Conceptual Framework of Accounting

Financial Reporting and Accounting

• The primary purpose of financial statements is to provide stakeholders with relevant information for decision-making.
• The need for a unique global system of accounting rules arose due to the increased globalization of businesses and the necessity for consistent financial reporting.

History of Accounting

• The development of modern accounting systems is attributed to Italy.
• In France, the "Code de Commerce" law emphasized the importance of financial statements as a source of protection for social creditor rights.
• Germany is one of the few countries that still possesses its own accounting principles.

Regulatory Bodies and Standards

• The Securities and Exchange Commission (SEC) was established in 1934.
• The SEC is the agency responsible for ruling on accounting principles in the US.
• The International Accounting Standards Board (IASB) is responsible for issuing international accounting principles.
• The European Financial Reporting Advisory Group (EFRAG) evaluates the impact of new accounting principles and issues an opinion on their application.
• The European Commission prepares a draft of the UE Rule based on EFRAG's opinion, which is then approved by the European Union (EU).
• The EU follows the endorsement approach to adopting international accounting standards.

Conceptual Framework

• The Conceptual Framework document outlines the underlying principles and concepts for financial reporting.
• The primary qualitative characteristic of financial information is faithful representation.
• The going concern basis of accounting assumes that the company will continue to operate for at least 12 months.
• A faithful representation of financial information means that financial statements accurately reflect the economic phenomena they are intended to represent.
• The consistency principle states that the same accounting principle should be applied consistently in different periods.
• The prohibition of offsetting states that even if there is one account in assets towards a client, and another in liabilities, one cannot directly record the net result, but both must be recorded.
• Legislative interventions have delayed the harmonization process of accounting standards.

Elements of Financial Statements

• A resource meets the definition of an asset if it is expected to generate future economic benefits.
• The rise of an obligation represents a liability.
• Equity is defined as the residual interest in the assets of an entity after deducting its liabilities.
• Income and expenses are defined as increases or decreases in equity, other than those resulting from transactions with owners.
• Comparability is not considered an enhancing qualitative characteristic of financial statements.
• Financial statements provide information about an entity's financial position, performance, and cash flows.
• Assets are defined as resources controlled by the entity as a result of past events, from which future economic benefits are expected to flow.
• Substance over form is a principle that requires financial statements to reflect the economic substance of a transaction, not just its legal form.