CFAS-PAS-1 PDF: Financial Reporting Concepts

Conceptual Framework The Conceptual Framework for Financial Reporting is a complete, comprehensive and single document promulgated by the International Accounting Standards Board. Purpose of Conceptual Framework The conceptual frameworks purpose is to serve as a guide in developing, understanding,...

Conceptual Framework The Conceptual Framework for Financial Reporting is a complete, comprehensive and single document promulgated by the International Accounting Standards Board. Purpose of Conceptual Framework The conceptual frameworks purpose is to serve as a guide in developing, understanding, and interpreting the standards. The conceptual framework is not a standard. In case of a conflict between these two, the standard prevails. Scope of the Conceptual Framework The conceptual framework is concerned with general purpose financial reporting. General purpose financial reporting involves the preparation of general purpose financial statements. Objective of Financial Reporting The objective of general purpose financial reporting is to provide information that is useful to primary users in making decisions about providing resources to the entity. Primary Users 1. Existing and potential investors 2. Lenders and other creditors Financial reports do not and cannot provide all the information needs of the primary users. Only their common needs. Qualitative characteristics Fundamental Qualitative Characteristics - These are the useful characteristics that make information useful to users. 1. Relevance - capable of making a difference in the decisions made by users. a.​ Predictive value - information help users in making decisions about future outcomes. b.​ Confirmatory value - the information help users in confirming previous predictions. Materiality is an entity-specific aspect of relevance. It is a matter of judgment. The overriding consideration when making materiality judgment is whether information could reasonably be expected to influence the decision of users. Materiality process involves following steps: 1. Identify 2. Assess 3. Organize 4. Review 2. Faithful representation — information provides a true, correct, and complete depiction of what it purports. a.​ Completeness - all information necessary for users to understand the phenomenon being depicted is provided. b.​ Neutrality - information is presented without bias. c.​ Free from error - means there are no errors in the description and in the process by which the information is selected and applied. Enhancing Qualitative Characteristics — These are the characteristics that enhance the usefulness of information. 1. Comparability - information is comparable if it helps users identify similarities and differences between sets of information. 2. Verifiability - information is verifiable if different users could reach a general agreement as to the information presented. 3. Timeliness - information is timely if it is available to users in time. 4. Understandability - information is understandable if it is presented in a clear and concise manner. The Cost Constraint Cost is a pervasive constraint; it affects virtually all aspects of financial reporting. Financial Statements and the Reporting Entity The objective of general purpose financial statements is to provide financial information about reporting entity’s assets, liabilities, equity, income and expenses that is useful in assessing: a. The entity’s ability to generate future net cash inflows b. Management’s stewardship over economic resources A reporting entity is one that is required, or chooses, to prepare financial statements. The Elements of Financial Statements The elements of financial statements refer to the quantitative information reported in the statements of financial position and income statement. The elements directly related to the measurement of financial position are: 1. Assets - is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. 2. Liabilities - is a present obligation of the entity to transfer an economic resource as a result of past events. 3. Equity - is assets less liabilities. These relate to the entity’s financial performance: 4. Income 5. Expenses Income and expenses are changes in assets and liabilities excluding owner contributions/distributions and capital maintenance adjustments. Recognition and Derecognition An item is recognized if it: a. Meets the definition of an element b. Recognizing it would provide useful information (relevant and faithfully represented) An item is derecognized of it ceases to meet the definition of an asset or a liability. Measurement Basis 1. Historical cost - value that becomes the asset’s (liability’s) deemed cost for subsequent measurement at historical cost. Historical cost does not reflect changes in value. 2. Current value - measures reflect changes in values at the measurement date. a.​ Fair value b.​ Value in use and fulfillment value c.​ Current cost Presentation and Disclosure Financial information is communicated to users through presentation and disclosure in the financial statements. Presentation and disclosure objectives are specified in standards. Concepts of capital The conceptual framework mentions two concepts of capital namely: a. Financial concept of capital — capital is regarded as the invested money or invested purchasing power b. Physical concept of capital - capital is regarded as the entity’s productive capacity PAS 1 - Presentation of Financial Statements PAS 1 prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods (intra-comparability) and with the financial statements of other entities (inter-comparability). Financial Statements are the “structured representation of an entity’s financial position and results of its operations.” General purpose financial statements are those statements that cater to the common needs of a wide range of primary (external) users. The purpose of financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. Complete set of financial statements 1. Statement of financial position 2. Statement of profit or loss and other comprehensive income 3. Statement of changes in equity 4. Statement of cash flows 5. Notes a. Comparative information 6. Additional statement of financial position (required only when certain instances occur) General Features of Financial Statements 1. Fair Presentation and Compliance with PFRSs The application of PFRSs, with additional disclosure, is presumed to result fair presentation of financial statements. 2. Going Concern It assumes that the entity continue operating indefinitely. An entity is not a going concern if it intends to months. 3. Accrual Basis of Accounting Entity should prepare its financial statements, except for cash flow, using the accrual basis. 4. Materiality and Aggregation Each material class or similar items must be presented separately in the financial statements. 5. Offsetting Assets and liabilities, income and expense, should not be offset unless permitted by a PFRS. 6. Frequency of reporting An entity shall present a complete set of financial statements (including comparative information) as least annually. 7. Comparative Information An entity shall present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements. 8. Consistency of presentation An entity shall retain presentation and classification of items in the financial statements from one period to another. Additional Statement of Financial Position An additional statement of financial position may be presented as at the beginning of the preceding period when an entity: a. Applies an accounting policy retrospectively b. Makes a retrospective restatement of items c. Reclassifies items in its financial statements Presentation of a statement of financial position 1. Classified presentation shows distinctions between current and noncurrent assets and current and noncurrent liabilities. 2. Unclassified presentation shows no distinction between current and noncurrent assets. Deferred tax assets and deferred tax liabilities are presented as noncurrent items in a classified statement of financial position, irrespective of their expected dates of reversal. PAS 1 does not prescribe the order or format in which an entity presents items. Statement of profit or loss and other comprehensive income Income and expenses may be presented by: a. Single statement of profit or loss and other comprehensive income b. Two statements with an income statement and a statement presenting comprehensive income Other comprehensive income (OCI) compromises items of income and expense (including reclassification adjustments) that are recognized in profit or loss as required or permitted by other PFRSs. OCI include: a. Changes in revaluation surplus b. Remeasurements of the net defined benefit liability (asset) c. Unrealized gains and losses on FVOCI investments d. Translation gains and losses on foreign operation e. Effective portion of gains and losses on hedging instrument in a cash flow hedge Reclassification adjustments are amounts reclassified from other comprehensive income (OCI) to profit or loss. OCI may be presented net or gross of related taxes Total comprehensive income includes all non-owner changes in equity. It compromises profit or loss and other comprehensive income. Presentation of Expenses 1. Nature of expense method — under this method, expenses are aggregated regarding to their nature (e.g., depreciation, purchase of materials, transport cost, advertising cost). 2. Function of expense method — under this method, an entity classifies expenses according to their function (e.g., cost of sales, distribution costs and other functional classifications). Disclosure of Dividends Dividends are disclosed either in the statement of changes in equity or in the notes. Notes The notes is an integral part of the financial statements. It presents: a. Information regarding the basis of preparation of financial statements b. Information required by the PFRSs c. Other information not required by PFRSs but is relevant to users of financial statements Other disclosures: Judgments and key assumptions - when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities -whether, in substance, particular sales of goods are financing arrangements and therefore do not giverise to revenue Dividends - the amount of dividends proposed or declared before the financial statements were authorised for issue but which were not recognised as a distribution to owners during the period - the related amount per share the amount of any cumulative preference dividends not recognized Capital disclosures - qualitative information about the entity's objectives, policies and processes for managing capital, including; - description of capital it manages nature of external capital requirements, if any how it is meeting its objectives -quantitative data about what the entity regards as capital -changes from one period to another -whether the entity has complied with any external capital requirements and -if it has not complied, the consequences of such non-compliance