7


• In 2002 the FASB and the IASB agreed to make their accounting standards compatible, including the Conceptual Framework.

• Framework broken into eight phases as follows:

– Phase A – Objectives and Qualitative Characteristics – issued Sept. 2010

– Phase B – Elements and Recognition – Discussion Paper expected soon????

– Phase C – Measurement – Discussion Paper expected soon????

– Phase D – Reporting Entity Concept – Discussion Memorandum out

– Not started yet:

• Phase E – Presentation and Disclosure

• Phase F – Framework Purpose and Status in US GAAP

• Phase G – Applicability to the Not-for-Profit Sector

• Phase H – Remaining Issues

Convergence with FASB

8


• “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 creditors (‘primary users’) in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.”3 – Consequently, primary users need information to help them assess the

prospects of future net cash inflows to an entity.

– To assess an entity’s prospects for future cash inflows, primary users need information about the resources of the entity, claims against the entity and how efficiently and effectively the entity’s management and governing board have discharged the responsibilities to use the entity’s resources.

3SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 1, “The Objective of General Purpose Financial Reporting,” OB2.

The Objective of General Purpose Financial Reporting

9


• Continued:– General purpose financial reports do not and cannot provide all the

information that primary users need, therefore, pertinent information from other sources needs to be considered, such as general economic conditions, political events and climate and industry outlook.

– General purpose financial statements are not designed to show the value of the reporting entity, are not designed for the sole use of management and are not directed towards regulators or other parties that are not primary users.

4SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 1, “The Objective of General Purpose Financial Reporting,” OB11.

The Objective of General Purpose Financial Reporting

10


Users of general purpose financial reports

• Primary users:– existing/potential investors– existing/potential lenders and other creditors

• Others (not listed in Conceptual Framework):– employees– customers– governments and their agencies– the public

11


Qualitative Characteristics of Useful Financial Information

Pervasive constraint: Costs

Fundamental characteristics:

Relevance and

faithful representation

Co

sts

Co

sts

Pervasive constraint: Costs

12


– Relevance: • Capable of making a difference in the decisions made

by users.• Capable of making a difference in decisions if it has

predictive value, confirming value or both.• Materiality:

– “Materiality is an element of relevance and is entity-specific based on the nature or magnitude or both of the items to which the information relates, in the context of an individual entity’s financial report.”14

– “Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.”15

14SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC11.15Ibid.

Fundamental Qualitative Characteristics of Useful Financial Information

13


Faithful representation: “Financial reports represent economic phenomena in words and numbers. To be useful, financial information must be relevant but also must faithfully represent the phenomena that it purports to represent.”16

– Completeness: “all information that is necessary for a user to understand the phenomena being depicted.”17

– Neutrality: there should not be bias in the selection or presentation of financial information. Financial information should not be slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably.

– Free from error: “no errors or omissions in the description of the phenomenon, and the process used to produce the reported information.”18

16SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC12.17Ibid, QC13.18Ibid, QC15.

Fundamental Qualitative Characteristics of Useful Financial Information

14


Enhance the usefulness of information that is relevant and faithfully represented. Comparability: “Enables users to identify and understand similarities and differences among items.”24

– Consistency is not the same as comparability although related and is described as “the use of the same methods for the same item either from period to period within a reporting entity or in a single period across entities.”25

Verifiability:– “Assures users that information faithfully represents the economic

phenomena it purports to represent.”26

– “Means that different and knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.”27

23SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC33. 24Ibid, QC21.25Ibid, QC22.26Ibid, QC26. 27Ibid.

Enhancing Qualitative Characteristics of Useful Financial Information

15


Timeliness: providing information to decision makers in time to be capable of influencing their decisions.

Understandability: “Classifying, characterizing, and presenting information clearly and concisely.”28

Pervasive constraint on useful financial information: costs, which are a pervasive constraint on financial information, should be assessed as to whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use the information.

28SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC30.

Enhancing Qualitative Characteristics of Useful Financial Information

16


Underlying assumption

Financial statements are normally prepared on the “going concern basis”.

It is assumed that the entity will continue in operation for the foreseeable future and has neither the intention nor the need to close down or to materially reduce the scale of its operations.

17


Elements: Financial position

• Asset"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"

• Liability"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"the residual interest in the assets of the entity after deducting all its liabilities"

18


ConvergencePhase B – Elements and Recognition

• Purpose is to revise and clarify various issues:– definition of asset and liability.– other elements and their

definitions.– Revise recognition criteria, resolve

derecognition and unit of account.

• Asset “… is a present economic resource to which an entity has a right or other access that others do not have,” which is:– Present – at date of financial

statements.– Economic resource – scarce,

provides cash.– A right or other access that others

do not have – legally enforceable or equivalent.

► Liability “… is a present economic obligation for which the entity is the obligor,” which is:► Present – at date of financial

statements.► Economic obligation – to provide

resources.► Entity is the obligor – enforceable

against entity.

► The Boards are to reconsider the

definition of a liability.► A Discussion Paper was

expected in 2011???

19


Elements: 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"

20


Recognition of an element

An item is recognised if:

(a) it is probable that any future economic benefit associated with the item will flow to or from the entity, and

(b) the item has a cost or value that can be

measured with reliability.

Recognition is "the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition".

21


Measurement bases

• Historical cost• Current cost• Realisable value• Present value

The measurement basis most commonly used is historical cost but this is sometimes combined with other bases (e.g. when valuing inventory at the lower of cost and net realisable value). Some entities use current cost to deal with the effects of changing prices of non-monetary assets (e.g. property).

22


Financial capital maintenance

Under this concept, a profit is earned only if the financial or money amount of the net assets at the end of an accounting period is greater than the financial or money amount of the net assets at the beginning of that period, after adjusting for any amounts contributed by or distributed to owners during the period.

Financial capital can be measured either in nominal monetary units or in units of purchasing power, where purchasing power is determined in accordance with changes in an index of general prices.

23


Physical capital maintenance

Under this concept, a profit is earned only if the physical operating capability of the entity at the end of the accounting period is greater than its physical operating capability at the start of the period, after adjusting for any amounts contributed by or distributed to owners during the period.

slide 2.1 alan melville, international financial reporting, 3rd edition, © pearson education...

Documents

financial reporting

iasc slide

iasb conceptual framework

iasbs conceptual framework

alan melville

pearson education limited

international standards

fasbs sfac