Conceptual Framework PDF

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The Conceptual Framework What is a Conceptual Framework? 1.

2.

A conceptual framework seeks to identify: 1.1. The objective of GPFSs; 1.2. The qualitative characteristics that financial information should possess; 1.3. The elements of financial reporting, including the characteristics and recognition criteria for assets, liabilities, income, expenses and equity; and 1.4. The audience of GPFSs. The conceptual framework provides guidance at a general level – it is not an accounting standard. However, note that management must refer to the conceptual framework where a specific issue is not addressed by accounting standards.

Five Benefits of a Conceptual Framework 1. 2. 3. 4. 5.

Accounting standards should be more consistent and logical because they are developed from an orderly set of concepts. Increased international compatibility of accounting standards. Enhanced communication between the AASB and its constituents. More economical development of accounting standards. Provides useful guidance in the absence of an accounting standard.

Qualitative Characteristics 1.

2. 3.

The two fundamental characteristics are “relevance” and “reliability”. 1.1. Relevant financial information is capable of making a difference in the decisions made by users. It should have predictive and confirmatory value. 1.1.1. Closely tied to the notion of relevance is the notion of materiality. An item is material if omitting or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entit y. This often calls upon professional judgment. 1.2. To be reliable, a depiction would be complete, neutral and free from error. Ideally, financial information should be both relevant and reliable. However, there is often a trade off between the two. These two fundamental characteristics are supported by four enhancing characteristics: 3.1. Comparability: to facilitate the comparison of the financial statements of different entities (and that of a single entity over time), methods of measurement and disclosure must be consistent. 3.2. Verifiability: the ability to ensure that the chosen method of measurement has been used without error or bias. 3.3. Timeliness: more timely or up-to-date financial information is more useful. 3.4. Understandability: information is considered to be understandable if it is likely to be understood by users with some business and accounting knowledge.

Definition and Recognition of the Elements of Financial Statements Definition

Recognition

Assets

A resource controlled by the entity as a result of past events and from which future Recognised in the balance sheet when it is probable that the future economic benefits are expected to flow to the entity. If an asset is to be recognised, economic benefits will flow to the entity and the asset has a cost or control rather than legal ownership must be established. Control is the capacity of the value that can be measured reliably. entity to benefit from the asset in the pursuit of the entity’s objectives and to deny or regulate the access of others to that benefit (e.g. leased assets). Assets can take a variety of forms: cash, receivables, prepayments, PPE

Liabilities

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. Note that this definition does not restrict liabilities to situations where there is a legal obligation. Liabilities should also be recognised in situations where equity (i.e. moral) or usual business practice dictates that obligations to external parties currently exist (i.e. equitable/constructive obligations).

Recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Where a liability cannot be reliably measured but is potentially material the liability should be disclosed within the notes to the financial statements as a contingent liability.

Expenses

Expenses are 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.

Recognised in the income statement when it is probable that a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.

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.

Recognised in the income statement when it is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred, and the inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably. Note that income consists of revenues and gains. Revenue arises in the course of the ordinary activities of an entity (e.g. sales, fees, interest, dividends, royalties, rent). Gains only might arise in the course of the ordinary activities of an entity (e.g. gains on the disposal of non-current assets).

Equity

The residual interest in the assets of the entity after deducting all its liabilities. The residual interest is a claim or right to the net assets of the entity.

Not applicable – governed by recognition of assets and liabilities....