ACC803

Advanced Financial Reporting

Week 1: Financial Accounting Conceptual Framework and IASB

1.1 Financial accounting conceptual framework.

1.2 Role of IASB and Conceptual framework.
1.3 US GAAP and IFRS.
 Introduction

Financialstatementsarepreparedandpresentedforexternalusersbymanyentitiesaround
theworld.

Althoughsuchfinancialstatementsmayappearsimilarfromcountrytocountry,thereare
differenceswhichhaveprobablybeencausedbyavarietyofsocial,economicandlegal
circumstancesandbydifferentcountrieshavinginmindtheneedsofdifferentusersof
financialstatementswhensettingnationalrequirements.

Thesedifferentcircumstanceshaveledtotheuseofavarietyofdefinitionsoftheelements
offinancialstatements:forexample,assets,liabilities,equity,incomeandexpenses.They
havealsoresultedintheuseofdifferentcriteriafortherecognitionofitemsinthefinancial
statementsandinapreferencefordifferentbasesofmeasurement.

TheInternationalAccountingStandardsBoardiscommittedtonarrowingthesedifferences
byseekingtoharmoniseregulations,accountingstandardsandproceduresrelatingtothe
preparationandpresentationoffinancialstatements.Itbelievesthatfurtherharmonisation
canbestbepursuedbyfocusingonfinancialstatementsthatarepreparedforthepurposeof
providinginformationthatisusefulinmakingeconomicdecisions.
Conceptual framework of financial
accounting
Referstoalogicallyconsistentsystemcomposedofmutuallyconnectedobjectivesandbasic
concepts.
Thesystemcanguidetoconsistentaccountingstandardsandsetrulesforthenature,
effects,andlimitationsoffinancialaccountingandstatements.

TheFinancialAccountingStandardsBoard(FASB)begandevelopmentofanaccounting
conceptualframeworkinthemid-1970s.

Between1978and2000,itissuedsevenpronouncementsentitledStatementsofFinancial
AccountingConcepts(SFAC).

TheseweredesignedtoprescribetheobjectivesandconceptsthattheFASBwillusein
developingstandardsoffinancialaccountingandreporting(FASB1978,6).

Theconceptualframeworkwastobeusedasaguideinthedevelopmentofconsistent
accountingstandards,hopefullyleadingtoamorecoherentsetofaccountingprinciplesto
aidpractice.
 The purpose of the Conceptual Framework
is:
ThisConceptual Framework setsouttheconceptsthatunderliethepreparationandpresentationoffinancialstatementsfor
externalusers.

(a)toassisttheBoardinthedevelopmentoffutureIFRSsandinitsreviewofexistingIFRSs;

(b)toassisttheBoardinpromotingharmonisationofregulations,accountingstandardsandproceduresrelatingtothe
presentationoffinancialstatementsbyprovidingabasisforreducingthenumberofalternativeaccountingtreatments
permittedbyIFRSs;

(c)toassistnationalstandard-settingbodiesindevelopingnationalstandards;

(d)toassistpreparersoffinancialstatementsinapplyingIFRSsandindealingwithtopicsthathaveyettoformthesubjectofan
IFRS;

(e)toassistauditorsinforminganopiniononwhetherfinancialstatementscomplywithIFRSs;

(f)toassistusersoffinancialstatementsininterpretingtheinformationcontainedinfinancialstatementspreparedin
compliancewithIFRSs;and

(g)toprovidethosewhoareinterestedintheworkoftheIASBwithinformationaboutitsapproachtotheformulationofIFRSs.

Role of framework of
accounting
Developingfinancialreportingstandardsandpractice.
Itfacilitatetheconsistencyofaccountingstandardsovertime
andprovideabasisforstandardsetterstorespondtothe
demandsoflobbygroup.
 Qualitative characteristics of useful
financial information
Iffinancialinformationistobeuseful,itmustberelevantandfaithfullyrepresentwhatitpurportstorepresent.

Theusefulnessoffinancialinformationisenhancedifitiscomparable,verifiable,timelyandunderstandable.

Fundamental qualitative characteristics

Relevance
Relevantfinancialinformationiscapableofmakingadifferenceinthedecisionsmadebyusers.Informationmaybe
capableofmakingadifferenceinadecisionevenifsomeuserschoosenottotakeadvantageofitorarealreadyaware
ofitfromothersources.

Informationismaterialifomittingitormisstatingitcouldinfluencedecisionsthatusersmakeonthebasisoffinancial
informationaboutaspecificreportingentity.Inotherwords,materialityisanentity-specificaspectofrelevancebased
onthenatureormagnitude,orboth,oftheitemstowhichtheinformationrelatesinthecontextofanindividual
entitysfinancialreport.

Faithful representation
Financialreportsrepresenteconomicphenomenainwordsandnumbers.Tobeuseful,financialinformationmustnot
onlyrepresentrelevantphenomena,butitmustalsofaithfullyrepresentthephenomenathatitpurportstorepresent.

Tobeaperfectlyfaithfulrepresentation,adepictionwouldhavethreecharacteristics.Itwouldbecomplete,neutral
andfree from error.
 Enhancing qualitative characteristics
Comparability,verifiability,timeliness andunderstandability arequalitativecharacteristicsthatenhancetheusefulnessof
informationthatisrelevantandfaithfullyrepresented.Theenhancingqualitativecharacteristicsmayalsohelpdetermine
whichoftwowaysshouldbeusedtodepictaphenomenonifbothareconsideredequallyrelevantandfaithfullyrepresented.

Comparability- informationaboutareportingentityismoreusefulifitcanbecomparedwithsimilarinformationaboutother
entitiesandwithsimilarinformationaboutthesameentityforanotherperiodoranotherdate.Comparabilityisthe
qualitativecharacteristicthatenablesuserstoidentifyandunderstandsimilaritiesin,anddifferencesamong,items.

Verifiability- Verifiabilityhelpsassureusersthatinformationfaithfullyrepresentstheeconomicphenomenaitpurportsto
represent.Verifiabilitymeansthatdifferentknowledgeableandindependentobserverscouldreachconsensus,althoughnot
necessarilycompleteagreement,thataparticulardepictionisafaithfulrepresentation.Quantifiedinformationneednotbea
singlepoint
estimatetobeverifiable.

Timeliness- Timelinessmeanshavinginformationavailabletodecision-makersintimetobecapableofinfluencingtheir
decisions.Generally,theoldertheinformationisthelessusefulitis.However,someinformationmaycontinuetobetimely
longaftertheendofareportingperiodbecause,forexample,someusersmayneedtoidentifyandassesstrends.

Understandability- Classifying,characterisingandpresentinginformationclearlyandconciselymakesitunderstandable.
Financialreportsarepreparedforuserswhohaveareasonableknowledgeofbusinessandeconomicactivitiesandwho
reviewandanalysetheinformation
diligently.Attimes,evenwell-informedanddiligentusersmayneedtoseektheaidofanadvisertounderstandinformation
aboutcomplexeconomicphenomena.
 Measurement of the elements of
financial statements
Measurementistheprocessofdeterminingthemonetaryamountsatwhichtheelementsofthefinancialstatementsaretoberecognisedand
carriedinthebalancesheetandincomestatement.

Thisinvolvestheselectionoftheparticularbasisofmeasurement.

(a)Historical cost. Assetsarerecordedattheamountofcashorcashequivalentspaidorthefairvalueoftheconsiderationgiventoacquirethemat

thetimeoftheiracquisition.Liabilitiesarerecordedattheamountofproceedsreceivedinexchangefortheobligation,orinsomecircumstances(for
example,incometaxes),attheamountsofcashorcashequivalentsexpectedtobepaidtosatisfytheliabilityinthenormalcourseofbusiness.

(b)Current cost. Assetsarecarriedattheamountofcashorcashequivalentsthatwouldhavetobepaidifthesameoranequivalentassetwas

acquiredcurrently.Liabilitiesarecarriedattheundiscountedamountofcashorcashequivalentsthatwouldberequiredtosettletheobligation
currently.

(c)Realisable (settlement) value. Assetsarecarriedattheamountofcashorcashequivalentsthatcouldcurrentlybeobtainedbysellingtheassetin

anorderlydisposal.Liabilitiesarecarriedattheirsettlementvalues;thatis,theundiscountedamountsofcashorcashequivalentsexpectedtobe
paidtosatisfytheliabilitiesinthenormalcourseofbusiness.

(d)Present value. Assetsarecarriedatthepresentdiscountedvalueofthefuturenetcashinflowsthattheitemisexpectedtogenerateinthenormal

courseofbusiness.Liabilitiesarecarriedatthepresentdiscountedvalueofthefuturenetcashoutflowsthatareexpectedtoberequiredtosettlethe
liabilitiesinthenormalcourseofbusiness.

Themeasurementbasismostcommonlyadoptedbyentitiesinpreparingtheirfinancialstatementsishistoricalcost.
Thisisusuallycombinedwithothermeasurementbases.Forexample,inventoriesareusuallycarriedatthelowerofcostandnetrealisablevalue,
marketablesecuritiesmaybecarriedatmarketvalueandpensionliabilitiesarecarriedattheirpresentvalue.Furthermore,someentitiesusethe
currentcostbasisasaresponsetotheinabilityofthehistoricalcostaccountingmodeltodealwiththeeffectsofchangingpricesofnon-monetary
assets.
Recognition of assets
Anassetisrecognisedinthebalancesheetwhenitisprobablethatthefutureeconomicbenefitswillflowtotheentityandtheassethasa
costorvaluethatcanbemeasuredreliably.

Recognition of liabilities
Aliabilityisrecognisedinthebalancesheetwhenitisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillresultfrom
thesettlementofapresentobligationandtheamountatwhichthesettlementwilltakeplacecanbemeasuredreliably.

Inpractice,obligationsundercontractsthatareequallyproportionatelyunperformed(forexample,liabilitiesforinventoryorderedbutnot
yetreceived)aregenerallynotrecognisedasliabilitiesinthefinancialstatements.

However,suchobligationsmaymeetthedefinitionofliabilitiesand,providedtherecognitioncriteriaaremetintheparticular
circumstances,mayqualifyforrecognition.Insuchcircumstances,recognitionofliabilitiesentailsrecognitionofrelatedassetsorexpenses.

Recognition of income
Incomeisrecognisedintheincomestatementwhenanincreaseinfutureeconomicbenefitsrelatedtoanincreaseinanassetoradecrease
ofaliabilityhasarisenthatcanbemeasuredreliably.

Thismeans,ineffect,thatrecognitionofincomeoccurssimultaneouslywiththerecognitionofincreasesinassetsordecreasesinliabilities
(forexample,thenetincreaseinassetsarisingonasaleofgoodsorservicesorthedecreaseinliabilitiesarisingfromthewaiverofadebt
payable).

Recognition of expenses
Expensesarerecognisedintheincomestatementwhenadecreaseinfutureeconomicbenefitsrelatedtoadecreaseinanassetoran
increaseofaliabilityhasarisenthatcanbemeasuredreliably.

Thismeans,ineffect,thatrecognitionofexpensesoccurssimultaneouslywiththerecognitionofanincreaseinliabilitiesoradecreasein
assets(forexample,theaccrualofemployeeentitlementsorthedepreciationofequipment).
Underlying assumption: Going concern

Thefinancialstatementsarenormallypreparedonthe
assumptionthatanentityisagoingconcernandwillcontinuein
operationfortheforeseeablefuture.Hence,itisassumedthat
theentityhasneithertheintentionnortheneedtoliquidateor
curtailmateriallythescaleofitsoperations;ifsuchanintention
orneedexists,thefinancialstatementsmayhavetobeprepared
onadifferentbasisand,ifso,thebasisusedisdisclosed.
Development of IFRS
IASCwasestablishedin1973.Thismarksthebeginningof
internationaleffortstodevelopglobalstandards.
Howeverinmanycasestheprofessionalbodies,whowere
membersoftheIASCwerenotthedomesticstandardsetting
authorityandthustherewaslittleadaptationofIAS.

IN1997TheIASCundertookastrategicreviewofitsstructure
andprocessculminatinginthereplacementofIASCwithIASB.
 Overview - IASB
InternationalAccountingStandardsBoard(IASB)

-basedinLondon,beganoperationsin2001.

-TheIASBiscommittedtodeveloping,inthepublicinterest,asinglesetof
highquality,globalaccountingstandardsthatrequiretransparentand
comparableinformationingeneralpurposefinancialstatements.
-TheIASBisselected,overseenandfundedbytheIFRSFoundation(formerly
calledtheInternationalAccountingStandardsCommittee(IASC)Foundation).
-TheIFRSFoundationisfinancedthroughanumberofnationalfinancing
regimes,whichincludeleviesandpaymentsfromregulatoryandstandard-
settingbodies,internationalorganisationsandotheraccountingbodies.

 Trustees
TheTrusteesprovideoversightoftheoperationsoftheIFRSFoundationandtheIASB.
TheresponsibilitiesoftheTrusteesinclude
-theappointmentofmembersoftheIASB,
theIFRSAdvisoryCouncilandtheIFRSInterpretationsCommittee;
-overseeingandmonitoringtheIASBseffectivenessandadherencetoitsdueprocessandconsultationprocedures;
-establishingandmaintainingappropriatefinancingarrangements;
-approvalofthebudgetfortheIFRSFoundation;andresponsibilityforconstitutionalchanges.
-TheTrusteeshaveestablishedapublicaccountabilitylinktoaMonitoringBoardcomprisingpubliccapitalmarket
authorities.

TheTrusteescompriseindividualsthatasagroupprovideabalanceofprofessionalbackgrounds,includingauditors,
preparers,users,academics,andotherofficialsservingthepublicinterest.

UndertheConstitutionoftheIFRSFoundationasrevisedin2010(seebelow),theTrusteesareappointedsothatthereare
sixfromtheAsia/Oceaniaregion,
sixfromEurope,
sixfromNorthAmerica,
onefromAfricaand
onefromSouthAmerica,and
twoothersfromanyarea,aslongasgeographicalbalanceismaintained.
IFRS Advisory Council
TheAdvisoryCouncilprovides
-aforumforparticipationbyorganisationsandindividualswithaninterestin
internationalfinancialreportingfromdiversegeographicalandfunctional
backgrounds.

-TheobjectiveoftheAdvisoryCouncilistogivetheIASBadviceonagenda
decisionsandprioritiesinitsworkandgiveotheradvicetotheIASBortheTrustees.

TheAdvisoryCouncilcomprisesaboutfiftymembers,representingstakeholder
organisationsnternationally.
TheAdvisoryCouncilnormallymeetsthreetimesayear.
Itsmeetingsareopentothepublic.
ThechairoftheAdvisoryCouncilisappointedbytheTrustees,andcannotbea
memberoftheIASBoritsstaff.
ThechairoftheAdvisoryCouncilisinvitedtoattendandparticipateintheTrustees
meetings.
DetailsofthemembersoftheAdvisoryCouncilareavailableonthewebsite
www.ifrs.org.
IFRS Interpretations Committee
TheTrusteesestablishedtheInterpretationsCommittee(thencalledtheInternationalFinancialReportingInterpretations
Committee(IFRIC))inMarch2002,whenitreplacedthepreviousinterpretationscommittee,theStandingInterpretations
Committee(SIC).

-TheroleoftheInterpretationsCommitteeistoprovidetimelyguidanceon
i)newlyidentifiedfinancialreportingissuesnotspecificallyaddressedinStandardsor
ii)issueswhereunsatisfactoryorconflictinginterpretationshavedeveloped,orseemlikelytodevelop.

ItthuspromotestherigorousanduniformapplicationofIFRS.

TheInterpretationsCommitteehasfourteenvotingmembersinadditiontoanon-votingchair.
Thechairhastherighttospeakaboutthetechnicalissuesbeingconsideredbutnottovote.
TheTrustees,astheydeemnecessary,mayappointasnon-votingobserversregulatoryorganisations,whoserepresentatives
havetherighttoattendandspeakatmeetings.

Currently,theInternationalOrganizationofSecuritiesCommissions(IOSCO)andtheEuropeanCommissionarenon-voting
observers.

TheInterpretationsCommitteepublishesasummaryofitsdecisionsaftereachmeeting.
ThisIFRICUpdateispublishedinelectronicformatonthewebsitewww.ifrs.org.
Objectives of the IASB
(a) todevelop,inthepublicinterest,asinglesetofhighquality,understandable,
enforceableandgloballyacceptedfinancialreportingstandardsbasedonclearly
articulatedprinciples.
Thesestandardsshouldrequirehighquality,transparentandcomparableinformationin
financialstatementsandotherfinancialreportingtohelpinvestors,otherparticipants
inthevariouscapitalmarketsoftheworldandotherusersoffinancialinformation
makeeconomicdecisions;

(b)topromotetheuseandrigorousapplicationofthosestandards;

(c)infulfillingtheobjectivesassociatedwith(a)and(b),totakeaccountof,asappropriate,
theneedsofarangeofsizesandtypesofentitiesindiverseeconomicsettings;

(d)topromoteandfacilitatetheadoptionofIFRSs,beingthestandardsand
interpretationsissuedbytheIASB,throughtheconvergenceofnationalaccounting
standardsandIFRSs.
 Domestic adoption of IFRS
FIAadoptedIFRSastherequiredstandardsstarting1January2007.

IFRS for SMEs

WhileadoptingIFRSprovidesbenefitsintermsoffacilitatinginternationalcapitalflows,theyarecostlyforpreparersto
implement.

Somepreparersorpotentialpreparesmaybeunlikelytodirectlybenefitfromaccesstoglobalcapitalmarkets.Forexamples
smallandmediumsizedentitiesthatarenotlistedonstockexchangearelesslikelytoparticipateininternationalcapital
markets.

InrespondingtotheneedforaccountingstandardsforSMEstheIASBissuesIFRSforSMEsinJuly2009.

IFRSforSMEsisastandalonedocumentthatisintendedtoreflecttheneedofusersofSMEsfinancialstatementsandcost-
benefitconsiderations.

IFRS for SMEs

i)omitsomestandardsthatdonotapplytoSMEs,
ii)reducesthechoiceofaccountingpoliciesand
iii)prescribesfewerdisclosures.

IFRS for SMEs

SMEsarethemainenginesofcountrieseconomiesduetotheirsignificantrolein
economicdevelopment(Siam&Rahahleh,2010)

Over95%oftheentitiesintheworldaresmallandmedium-sized,whereasthenumberof
listedcompaniesisabout46,000(Vasek,2011;IASB,2012).
Therefore,theexpectedcomparabilityofentitiesfinancialstatementscannotbe
maintainedwiththeapplicationofinternationalstandardssolelybylistedentities(which
areusingIFRS).

Further,theuseofinternationallyacceptedfinancialreportingstandardsincreasesthe
qualityofthefinancialinformation.Notonlylistedentities,butalsounlistedentitiesneed
comparablehigh-qualityfinancialinformation(Pacter,2009).

Hence,theuseoftheIFRS for SMEs will provide internationally understandable and

comparable financial statementsinamoresimplifiedandlesscostlywayforSMEs.The
useoftheIFRSforSMEsisbecomingmorewidespreaddaybyday.
 Advantages and disadvantages of and
obstacles to IFRS for SMEs adoption
Theadoptionofuniversallyacceptedfinancialreportingstandardsthatrequirehigh-quality,transparent,and
comparableinformationhasbeenwelcomedbyinvestors,creditors,financialanalysts,andotherusersoffinancial
statements(Ankarathet al.,2010).

Themotivationofthepartiestoattainacommonsetofstandardsstemsfromthedemandforfinancialinformation
thatispreparedinaccordancewithaglobalsetofstandardsratherthanlocalaccountingstandards(El-Gazzaret al.,
1999).

Theadvantagesofusingacommonsetofstandardsarelistedinliteratureas:

improvedefficiencyandeffectivenessinfinancialreportingandauditing(Joshi&Ramadhan,2002)
enhancedcomparability(Ball,2006)
greatertransparencyandreliability(Ball,2006);
increasedopportunitiesforexternalfinancing(El-Gazzaret al.,1999;Joshi&Ramadhan,2002;)
reducedcostofcapital(Becket al.,2008;Ankarathet al.,2010;Cai&Wong,2010)
decreasedrisksanduncertaintyforinternationalfinancialstatementusersandresourceproviders(Chorafas,2006).

Ontheotherhand,somepartieshavecriticizedtheIASBconcerningthe
developmentofacommonstandardforSMEsduetoseveralreasons,
includingtwomainarguments.

Firstly, theyassertedthattheIASBdevelopedstandardsthroughouttheworld,irrespective of each countrys culture and level of

economic development, asauniversalstandard(Al-Shammariet al.,2008).

Havingthesamesetofaccountingstandardsmaynotbeenoughtomaintaincomparabilitybetweenthefinancialstatementsofentities
becauseofcountryfactors(Schultz&Lopez,2001;Evanset al.,2005;Zeghal&Mhedhbi,2006;Stainbank,2008;Djatejet al.,2009;Cole
et al.,2011;Nobes,2011),thecompany-specificfactors(Evanset al.,2005),andtheincentiveofpreparers(Coleet al.,2011).

AnotherargumentconcernedtheIASBsexperienceandexpertiseinthefieldofaccounting.
Intheirview,the IASB may not be an appropriate body to develop a simple standard for non-listed entities because most of its
members have expertise in the financial reporting of large listed entities rather than small ones (Mantzariet al.,2009).

Otherdisadvantagesandobstacleswhichareproposedbytheresearcherscanbesummarizedas
i)associatedcosts(Larson&Street,2004;Taylor,2009;Winneyet al.,2010;Ballaset al.,2010;Jones&Finley,2011);
ii)complexityanddifficultiesininterpretation(Horaet al.,1997;Zeff,2007;Alali&Cao,2010;Chandet al.,2010;Bunea-Bontaset al.,
2011);and
iii)lackoftrainedpersonnel(Ballaset al.,2010;Jones&Finley,2011;Uyar&Gngrm,2013).

Effective adoption of IFRS for SMEs require commitmentandreinforcementfromaccountingprofessionals,theinternationalstandard-

settingauthorities,regulatorybodies,auditors,andacademicians.
Readings
Week1Reading1-FinancialaccountingIncommunicating
reality,weconstructreality.

Week1Reading2-TheLatestProgressoftheConceptual
Framework

Week1Reading3-DiscussionaboutConceptualFramework