Concepts –Evolution of a Global Conceptual Framework CHAPTER10 Concepts –Evolution of a Global Conceptual Framework

The qualitative characteristics The attributes that make the information in financial statements useful to investors, creditors, and others. The Framework identifies four principal qualitative characteristics: Understandability Relevance Reliability Comparability

Qualitative characteristics Understandability presented in such a way that it can be recognised for what it is and be understood by users who have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence. Reliability representationally faithful, verifiable, unbiased Comparability between accounting periods and entities in similar businesses

Conceptual framework – IASB-FASB convergence project Framework to be developed over eight phases Phase A: Objective and qualitative characteristics (Final chapter published) Phase B: Elements and recognition Phase C: Measurement Phase D: Reporting entity (ED Q2 2010) Phase E: Presentation and disclosure Phase F: Purpose and status of framework Phase G: Applicability to not-for-profit entities Phase H: Other issues, if necessary.

Phase A – the objective of financial reporting The fundamental objective is to provide financial information that is useful to present and potential equity investors when making investment decisions and assessing stewardship. Stewardship not specifically mentioned. BUT reviewing past performance has an implication for assessing future cash flows. Presumption that general purpose financial statements will satisfy the information needs of other stakeholders.

Phase A – qualitative characteristics Two fundamental qualitative characteristics Relevance and faithful representation Other characteristics that may make the information more useful are: Comparability Consistency, verifiability Timeliness and understandability.

Discussion points Do you agree or disagree with the following statements: Accountability and decision-usefulness are not compatible The present balance sheet almost defies comprehension. Insufficient attention is paid to an enterprise’s cash or liquidity position Current values may be more relevant than HCA, but may be too unreliable.

Review questions ‘The replacement of accrual accounting with cash flow accounting would avoid the need for a conceptual framework.’ Discuss. Key qualitative characteristics in the IASB Framework are relevance and reliability. Preparers of financial statements may face a dilemma in satisfying both criteria at once. Discuss. An asset is defined in the IASB Framework as a resource which an entity controls as a result of past events and from which future economic benefits are expected to flow to the entity. Discuss whether property, plant and equipment automatically qualify as assets.

References Elliott, Barry, Elliott, Jamie, Financial Accounting and Reporting 15th edition Chapter 10