Chapter 12 Sources of Authority and Conceptual Frameworks for

Chapter 12 Sources of Authority and Conceptual Frameworks for
Accounting Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Chapter 12 Objectives Identify the different sources of accounting regulation Explain the nature and purpose of accounting standards Explain the nature and role of international accounting standards Consider the advantages and disadvantages of international accounting standards Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Chapter 12 Objectives Discuss why standard-setting is a political activity in Australia and overseas Identify the nature and general structure of conceptual frameworks for accounting and financial reporting Explain the purpose of, and various motives for, conceptual frameworks Identify the objectives of general-purpose financial reports Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Chapter 12 Objectives Explain the definitions and recognition criteria for assets, liabilities, equity, revenue and expenses Discuss the qualitative characteristics that information should possess to qualify for inclusion in financial reports Explain the limitations of conceptual framework projects Identify the impact of conceptual frameworks on accounting and business practice Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Chapter 12 Overview 12.1 Sources of authority in accounting
International financial reporting standards Australian adoption of international financial reporting standards 12.4 The ‘politicisation’ of accounting standard-setting 12.5 Conceptual frameworks for financial reporting 12.6 Purposes and motivations for a conceptual framework 12.7 The conceptual framework applicable in Australia Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Introduction Preparation and content of financial (accounting) reports governed by: Sources of authority for the various accounting rules and requirements Sources of authority generally stem from: Companies’ legislation Stock exchange listing requirements and Professional accounting standards Development of a conceptual framework for financial reporting Various efforts by professional bodies Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Looking back (previous chapters):
Examined: The accounting environment Basic accounting principles Preparation of accounting information and financial reports Internal and external users of accounting information and financial reports To gain a more complete understanding of accounting information and financial reports also requires examination of: Sources of authority that specify accounting/financial reporting requirements; and Concepts recommended to guide the preparation of financial reports Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Looking forward: Work of the practicing accountant governed by:
Various accounting regulations, rules and guidelines that govern the preparation, disclosure and audit of financial reports General requirements also set out: Legal and ethical responsibilities of accountants in performing their professional duties Accountants are obliged to follow accounting regulations Risk punitive measures imposed by law and/or disciplinary processes of professional accounting bodies Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Looking forward: This chapter:
Concentrates on the sources of authority for the accounting rules with which corporate entities must comply Sources of authority stem from: Governmental (legislative) requirements Professional (self-regulatory) requirements Three major sources of accounting rules and regulation: Companies legislation Listing regulations for public companies specified by a relevant stock exchange; and Accounting standards issued by a relevant standard-setting body Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.1 Sources of authority in accounting
Companies legislation Important source of authority for accounting regulation Due to its statutory nature Requirements of companies legislation and the bodies responsible for their enforcement Differ from country to country However, there are a number of commonalities Requires presentation of financial reports These reports must disclose the company’s financial position and results of operations Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Companies legislation In the United Kingdom, companies legislation is contained in the Companies Act Major accounting rule: Requires companies’ financial reports to convey a true and fair view of their financial position and operations True and fair not specifically defined  generally considered to require compliance with relevant statutory provisions and regulations, accounting standards and GAAP  infers that accounting policies adopted are appropriate to the company’s business and that the financial statements provide adequate disclosure of all material matters Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Companies legislation Almost every former British colony has financial accounting practices patterned on the United Kingdom model Australia, India, Malaysia, New Zealand, Pakistan and Singapore have: Companies Acts historically derived from the United Kingdom companies legislation Different approach in the United States Securities markets represent the prevailing influence on accounting regulation Major legislative provisions are: Securities Acts of 1933 Securities Exchange Act 1934 Financial Accounting Standards Board (FASB) Specify detailed financial accounting and reporting provisions Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Companies legislation In Australia, the Corporations Act 2001 requires directors to present an audited financial report that conveys a true and fair view. The financial report should comprise the following: Income Statement Balance Sheet Statement of changes in equity Statement of Cash Flows Notes to the financial statements Directors’ declaration Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Companies legislation Interaction between Australian companies legislation and accounting standards Company financial reports must comply with: Applicable accounting standards issued by the Australian Accounting Standards Board (AASB) AASB accounting standards given legal backing by the compliance requirement Major accounting standard governing the general form and content of Australian financial reports AASB101, Presentation of Financial Statements Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Stock exchange listing requirements Also a source of authority for accounting requirements Specifies rules to be followed by listed entities All listed companies must comply with applicable listing requirements Example: Australian Stock Exchange (ASX) Operates Australia’s primary national stock exchange for equities (shares), derivatives and fixed interest securities Provides comprehensive market data and information to a range of users ASX oriented towards: Protection of shareholders and investors Promotion of share market efficiency Regulation of corporate financial disclosures through listing requirements Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Stock exchange listing requirements Example: Australian Stock Exchange (ASX) continued Concern with timely disclosure Requirement: for half-yearly and preliminary final reports Continuous disclosure of material, ‘price-sensitive’ information Listing requirements Traditional concern was on disclosure rather than with technical accounting issues such as measurement or valuation However, when regulatory mechanisms fall behind (eg. accounting standards), the stock exchange may insert additional disclosures into the listing requirements Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Accounting standards Companies legislation does not specify how information should be accounted for or presented This role is given to accounting standards which are, in Australia and many other regimes, given authority by companies legislation Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Accounting standards Companies legislation provides authoritative direction on broad disclosures in the financial reports of entities Accounting standards provide detailed accounting principles and rules on how particular types of financial transactions and other events should be dealt with in an entity’s accounting records Accounting standards very important in ensuring that financial reports: Provide an accurate and fair representation and Ensure that relevant and reliable disclosures are provided Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Accounting standards Diversity of accounting standard-setting arrangements in different countries However, commonality is that accounting standards tend to be developed by or with significant input from: Private sector and/or Professional accounting bodies Self-regulation approach Accounting standards developed with an open, due process Involves the release of exposure drafts of proposed standards Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Accounting standards Structure and format of an accounting standard includes: Explanation of the main feature of the standard What the standard broadly requires Information about which entities the standard applies to In the case of AASB standards, they mainly apply only to corporate entities When the standard takes force, or the operative date Most accounting standards become operative anywhere between six months and a year after their release Purpose or rationale for the standard; and Detailed requirements of the standard, including relevant commentary explaining, where appropriate, the purpose of the requirements Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.2 International financial reporting standards
International financial reporting standards (IFRS) are: High-quality, understandable and enforceable global accounting standards Issued by the International Accounting Standards Board (IASB) Role of IASB: Develop a single set of IFRS Cooperate with national accounting standard setters to achieve convergence in accounting standards around the world Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Divergences in the disclosure and financial accounting practices of companies operating in different countries Accounting standards set by different standard-setting bodies around the world differ due to: Cultural, legal, political and economic factors Divergences can adversely impact on user interpretations of the financial reports of companies having foreign-based or multinational operations Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Importance of international accounting and international financial reporting standards More widely recognised and understood by standard-setting bodies around the world. Due to: Significant and political influences exercised by multinational corporations around the world Increasing globalisation of the world’s financial, business and consumer markets Need for harmonisation, compatibility and transparency in accounting principles around the world Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Benefits of adopting international standards include: Save money, time and resources Local country will not have to produce its own accounting standards Foreign investment might improve Perceptions that local companies are conforming to best international practice Local accounting profession gain more prestige Seen emulating internationally accepted professional standards of behaviour and conduct Legitimise a country’s status An active and compliant member of the international community Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Problems of adopting IASB standards include: Certain industrialised nations, such as the United States, have not perceived IASB standards to be of sufficient quality to warrant worldwide observance International standards are considered by some to be too permissive and flexible Approach of trying to please every nation has adversely impacted on perceptions about the quality of international standards Wholesale adoption of international standards could stifle debate by national standard setters on how best to regulate accounting practices Some countries might have unique political and economic arrangement/objectives Might render international harmonisation a difficult task Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.3 Australian adoption of international financial reporting standards
Australian Financial Reporting Council (FRC): Announcement of the adoption of international standards from 1 January 2005 FRC and Australian Government held the view that: Single set of high-quality accounting standards accepted in major international capital markets: Would greatly facilitate cross-border comparisons by investors Reduce the cost of capital for companies and Assist Australian companies to raise capital or list overseas Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.4 The ‘politicisation’ of accounting standard setting
Accounting standard setting as a political process Financial statements can affect various parties in different ways Those parties that have an interest in promulgations of accounting standards may influence the content of those standards Politicisation has occurred because: Financial reports of entities impact on a number of competing economic interests in society Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.5 Conceptual frameworks for financial reporting
A coherent body of accounting theory A set of interrelated concepts A constitution for financial accounting Primary purpose of such a theory or set of concepts To define the nature, scope and purpose of financial accounting and reporting Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Seeks to answer questions like: What types of entities should be required to prepare financial reports and follows accounting standards? What are the objectives of financial statements? Whose interests should financial statements serve? What are the qualitative characteristics (attributes) with which financial information should comply to be useful? What types of information should be included in financial reports? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Can adopt different approaches Descriptive framework: Describes or codifies existing accounting practices Attempts to explain existing practices in a logical and rational manner Prescriptive framework: Attempts to impose changes on accounting practice Explains what accounting practices should be or ought to be Conceptual framework for Australian financial reporting adopts the prescriptive framework Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.6 Purposes and motivations for a conceptual framework
Primary purpose of a conceptual framework: To define the nature, scope and purpose of financial accounting and reporting Implicit in efforts of accounting standard setters to develop a conceptual framework is: The recognition that a number of fundamental issues in accounting remain unresolved, poorly understood or have failed to achieve general consensus by: Accounting community Business practitioners Academics and Regulators Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Fundamental questions that a conceptual framework attempts to answer include: What types of entities should be required to prepare financial reports and comply with accounting standards What is the primary purpose or objective of financial statements? What qualities (attributes) should financial information possess before it is recognised in an entity’s financial report? How should the basic elements of the financial statements (ie. assets, liabilities, equity, income and expenses) be defined and recognised? How should the elements of financial statements be measured? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

AASB in Policy Statement 5: The Nature and Purpose of Statements of Accounting Concepts states the following benefits of a conceptual framework: Accounting standards should be more consistent and logical, because they are developed in the context of an orderly set of concepts; Increased international compatibility of accounting standards should occur, because they are developed in the context of a conceptual framework that is similar to the explicit conceptual frameworks used by the International Accounting Standards Board (IASB) and major overseas national standard-setters; (c) The AASB should be more accountable for its decisions, because the thinking behind specific requirements should be more explicit, as should any departures from the concepts which may be included in particular accounting standards; (d) The process of communication between the AASB and its constituents should be enhanced, because the conceptual underpinnings of proposed accounting standards should be more apparent when the AASB seeks public comment on them; and (e) The development of accounting standards and other authoritative pronouncements should be more economical because the concepts developed by the AASB will guide the relevant bodies in their decision making. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

IASB stresses additional goals for its conceptual framework: to assist the board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards; and (b) to assist national standard-setting bodies in developing national standards Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

12.7 The conceptual framework applicable in Australia
Represents a combination of: statements of accounting concepts (SACs) developed by the Australian accounting bodies and IASB’s Framework for the Preparation and Presentation of Financial Statements General structure of a conceptual framework illustrated in Figure 12.3: Building blocks of a conceptual framework for general-purpose financial reports Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Figure 12.3 Building blocks of a conceptual framework for general-purpose financial reports Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

The reporting entity concept SAC 1 states only reporting entities should be required to prepare financial statements and comply with accounting standards. A reporting entity is defined by SAC 1 as any entity: in respect of which it is reasonable to expect the existence of users dependent on financial statements for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

The objectives of financial reports AASB Framework defines the objectives of financial statements in terms of two qualities: Economic decision making The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Managerial accountability Financial reports also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or accountability of management do so in order that they may make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

The objectives of financial reports AASB Framework defines the following external users as being dependent on financial statements: Investors Employees Lenders Suppliers Customers Government and other agencies Public enterprises Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Qualitative characteristics of financial reports AASB Framework indicates: Qualitative characteristics Are attributes that make the information provided in financial statements useful to users Four basic qualitative characteristics: Understandability Relevance Reliability Comparability Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Qualitative characteristics of financial reports Understandability AASB Framework, paragraph 25: An essential quality of the information provided in financial reports is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. However, information about complex matters that should be included in the financial report because of its relevance to the economic decision-making needs of users should not be excluded merely on the grounds that it may be too difficult for certain users to understand. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Qualitative characteristics of financial reports 2. Relevance AASB Framework, paragraph 26 To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Qualitative characteristics of financial reports 3. Reliability AASB Framework, paragraphs 31 and 32: To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading. For example, if the validity and amount of a claim for damages under a legal action are disputed, it may be inappropriate for the entity to recognise the full amount of the claim in the balance sheet, although it may be appropriate to disclose the amount and circumstances of the claim. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Qualitative characteristics of financial reports 4. Comparability AASB Framework, paragraph 39: Users must be able to compare the financial reports of an entity through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial reports of different entities in order to evaluate their relative financial position, financial performance and cash flows. Hence, the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an entity and over time for that entity and in a consistent way for different entities. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Qualitative characteristics of financial reports The Framework also stresses that accounting information should reflect: Substance over form ‘Transactions should be accounted for and presented in accordance with their substance and economic reality and not merely their legal form’ Neutrality Information contained in financial statements must be free from bias Completeness Information in financial statements ‘must be complete within the bounds of materiality and cost’ Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Definition and recognition of elements of financial statements Determine the transactions and balances that should be included in financial statements AASB Framework sets out definitions and rules for the recognition of accounting elements Guidelines are provided in paragraphs 47 – 81 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Definition and recognition of elements of financial statements An asset is defined as: ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’ (b) A liability is defined as: ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’ Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Definition and recognition of elements of financial statements (c) Equity is defined as: ‘the residual interest in the assets of the entity after deducting all its liabilities’ (d) Income is defined as: the increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Definition and recognition of elements of financial statements (e) Expenses are defined as: decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Recognition of the elements of financial statements Recognition criteria specified in paragraphs 82 to 92 of the AASB Framework An item that meets the definition of an element should be recognised if: It is probable that any future economic benefit associated with the item will flow to or from the entity; and (b) The item has a cost or value that can be measured with reliability Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Measurement of the elements of financial statements Fundamental question: How should assets and liabilities be valued given the objective of financial reporting and the qualitative characteristics of financial information? Conceptual Framework describes some of the basic measurement models that are available in practice: Historical cost Current cost Realisable (settlement) value Present value Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Display of financial information Final level of the main body of the conceptual framework This level considers in detail the nature of the information to be displayed in financial reports This involves identifying the appropriate information groupings: Financial position Performance Investing and financing and Compliance and analysing the components of those selected groupings Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Standard-setting policy and enforcement Lowest levels of the conceptual framework consider policy issues: Audit status Applicability and timing of financial reporting Enforcement of policy Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Summary The 3 key sources of accounting regulation authority are
Companies legislation Stock exchange listing requirements Accounting standards Conceptual frameworks help determine: Who should report and what should they report? What objectives are reports trying to achieve? What qualities should reports have? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

Summary An accounting conceptual framework addresses:
Scope (General-purpose financial reports) Objectives (Information for decisions and stewardship) Qualities (Understandable, relevant, reliable, and comparable) Elements (Assets, Liabilities, Equity, Income and Expenses) Recognition (Probable and measurable) Measurement (Historical cost, Current cost, Realisable (settlement) value and Present value) Display, Standard-setting policy and Enforcement Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: A Framework for Decision Making 2e, by Jackling, Raar, Williams & Wines Slides prepared by Mary Low

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