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CONCEPTUAL FRAMEWORK OF FINANCIAL REPORTING - Coggle Diagram
CONCEPTUAL FRAMEWORK OF FINANCIAL REPORTING
About
This is not a standard and does not override standards
It provides a foundation upon which standards can be formulated or developed
So in order to develop a standards let's say IFRS 15 then the IASB would be guided by the conceptual framework
Purpose of the Conceptual Framework
Assisting the Board in developing Standards
Assisting preparers in developing accounting policies when no Standard applies to a particular transaction or other event or when a Standard allows a choice of accounting policy
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions
Assisting all parties in understanding and interpreting Standards
Primary users of financial statements
Lenders and other creditors
Other Users
Customers
Suppliers
Employees
Financial Analysts and Advisors
Management
Media
Government
General Public
Existing and potential investors
They need to make decisions involving:
(ii) providing or settling loans and other forms of credit
(iii) exercising rights to vote on or otherwise influence management`s actions
(i) Buying, selling or holding equity and debt instruments
Qualitative Characteristics of Useful Financial Information
Enhancing Characteristics
Comparability:
Financial information of an entity can only be useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date
This allows users to make choice between alternatives
Consistency helps to achieve comparability
Verifiability:
It helps to achieve faithful representation. Verifiability means that different knowlegeable and independent observers could reach concensus although not necessarily complete agreement.
Timeliness:
This means having information available to the decision makers in time for the information to be capable of influencing their decisions
Understandability:
Presented information should be classified, characterised and provided in a clear way that makes it understandable to the average user
Fundamental Characteristics
Relevant
For information to be relevant, it should be capable of making a difference in the decisions made by users
Faithful representation:
Financial information should be presented without bias and with honesty and this is achieved through the following
(i) Complete:
All information necessary for users to understand the phenomenon being depicted including descriptions and explanations should be presented
(ii) Neutral:
This means financial information should be selected and presented withot bias and should not be slanted, weighted, emphasised or deemphasised to increase the probability that the users will receive the information favourably;
(iii) Free from error:
No errors or omissions in describing the phenomenon and the process used to provide the information should be selected and applied with no errors in the process
Materiality:
Information is considered material if omitting, misstating or obscuring it could reasonably be expected to influence decisions made by primary users based on the financial reports
Reporting period
Financial statements are prepared for a specific period of time and provide information about:
(2) Incomes and expenses
(3) Equity
(1) Assets and liabilities
Going concern assumption
It is assumed that the business has neither the intention or need to enter liquidation and cease trading
Financial statements are usually prepared on the assumption that the reporting entity is a going concern, that is it will continue operating into the foreseeable future.
Reporting Entity
A reporting entity is an entity that is required to prepare financial statements
ELEMENTS OF FINANCIAL STATEMENTS
There are five elements that are reported in the financial statements and these are:
Incomes
This is an increase in assets or decrease in liabilities which results in the increase in equity other than those relating to contributions from
(ii) result in an increase in equity
Examples
Commission income
Credit Losses Recovered
Interest income
Fair value gains onfinancial assets held through profit or loss
Service Fees
Dividends received
Fees
Profit on sale of non - current assets
Sales
(iii) other than those contributions resulting from equity participants
(i) Increase in assets or decrease in liabilities
Expenses
This a decrease in assets or increase in liabilities, which result in a decrease in equity, other than those relating to distributions to equity participants
(ii) Decrease in equity
(iii) other than distributions to equity participants
Examples
Purchases
Fuel
Rent Expense
Depreciation
Municipal Rates
Printing & Stationery
Repairs and Maintenance
Water & Electricity
Insurance
(i) Decrease in assets or increase in liabilities
(iv) Measurable
Liabilities
This is a present obligation resulting from past events, settlement of which will result in an outflow of economic benefits
(ii) arising from past events
(iii) transfer of economic resource
Examples
Short term loans
Bank Loans
Long term loans
Bank Overdraft
Bond
Trade & Other Payables
Mortgage
Income Tax Payable
VAT Payable
Dividends Payable
(i) Present obligation (legal or constructive)
(iv) Measurable
Equity
This is the residual interests of the owners after deducting liabilities: Equity = Assets - Liabilities
Examples
Revaluation Surplus
Asset Replacement Reserve
Retained Earnings
Mark to market
Preference Share Capital
Ordinary Share Capital
Assets
An asset is a present economic resources that is controlled by the entity as a result of past events
(iii) Controlled by the entity
Example
Motor Vehicles
Furniture & Equipment
Investment Property
Financial Assets ( Fixed Deposits, Investments in shares or debentures)
Land & Buildings
Inventory
Plant & Machinery
Debtors / Trade and Other Receivables
VAT Receivable
Cash & Cash Equivalents
(iv) As a result of past events
(ii) Economic resources - provide future economic benefits
(v) Measurable
(i) a present
Measurement Basis
(ii) Current value
The value is updated to reflect conditions existing at the measurement date
(iii) Fair value
Liability: This is the price that could be paid to transfer a liability in an orderly transaction between market participants at the transaction date
Assets: This is the value that would be received to sell an asset in an orderly transaction between market participants in an arm`s length deal at the measurement date
(iv) Value in use
Liability: This is the fulfilment value in terms of present value of the cash, or other economic resources that an entity expects to be obliged to transfer as it fulfils the liability
Asset: This is the present value of the cash flows or other economic benefits an entity expects to derive from the use of the asset and from its disposal
Current Cost
Asset: This is the cost of an equivalent asset at the measurement date
Liability: This is the consideration that would be received for an equivalent liability less transaction costs
(i) Historical cost
This measures assets and liabilities based on the transaction price
Liabilities: These are recorded at the value of the consideration received to take up the liability minus transaction costs and the value is increased when the liability becomes onerous.
Assets: These are valued based on the costs incurred when acquiring or creating the asset. The value will then be reduced if the asset becomes impaired.
Selection based on
Relevance
Faithful Representation
Cost Contraint
Only capture elements in the AFS if they meet the fundamental characteristics Being
Faithful representation
Relevance
Concept of capital & capital maintenance
Concept of capital
Physical concept: Capital is measured in terms of the operating capability or productive capacity
Financial concept: This refers to amounts or resources invested
Derecognition
When to remove elements in the AFS
Liability
When there is no longer a present obligation
Asset
When control is lost