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.

Test your knowledge on the Conceptual Framework of accounting and its evolution over the years. Explore the concept of substance over form and understand its significance in the field of accounting. Learn about the changes made in the 2010 and 2015 versions of the framework and how they impact the analysis of contracts.