CONCEPTUAL FRAMEWORK

FOR
FINANCIAL REPORTING UNDER INDIAN ACCOUNTING
STANDARDS (IND AS)

Faculty : CA. Manoj Fadnis

Disclaimer: The views expressed herein are solely those of the Faculty/Presenter and not that of the ICAI or any of
its committees. The ICAI or the Faculty or Preparer of this material do not accept any responsibility for omission
or inadequacy of the contents in this document and also for loss caused to any person who acts or refrains from
acting in reliance on the contents of this document irrespective of the cause of / reason for the loss.
CONTENTS
ASB, ICAI

1. Objective, Usefulness and Limitations Of General Purpose Financial

Reporting
2. Qualitative Characteristics of Useful Financial Information
3. Financial Statements and the Reporting Entity
4. Elements of Financial Statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance

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OVERVIEW
ASB, ICAI

 The Conceptual Framework for Financial Reporting under Indian Accounting Standards
(Conceptual Framework) describes the objective of, and the concepts for, general purpose
financial reporting.
 The purpose of the Conceptual Framework is to:
(a) assist the Institute of Chartered Accountants of India (ICAI) in formulation of Indian
Accounting Standards (Ind ASs) that are based on consistent concepts;

(b) assist preparers to develop consistent accounting policies when no Ind AS applies to a
particular transaction or other event, or when an Ind AS allows a choice of accounting
policy; and

(c) assist all parties to understand and interpret the Ind ASs.
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1. OBJECTIVE, USEFULNESS AND LIMITATIONS OF
GENERAL PURPOSE FINANCIAL REPORTING ASB, ICAI

The objective of general purpose financial reporting is to provide financial information

about the reporting entity that is useful to the users of financial statements in making
decisions relating to providing resources to the entity .

User’s decision involve To make these To make both these

assessments, users need
decisions about decisions, users assess information about both
buying, selling or holding prospects for future the entity’s economic
equity or debt instruments resources, claims against the
net cash inflows to entity and changes in those
providing or settling loans the entity resources and claims
and other forms of credit
management’s how efficiently and effectively
voting, or stewardship of the management has discharged its
otherwise influencing entity’s economic responsibilities to use the
management’s actions resources entity’s economic resources

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2. QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION ASB, ICAI

 The qualitative characteristics of useful financial information identify the types of information
that are likely to be most useful to the users of financial statements for making decisions about
the reporting entity on the basis of information in its financial report .

Fundamental qualitative Enhancing qualitative

characteristics characteristics

Relevance Comparability

Materiality Verifiability

Faithful Representation Timeliness

Understandability
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3. FINANCIAL STATEMENTS AND THE
REPORTING ENTITY ASB, ICAI

Financial a particular form of financial report that provides information about the
Statements: reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for
Meaning and future net cash inflows to the reporting entity and in assessing
Objective management’s stewardship of the entity’s economic resources.

Reporting • an entity that is required, or chooses, to prepare financial statements

Entity • not necessarily a legal entity—could be a portion of an entity or
comprise more than one entity

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  Perspective adopted
LIVESTOCK ACCOUNTING
Financial statements provide information about transactions and other events viewed from
the perspective of the reporting entity as a whole, not from the perspective of any particular
group of the entity’s existing or potential investors, lenders or other creditors.
 Going concern assumption
Financial statements are normally prepared on the assumption that the reporting entity is a
going concern and will continue in operation for the foreseeable future. Hence, it is assumed
that the entity has neither the intention nor the need to enter liquidation or to cease trading.
 Boundary of the Reporting Entity
Determining the appropriate boundary of a reporting entity can be difficult if, for example, the
entity is not a legal entity. In such cases, the boundary is determined by considering the
information needs of the users of the entity’s financial statements. Those users need
information that is relevant and that faithfully represents what it purports to represent.
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• Sometimes one entity (parent) has control over another entity (subsidiary).
• If a reporting entity comprises both the parent and its subsidiaries, the reporting entity’s
financial statements are referred to as ‘consolidated financial statements’.
• If a reporting entity is the parent alone, the reporting entity’s financial statements are
referred to as ‘unconsolidated financial statements’.
• If a reporting entity comprises two or more entities that are not all linked by a parent-
subsidiary relationship, the reporting entity’s financial statements are referred to as
‘combined financial statements’.

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4. THE ELEMENTS OF FINANCIAL STATEMENTS
ASB, ICAI

 This chapter defines the five elements of financial statements—an asset, a liability, equity,
income and expenses.

Element Definition
Asset A present economic resource controlled by the entity as a result
of past events.
An economic resource is a right that has the 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 the assets of the entity after deducting all
its liabilities.
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 Element Definition

Income Increases in assets, or decreases in liabilities, that result in

increases in equity, other than those relating to contributions from
holders of equity claims.
Expenses Decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to
holders of equity claims.

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 Selecting the unit of account
 Relevance – a unit of account is selected to provide relevant information about the asset or
liability and any related income and expenses.
 Faithful representation – a unit of account is selected to provide a faithful representation
of the substance of the transaction or other event from which the asset, liability and any
related income or expenses have arisen.

Executory Contract Substance of Contracts

An executory contract is a contract To represent contractual rights and
that is equally unperformed. It obligations faithfully, financial statements
establishes a single asset or liability must report their substance. Generally,
for the inseparable combined right the substance is clear from a contract’s
legal form but in some cases may require
and obligation to exchange economic
analysis to identify the substance.
resources.
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CLARIFYING ASPECTS OF FAITHFUL
REPRESENTATION ASB, ICAI

Prudence Measurement Substance

Uncertainity Over Form
Exercise of caution Arises when monetary
under conditions of Economic substance of
amounts cannot be the underlying economic
uncertainty observed directly and phenomenon is normally
need to be estimated the same as the legal
Does not allow for
overstatement or Does not prevent form
understatement of information from being
assets, liabilities, useful If not, need to
income or expenses If very high, may affect represent the
whether a sufficiently substance to provide
Supports neutrality faithful representation can faithful representation
be achieved
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5. RECOGNITION AND DERECOGNITION
ASB, ICAI

Recognition
Cows

Why recognition is important?

▪ Recognising assets, liabilities, equity, income and expenses depicts an entity’s financial position
and financial performance in structured summaries.
▪ The amounts recognised in a statement are included in the totals and, if applicable, subtotals,
in the statement.
▪ The statements are linked because income and expenses are linked to changes in assets and
liabilities.

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How recognition links the elements of financial statements:

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 Recognition Criteria

Relevance Faithful Representation

Whether recognition of an item Whether recognition of an item

results in relevant information results in a faithful representation
may be affected by, may be affected by, for example:
for example: • measurement uncertainty
• low probability of a flow of • recognition inconsistency
economic benefits • presentation and disclosure of
resulting income, expenses and
• existence uncertainty changes in equity
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 Derecognition
The removal of all or part of a recognised asset or liability from an entity’s statement
of financial position.

Derecognition normally occurs

For an asset For a liability
when the entity loses control when the entity no longer has
of all or part of the recognised a present obligation for all or
asset. part of the recognised liability.

Derecognition aims to faithfully represent both:

✓ any assets and liabilities retained after the transaction that led to the derecognition.

✓ the change in the entity’s assets and liabilities as a result of that transaction. 16
6. MEASUREMENT
ASB, ICAI

Applying a measurement
Elements recognised in A measurement basis basis to an asset or
financial statements are is an identified feature liability creates a measure
quantified in monetary
terms which require of an item being for that asset or liability
measured. and for related income
measurement basis.
and expenses.

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 Types of Measurement Bases:-

Historical Cost measurement bases

• Historical cost provides information derived, at least in part, from the price of
the transaction or other event that gave rise to the item being measured

• Historical cost of assets is reduced if they become impaired and historical cost
of liabilities is increased if they become onerous

• One way to apply a historical cost measurement basis to financial assets and
financial liabilities is to measure them at amortized cost

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 Current Value measurement bases
• Current value provides information updated to reflect conditions at the measurement date
• Current value measurement bases include:
• 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
Fair value measurement date
Fair value • reflects market participants’ current expectations about the amount,
timing and uncertainity of future cash flows.

Value in use (for assets)

• reflects entity specific current expectations about the
Fulfillment value (for
liabilities) amount, time and uncertainity ofValue
futureincash
use (for assets)
flows.
Fulfillment value (for
liabilities)
• reflects the current amount that would be:
Current cost - paid to acquire an equivalent asset
- received to take on an equivalent liability 19
 Factors to consider in selecting a measurement basis
The factors to be considered when selecting a measurement basis are relevance and faithful
representation, because the aim is to provide information that is useful to investors, lenders
and other creditors.

Relevance
Relevance of information provided by a measurement basis is affected by:
characteristics of the asset or liability contribution to future cash flows
• the variability of cash flows • whether cash flows are produced directly or
• sensitivity of the value to market factors or indirectly in combination with other economic
other risks resources
• for example, amortised cost cannot provide • the nature of the entity’s business activities
relevant information about a deriviative • for example, if assets are used in combination to
produce goods or services, historical cost can
provide relevant information about margins
achieved in a period 20
 Faithful Representation
Whether a measurement basis can provide a faithful representation is affected by:
measurement inconsistency measurement uncertainty
• if financial statements contain • does not necessarily prevent the use of a
measurement inconsistencies (accounting measurement basis that provides relevant
mismatch), those financial statements may information
not faithfully represent some aspects of • but if too high might make it necessary to
the entity’s financial position and financial consider selecting a different measurement
performance basis

In selecting a measurement basis, it is necessary to consider the nature of the

information in both the statement of financial position and the statement(s) of
financial performance.
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7. PRESENTATION AND DISCLOSURES
ASB, ICAI

 A reporting entity communicates information about its assets, liabilities, equity, income and
expenses by presenting and disclosing information in its financial statements.
 Effective communication of information in financial statements requires:
(a) focusing on presentation and disclosure objectives and principles rather than focusing on
rules;
(b) classifying information in a manner that groups similar items and separates dissimilar items;
and
(c) aggregating information in such a way that it is not obscured either by unnecessary detail
or by excessive aggregation.
 In making decisions about presentation and disclosure, it is important to consider whether
the benefits provided to users of financial statements by presenting or disclosing particular
information are likely to justify the costs of providing and using that information.
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  Classification
INABILITY TO MEASURE FAIR VALUE RELIABLY
Classification is the sorting of assets, liabilities, equity, income or expenses on the basis
of shared characteristics for presentation and disclosure purposes.
 Income and expenses are classified and included either:
(a) in the profit or loss section of statement of profit and loss; or
(b) outside the profit or loss section of statement of profit and loss, in other
comprehensive income.

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 In principle, income and expenses included in other comprehensive income in
one period are reclassified from other comprehensive income into the profit or
loss section of statement of profit and loss in a future period when doing so results
in the profit or loss section of statement of profit and loss providing more relevant
information, or providing a more faithful representation of the entity’s financial
performance for that future period.
 Offsetting
Offsetting occurs when an entity recognises and measures both an asset and
liability as separate units of account, but groups them into a single net amount in
the balance sheet. Offsetting classifies dissimilar items together and therefore is
generally not appropriate.
 Aggregation
Aggregation is the adding together of assets, liabilities, equity, income or expenses
that have shared characteristics and are included in the same classification.
Aggregation makes information more useful by summarising a large volume of detail. 24
7. CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE ASB, ICAI

 A financial concept of capital is adopted by most entities in preparing their financial

statements.
 Under a financial concept of capital, such as invested money or invested purchasing
power, capital is synonymous with the net assets or equity of the entity.
 The concept of capital maintenance is concerned with how an entity defines the
capital that it seeks to maintain.
 It provides the linkage between the concepts of capital and the concepts of profit
by providing a point of reference by which profit is measured.
 It is a prerequisite for distinguishing between an entity’s return on capital and its
return of capital; only inflows of assets in excess of amounts needed to maintain
capital may be regarded as profit and therefore as a return on capital.
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 The concepts of capital give rise to the following concepts of capital maintenance:
(a) Financial capital maintenance.
(b) Physical capital maintenance.

 Under the concept of financial capital maintenance where capital is defined in terms of
nominal monetary units, profit represents the increase in nominal money capital over
the period.
 Under the concept of physical capital maintenance when capital is defined in terms of
the physical productive capacity, profit represents the increase in that capital over the
period.
 The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the entity.
 The selection of the measurement bases and concept of capital maintenance will
determine the accounting model used in the preparation of the financial statements. 26
 ASB, ICAI

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