1. Concepts – Evolution of a Global Conceptual Framework
Chapter 10
Concepts – Evolution of a Global Conceptual Framework

2. Objectives By the end of the chapter, you should be able to:
discuss how financial accounting standards have evolved
discuss the accounting principles set out in
the International Framework
the UK Statement of Principles
FASB Statements of Financial Accounting Concepts
comment critically on rule-based and principles-based approaches.

3. Development of standards
Numerous accounting standards produced by:
International – IASB
European – EU Directives
National standard setters – FASB in USA; ASB in UK.
Early standards aimed at consistency to protect the auditors
Aim to achieve consistency in the treatment of major items eg. IAS 2 Inventories), and were seen as a mechanism to avoid conflicting rules and practices.
Developed in answer to existing problems
Later standards aimed at transparency for investors
Emphasis on provision of information useful for making economic decisions
Reliability of information only apparent if management changes.

4. Conceptual framework
The framework does not create standards. It aims to assist:
standard setters to develop standards on a rational basis
preparers with a principles basis for decisions where there are no standards
auditors who can refer to the Framework principles, and
stakeholders when interpreting the financial statements.

5. Framework content
Objectives of General Purpose Financial Reports (GPFRs)
Qualitative characteristics of information
Assumptions underlying preparation of financial statements
Influences on preparation of statements
Definition, recognition and measurement of accounting elements

6. Concepts of Accounting

7. FASB concepts statements
The FASB series of Concepts Statements include:
Statement No. 1 : Objectives of Financial Reporting by Business Enterprises
Statement No. 2 : Qualitative Characteristics of Accounting Information
Statement No. 6 : Elements of Financial Statements
Statement No. 5 : Recognition and Measurement in Financial Statements of Business Enterprises.

8. IASB framework for presentation and preparation of financial statements
The objective:
is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions
The qualitative characteristics:
are 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

9. Qualitative Characteristics

10. Qualitative characteristics
Relevance
timely - users have the information when it is needed and useful
Feedback - on the way in which past events have affected the entity during the period being reported on, and the outcome of earlier predictions on which the entity’s management based its decisions
predictive - allow users to either make their own prediction about the economic viability of the entity or assess predictions and assurances given by management as to the future success or otherwise of the entity

11. 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

12. Influences on Qualities
Need to balance between characteristics
Relevance – timely
Reliable – verifiable and accurate
Benefits must exceed costs
Materiality is subjective judgement call
IAS 1 says this is relevant to all financial reporting
Prudence
Caution with estimates
Not overly conservative
No secret reserves

13. Assumptions in Preparation
Accrual basis accounting
transactions accounted for in the period in which they occur, not necessarily when cash is exchanged.
Going concern basis
that the business will continue operating as normal for the foreseeable future (at least the next accounting year)
discontinued activities reported separately
Period reporting
Common time periods (normally a year)
Allows for performance comparison
Interim financial reports

14. IASB framework for presentation and preparation of financial statements
Definition of elements:
Assets - resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise
Liabilities - present obligations 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
Equity - the residual interest in the assets of the enterprise after deducting all its liabilities

15. IASB framework for presentation and preparation of financial statements
Income - 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
Expenses - 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

16. IASB framework for presentation and preparation of financial statements
Recognition and Measurement:
Elements are recognised in the financial statements when the following criteria are satisfied:
It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and
The item's cost or value can be measured with reliability.
Measurement involves using monetary amounts at which the elements are to be recognised and reported.
A number of measurement bases can be used including:
Historical cost
Current cost
Net realisable (settlement) value
Present value (discounted)

17. 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.

18. 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.

19. 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.

20. 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.

21. Discussion points (Continued)
Do you agree or disagree with the following statements:
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.

22. Review questions
‘The replacement of accrual accounting with cash flow accounting would avoid the need for a conceptual framework.’ Discuss.
9. 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.
10 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.