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Conceptual Framework for Financial Reporting CFFR - Coggle Diagram
Conceptual Framework for Financial Reporting CFFR
A Conceptual Frame Work
A statement of generally accepted principles which form the frame of reference for a particular field of enquiry/decision
Two strongest reasons for preparing Financial Statements
Stewardship
provide a basis for shareholders to decide whether their directors are good stewards of the company's assets
Decision making
identification of companies whose shares are mispriced to enable smart investment and overpricing
Basis for CFFR
Who are the legitimate users of Financial Statements
Lenders
Investors
Shareholders
Public
Government/regulators
Employees
market/sector
Identifying primary users creates the risk of legitimate complaint from others that their needs are not being addressed adequately
What decisions are financial statements designed to inform
creates a potential legal responsibility to users who actually make decisions based on FSs
Once users and manner in which they should be expected to use FSs have been decided, other questions and content of a conceptual framework will follow on
What are the information needs of these users
What types of report will satisfy their needs
A conceptual frame work is designed to set a frame of reference; without this there is a risk that different standards will be inconsistent between statements/companies
Conceptual Framework for Financial Reporting was issued by the IASB in 2010 and updated in 2018
to assist IASB in developing future IFRSs and reviewing current ones
promote harmonisation of regulations, standards and procedures by reducing number of alternative treatments permitted by IFRSs
help national bodies develop national standards
assist in applying IFRSs to FSs
assist in forming auditor opinion
provide information about how the IASB has formulated its IFRS development
CFFR is not an accounting standard and does not override any IFRS in conflict.
Framework applies to general purpose FSs of both private and public entities
FSs prepared with this and IFRSs usually consist of SoFP, SoCI (or separate SoCI and SoPL), SoCE, SoCFs and notes to the FSs
Chapters of the CFFR
Objectives of general purpose FSs
Qualitative characteristics of useful financial information
FSs and the reporting entity
Elements of FSs
Recognition and derecognition
Measurement
Presentation and disclosure
Ceoncepts of captial/capital maintenance
Framework states: general purpose FSs provide financial information about the reporting entity that is useful to existing and potential stakeholders in making decisions about providing resource to the entity
Framework therefore identifies required information as: economic resources and claims against an entity, and, returns from those economic resources
Resources and claims info can be found within SoFP
Returns info is harder to identify since it is forward looking. Framework recognises that info about effects of transactions and other events can give insight, and this is found in SSoCI, So CF and SoCIE
FSs are prepared using the going concern underlying assumption; that entity will continue to operate for the foreseeable future.
If FSs are not prepared using going concern e.g. liquidation or scaling back of operations requires reporting, this preparation basis would need to be disclosed.
Framework identifies two fundamental qualitative characteristics and four enhancing ones for financial information to be included
Fundamental
Relevance
information that helps users assess the future performance and position of an entity is likely to be relevant
Materiality assists with relevance, where its omission or misstatement could influence the decision making of users
Nature can assist with relevance, irrespective of its materiality e.g. change of market would create further risk that would influence decision making
Faithful representation
Depiction of transactions and other events is complete, neutral and free from error
Information is complete - all info, explanations to understand transactions and events is included
Information is neutral - free from bias and not weighted to manipulate opinion
Free from error - relates to process to arrive at reported info, rather than perfectly accurate information
Enhancing
Comparability
must be able to compare FSs/periods and with other entity FSs. Items must be treated in consistent manner across periods and entities, and disclose accounting policy used
Verifiability
Can either be direct through observation or indirect through checking inputs into a model
Timeliness
the older the information the less useful, reliable and relevant it is. Info has to be timely to influence decision making
Understandability
information needs to be understandable to users in order to be relevant to decision making
Framework definitions of FS elements
Asset
a present economic resource controlled by the entity as a result of past events. It is a right that has potential to produce economic benefits
Liability
a present obligation of the entity to transfer an economic resource as a result of past events
Equity
the residual interest in assets after deducting all liabilities
Income
Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants
Expenses
decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants
To be recognised in the FSs an item must
Meet the definition of one of the FS elements
Provides relevant info regarding the element
Provides a faithful representation of the element
Derecognition occurs when an item no longer meets the definitions of FSs. This is likely to result in recognising a gain or loss on derecognition, e.g. asset disposal
Measurement
Once an item is classified as an element, it must be decided how to measure its value
Historical cost
Current value
Fair value
Value in use and fulfilment values
Current cost
Capital and capital maintenance concepts
Concept/definition
Financial concept of capital
An entity's net assets (equity) are measured in terms of the funds invested
Physical concept of capital
Measure capital in terms of an entity's operating capacity e.g. ability to produce a particular volume of products
Determining profit
Financial concept of capital
profit is earned if financial amount of net assets is greater than at the beginning of the period (after deducting any distributions to and contributions from owners)
Physical concept of capital
profit is earned if the physical productive capacity of the entity (or the resources needed to achieve capacity) at the end of the period is greater than at the beginning, after deducting any distributions to and contributions from owners
Capital maintenance
As much capital at the beginning as at the end of the period
Financial concept of capital
measured in either nominal units (i.e. historical cost no adjustments) or units of constant purchasing power (i.e. historical costs adjusted for inflation)
Physical concept of capital
adopts the current cost basis of measurement (what it would cost to replace assets at current prices)
Framework operates on assumption that entities prepare FSs in a manner that is commonplace in US-UK (Anglo-American approach)
National differences are gradually decreasing with globalisation of finance and use of IFRSs
Associated with:
-Substantial amounts of finance raised from equity shareholders
a widespread and active stock exchange
individual shareholders have low opportunity to be involved with monitoring company activities