FRAMEWORK FOR FINANCIAL REPORTING CHAPTER 1 FRAMEWORK FOR FINANCIAL REPORTING

1.1 INTRODUCTION Communication of financial information Annual report and financial statements Regulatory and conceptual frameworks (See Section 1.2 and Section 1.3)

1.2 REGULATORY FRAMEWORK What and why? Company law Stock Exchange regulations Accounting standards (See next)

Accounting standards Objectives of IASB IASB’s process for the development of standards IFRS Interpretations Committee The IFRS Framework (See Section 1.3)

1.3 THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING Definition Purpose Historical development (The Corporate Report,1975; IASC Framework, 1988; Conceptual Framework for Financial Reporting, 2010 [the IFRS Framework]) (See next)

Historical development Conceptual Framework for Financial Reporting (2010) Scope – general purpose financial reports Purpose (See next) Users of financial reports (See later) Content of the IFRS Framework (See later) Status – non authoritative Accounting standards prevail Living document – ‘conceptual accounting framework’ See Chapter 1, Table 1.2

Purpose To assist IASB in setting standards To serve as a basis for harmonisation To assist national standard-setters To assist preparers, auditors and users To assist in understanding of standard-setting To reduce conflicts between Framework and Standards

Users of financial reports Investors Employees Lenders Suppliers and other trade creditors Customers Government Public

Content of the IFRS Framework Currently four chapters (See next) An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits

Content of IFRS Framework Chapter 1: Objective of General Purpose Financial Reporting To provide information about Economic resources and claims (SFP) Changes in economic resources and claims (SPLOCI) Financial performance reflected by past cash flows (SCF) Changes in economic resources and claims not resulting from financial performance (SCE)

Content of IFRS Framework Chapter 3: Qualitative Characteristics of Useful Financial Information Relevance Faithful representation Comparability Verifiability Timeliness Understandability

Content of IFRS Framework Constraints on relevant and reliable information Timeliness Balance between costs and benefits Balance between relevance and reliability True and fair presentation

Content of IFRS Framework Chapter 4: The Framework Underlying assumptions of financial reporting – going concern and accruals accounting Elements of financial statements – asset, liability, equity, income, expenses Recognition of the elements of financial statements – probability and monetary value Measurement of the elements of financial statements – historic cost, current cost, realisable value, present value (See Section 1.4)

Content of IFRS Framework Chapter 4: The Framework (cont’d) Concepts of capital maintenance Financial concept: NA @ EoP > NA @ SoP Physical concept: Physical productive capacity @ EoP > Physical productive capacity @ SoP

1.4 Fair Value Measurement Background Why is a single standard on fair value measurement important? IFRS 13 Fair Value Measurement (See next)

IFRS 13 Fair Value Measurement Scope applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements (except for IFRS 2, IAS 2, IAS 17 and IAS 36) IFRS 13 does not mandate when fair value measurements should be used – this is dealt with in other IFRSs

IFRS 13 Fair Value Measurement Key definition Fair value = ‘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’. This is sometimes referred to as an ‘exit price’.

IFRS 13 Fair Value Measurement Determining fair value Identify the asset or liability May be: A stand-alone asset or liability A group of assets or a group of liabilities A group of assets and liabilities Level at which fair value is measured may depend upon the level at which the asset or liability is aggregated for recognition

IFRS 13 Fair Value Measurement Determining fair value (cont’d) An entity should take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability Such characteristics include: The condition and location of the asset Restrictions, if any, on the sale or use of the asset

IFRS 13 Fair Value Measurement Determining fair value (cont’d) A fair value measurement assumes that the transaction takes place either: in the principal market for the asset or liability; or in the absence of a principal market, in the most advantageous market for the asset or liability The principal market is the market with the greatest volume and level of activity for that asset or liability The most advantageous market is the market in which the entity could achieve the most beneficial price

IFRS 13 Fair Value Measurement Determining fair value (cont’d) An entity should measure the fair value of an asset or a liability using the assumptions that market participants would use when pricing the asset or liability Market participants are: Independent of each other and knowledgeable about the asset or liability Able and willing to enter into a transaction for the asset or liability

IFRS 13 Fair Value Measurement Determining fair value (cont’d) A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction under current market conditions at the measurement date An ‘orderly transaction’ means that it is not a forced transaction (liquidation or distress sale)

IFRS 13 Fair Value Measurement Determining fair value (cont’d) For a non-financial asset, this takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use The highest and best use takes into account the use of the asset that is: Physically possible (e.g. property location or size) Legally permissible (e.g. property zoning laws) Financially feasible (e.g. adequate return generated)

IFRS 13 Fair Value Measurement Determining fair value (cont’d) A fair value measurement of a liability or an entity’s own equity instrument is based on the assumption that the liability or equity instrument is transferred to a market participant and would remain outstanding It is a transfer value, not an extinguishment or settlement

IFRS 13 Fair Value Measurement Fair value hierarchy Level 1 – highest priority is given to quoted prices in active markets for identical assets or liabilities Level 2 – observable inputs not included in level 1 (e.g. quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active) Level 3 – unobservable inputs developed using best information available (e.g. entity’s own data)

IFRS 13 Fair Value Measurement Fair value hierarchy (cont’d) Valuation techniques used to measure fair value should maximise the use of relevant observable inputs and minimise the use of unobservable inputs Observable inputs – developed using market data such as publicly available information about actual events or transactions Unobservable inputs – market data not available and developed using best information available about assumptions that market participants would use

IFRS 13 Fair Value Measurement Fair value measurement techniques When transactions are directly observable in a market, the determination of fair value can be relatively straightforward. In other circumstances, a valuation technique is used. IFRS 13 describes three valuation techniques: Market approach – uses prices generated by market transactions Income approach – converts future amounts to a single (present value) amount Cost approach – determines the value that reflects current replacement cost

IFRS 13 Fair Value Measurement Disclosures include: Valuation techniques and inputs used to develop fair value measurements (including the level of the hierarchy within which the fair value measurements are categorised) Effect of measurements on profit/loss or OCI for the reporting period for recurring fair value measurements Additional disclosure requirements, particularly for fair value measurements based on Level 2 and Level 3 inputs