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INTRDOUCTION TO
ACCOUNTING
Introduction to Accounting

Week 2
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www.ifrs.org
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 Introduction

:4 • The revised Conceptual Framework for Financial Reporting (Conceptual

Framework) issued in March 2018 is effective immediately for the
International Accounting Standards Board (Board) and the IFRS
Interpretations Committee.

• For companies that use the Conceptual Framework to develop accounting

policies when no IFRS Standard applies to a particular transaction, the
revised Conceptual Framework is effective for annual reporting periods
beginning on or after 1 January 2020, with earlier application permitted.
 What do you mean by a conceptual
framework?
:5 • Conceptual frameworks can apply to many disciplines, but when
specifically related to financial reporting, a conceptual framework
establishes the concepts that underlie financial reporting.

• As the purpose of financial reporting is to provide useful information as

a basis for economic decision making, a conceptual framework for
financial reporting will form a theoretical basis for determining how
transactions should be measured and reported.
 What do you mean by a conceptual
framework for financial reporting?
:6  It is a set of guiding principles used to plan and decide financial
accounting standards.

Those guidelines/principles are designed to provide guidance and help

make decisions relating to the financial accounting treatments.

 Those guidelines/principles can be used as a basis for forming the

accounting standards and interpretations used for financial reporting.

 A conceptual framework for financial reporting differs from an

accounting standard. Accounting standards state specific requirements for
a particular area of financial reporting.
 Structure of the Conceptual Framework

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The 2018 Conceptual Framework is structured into an introductory
explanation on the status and purpose of the Conceptual Framework, eight
chapters, and a glossary.
 Structure of the Conceptual
Framework
Chapter Topic
:8 1
Status and purpose of the Conceptual Framework
The objective of general-purpose financial reporting
2 Qualitative characteristics of useful financial information
3 Financial statements and the reporting entity
4 The elements of financial statements
5 Recognition and derecognition
6 Measurement
7 Presentation and disclosure
8 Concepts of capital and capital maintenance
Appendix A Glossary

Sourcehttps://www.iasplus.com
 1. The objective of general purpose
financial reporting
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This chapter sets out the objective of general purpose financial reporting
(financial reporting), what information is needed to achieve that objective
and who the primary users (users) of financial reports are.
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 The objective of general-purpose financial
reporting
:11 foundation
 The objective of general purpose financial reporting forms the
of the conceptual framework.

 It is to provide financial information about the reporting entity that is

useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.

 However such reports do not and cannot provide all the information
that primary users need. They need to consider pertinent information
from other sources, for example, general economic conditions and
expectations, political events and political climate, and industry and
company outlooks.
 The objective of general-purpose financial
reporting
:12Who are the financial reports for?
• For a range of users who may provide resources.

• Primary users:
• Investors
• Lenders
• Other creditors
 The objective of general-purpose financial
reporting
:13 What to report?

• Economic resources and claims

• Changes in economic resources and claims

• Financial performance reflected by accrual accounting

• Financial performance reflected by past cash flows

 2. Qualitative characteristics of financial
information
:14 This chapter discusses what makes financial information useful.
Two fundamental qualitative characteristics of:
Relevance
Faithful representation

Desired enhancing characteristics of:

Timeliness
Comparability
Verifiability
Understandability
 2. Qualitative characteristics of financial
information
:15 Fundamental Qualitative Characteristics
1. Relevance: This characteristic ensures that the information
included in the financial statement has the ability to influence the
economic decisions of users. It must have:
•predictive value, i.e., help users to evaluate past and present
event, or predict future event.
•confirmatory value, i.e., help users to confirm or correct their
past evaluation.
•A related aspect of relevance is materiality.
•Importance of materiality varies across different entity.
 2. Qualitative characteristics of financial
information
2. Faithful representation: This characteristic ensures that users have
:16 confidence in and can trust the information stated in financial reports.
• Three components affect the faithful representation of financial information:
• Complete depiction: Users require all relevant information to be
included in the financial reports, if they are to be useful for decision
making. (not just number, but also descriptions and explanations.)
• Neutrality: this aims to ensure that there is no attempt to promote any
particular view; the financial statements provide an impartial description
of the events and transactions.
• Free from error: transactions have been accurately recorded and
reported. (reasonable basis)
 3. Financial Statements and the reporting
entity
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This chapter describes the objective and scope of financial
statements and provides a description of the reporting entity.

Although the term “reporting entity” is a new concept introduced

in 2018, it has been used throughout IFRS for some time.
 3. Financial Statements and the reporting
entity
The financial statements should provide the useful information about the reporting
:18 entity:
In the statement of financial position, by recognizing
Assets,
Liabilities,
Equity
In the statements of financial performance, by recognizing
Income, and
Expenses
In other statements, by presenting and disclosing information about
recognized and unrecognized assets, liabilities, equity, income and expenses,
their nature and associated risks;
Cash flows;
Contributions from and distributions to equity holders, and
Methods, assumptions, judgements used, and their changes.
 3. Financial Statements and the reporting
entity
:19 Reporting entity is an entity who must or chooses to prepare the financial
statements. It can be:
A single entity – for example, one company;
A portion of an entity – for example, a division of one company;
More than one entities – for example, a parent and its subsidiaries reporting as a
group.
As a result, there are a few types of financial statements:
Consolidated: a parent and subsidiaries report as a single reporting entity;
Unconsolidated: e.g. a parent alone provides reports, or
Combined: e.g. reporting entity comprises two or more entities not linked by parent-
subsidiary relationship.
 4. Elements of financial statements
This chapter defines the five elements of financial statements—an asset, a
:20 liability, equity, income and expenses.
1.Asset = a present economic resource controlled by the entity as a result of past
events;
2.Liability = a present obligation of the entity to transfer an economic resource
as a result of past events;
3.Income = increases in assets or decreases in liabilities resulting in increases in
equity, other than contributions from equity holders;
4.Capital (or Equity) = the residual interest in the assets of the entity after
deducting all its liabilities;
5.Expenses = decreases in assets or increases in liabilities resulting in decreases
in equity, other than distributions to equity holders;
 5. Recognition and derecognition

:21 This chapter discusses criteria for including assets and liabilities in
financial statements (recognition) and guidance on when to remove
them (derecognition).
Recognition means including an element of financial statements in the
financial statements.

Derecognition means removal of an asset or liability from the

statement of financial position and normally it happens when the item
no longer meets the definition of an asset or a liability.
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 6. Measurement

:23 This chapter describes various measurement bases and discusses

factors to be considered when selecting a measurement basis.
The Framework discusses two basic measurement basis:
1. Historical cost – this measurement is based on the transaction price at the
time of recognition of the element;
2. Current value – it measures the element updated to reflect the conditions at
the measurement date. Here, several methods are included:
o Fair value;
o Value in use;
o Current cost.
 7. Presentation and disclosure

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This chapter includes concepts on presentation and disclosure and
guidance on including income and expenses in the statement of profit
or loss and other comprehensive income.
 8. Concepts of capital and capital
maintenance
:25The Framework explains two concepts of capital:
Financial capital – this is synonymous with the net assets or equity of the entity.
Under the financial maintenance concept, the profit is earned only when the amount
of net assets at the end of the period is greater than the amount of net assets in the
beginning, after excluding contributions from and distributions to equity holders.

The financial capital maintenance can be measured either in

Nominal monetary units, or

Units of constant purchasing power.

Physical capital – this is the productive capacity of the entity based on, for example,
units of output per day.
 References

:26 • www.ifrs.org

• www.iasplus.com

• www.ifrsbox.com

• Elliot, B. & Elliot, J. 2017. Financial Accounting & Reporting

(Eighteenth Edition). Harlow, Pearson.