YARDSTICK

INTERNATIONAL
COLLEGE
YIC ONLINE program

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Financial and
Managerial
Accounting
Course leader : Kirubel Asegdew (Asst. prof.)

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CHAPTER ONE
PART II
Introduction to Accounting and Business

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Conceptual Framework
Conceptual Framework establishes the concepts that underlie financial
reporting.

Need for a Conceptual Framework

● Rule-making should build on and relate to an established body of
concepts.
● Enables IASB to issue more useful and consistent pronouncements over
time.

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 Conceptual Framework
Development of a Conceptual Framework
Presently, the Conceptual Framework is comprises of the following.
• Chapter 1: The Objective of General Purpose Financial Reporting
• Chapter 2: The Reporting Entity (not yet issued)
• Chapter 3: Qualitative Characteristics of Useful Financial Information
• Chapter 4: The Framework, comprised of the following:
● Underlying assumption—the going concern assumption;
● The elements of financial statements;
● Recognition of the elements of financial statements;
● Measurement of the elements of financial statements; and
● Concepts of capital and capital maintenance.

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Conceptual Framework
Overview of the Conceptual Framework

Three levels:
● First Level = Objectives of Financial Reporting
● Second Level = Qualitative Characteristics and Elements of Financial
Statements
● Third Level = Recognition, Measurement, and Disclosure Concepts.

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 ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third level
3. Monetary unit 3. Expense recognition The "how"—
4. Periodicity 4. Full disclosure implementation

5. Accrual

QUALITATIVE OBJECTIVE ELEMENTS

CHARACTERISTICS Provide information 1. Assets
1. Fundamental about the reporting 2. Liabilities
Second level entity that is useful Second level
Bridge between qualities 3. Equity
to present and Bridge between
levels 1 and 3 2. Enhancing 4. Income levels 1 and 3
potential
qualities 5. Expenses
equity investors,
lenders, and other
creditors in their
capacity as capital
providers.
First level
The "why"—purpose of accounting 7
Basic Objective
“To provide financial information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in making
decisions about providing resources to the entity.
● Provided by issuing general-purpose financial statements.
● Assumption is that users need reasonable knowledge of business and
financial accounting matters to understand the information.

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Fundamental Concepts
Qualitative Characteristics of Accounting Information
IASB identified the Qualitative Characteristics of accounting information that
distinguish better (more useful) information from inferior (less useful)
information for decision-making purposes.

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Qualitative Characteristics

ILLUSTRATION 2.2
Hierarchy of Accounting
Qualities

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 Relevance

ILLUSTRATION 2.7
Conceptual Framework for
Financial Reporting

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 Qualitative Characteristics
Fundamental Quality—Relevance

To be relevant, accounting information must be capable of making a

difference in a decision.
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 Qualitative Characteristics
Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to predictive

processes used by investors to form their own expectations about the future.

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 Qualitative Characteristics
Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior expectations.

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 Qualitative Characteristics
Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence decisions that

users make on the basis of the reported financial information.
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Faithful Representation

ILLUSTRATION 2.7
Conceptual Framework for
Financial Reporting

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 Qualitative Characteristics
Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions match what
really existed or happened.
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Qualitative Characteristics

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for faithful
representation is provided.
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Qualitative Characteristics

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor one set of
interested parties over another.
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Qualitative Characteristics

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate (faithful)
representation of a financial item.
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Qualitative Characteristics
Enhancing Qualities

Information that is measured and reported in a similar manner for different

companies is considered comparable.
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Qualitative Characteristics
Enhancing Qualities

Verifiability occurs when independent measurers, using the same methods,

obtain similar results.
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Qualitative Characteristics
Enhancing Qualities

Timeliness means having information available to decision-makers before it

loses its capacity to influence decisions.
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Qualitative Characteristics
Enhancing Qualities

Understandability is the quality of information that lets reasonably informed

users see its significance.
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Basic Elements

ILLUSTRATION 2.7
Conceptual Framework for
Financial Reporting

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Basic Elements

Elements of Financial Statements

A resource controlled by the entity as a result of
Asset
past events and from which future economic
benefits are expected to flow to the entity.
Liability

Equity

Income

Expenses
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Basic Elements

Elements of Financial Statements

Asset
A present obligation of the entity arising from
past events, the settlement of which is expected
Liability
to result in an outflow from the entity of
resources embodying economic benefits.
Equity

Income

Expenses
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Basic Elements

Elements of Financial Statements

Asset

Liability
The residual interest in the assets of the entity
Equity after deducting all its liabilities.

Income

Expenses
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Basic Elements

Elements of Financial Statements

Asset

Liability
Increases in economic benefits during the
Equity accounting period in the form of inflows or
enhancements of assets or decreases of
Income liabilities that result in increases in equity, other
than those relating to contributions from equity
participants.
Expenses
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Basic Elements

Elements of Financial Statements

Asset

Liability

Equity Decreases in economic benefits during the

accounting period in the form of outflows or
Income depletions of assets or incurrences of liabilities
that result in decreases in equity, other than
those relating to distributions to equity
Expenses participants.
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Basic Elements

Elements of Financial Statements

These concepts explain how companies should recognize, measure, and
report financial elements and events.
Recognition, Measurement, and Disclosure Concepts
ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual

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Assumptions

Economic Entity – company keeps its activity separate from its owners and
other business unit.
Going Concern - company to last long enough to fulfill objectives and
commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activities into time periods.
Accrual Basis of Accounting – transactions are recorded in the periods in
which the events occur.

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Basic Principles of Accounting

● Measurement Principles
○ Historical Cost is generally thought to be a faithful
representation of the amount paid for a given item.
○ Fair value is defined as “the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.”

IASB has given companies the option to use fair value as the basis for
measurement of financial assets and financial liabilities.

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The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and summarizing economic

events.
Applies to all economic entities regardless of size.

LO 6 State the accounting equation, and define its components. 34

The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and summarizing economic

events.
Assets
● Resources a business owns.
● Provide future services or benefits.
● Cash, Inventory, Equipment, etc.

LO 6 State the accounting equation, and define its components. 35

The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and summarizing economic

events.
Liabilities
● Claims against assets (debts and obligations).
● Creditors - party to whom money is owed.
● Accounts payable, Notes payable, etc.

LO 6 State the accounting equation, and define its components. 36

The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and summarizing economic

events.
Equity
● Ownership claim on total assets.
● Referred to as residual equity.
● Share capital-ordinary and retained earnings.

LO 6 State the accounting equation, and define its components. 37

THANK YOU!

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