Introduction to Conceptual Framework for Financial Reporting PDF

INTRODUCTION TO CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING P R O F M A D YA D R A Z R U L A B D U L L A H , C. A. ( M )  LEARNING OUTCOMES AT T H E E N D O F T H I S TO P I C , S T U D E N T S SHOULD BE ABLE TO EXPLAIN: 1. Fundamental qualitative characteristics 2. Enhancing qual...

INTRODUCTION TO CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING P R O F M A D YA D R A Z R U L A B D U L L A H , C. A. ( M )  LEARNING OUTCOMES AT T H E E N D O F T H I S TO P I C , S T U D E N T S SHOULD BE ABLE TO EXPLAIN: 1. Fundamental qualitative characteristics 2. Enhancing qualitative characteristics 3. Accounting assumptions and concepts 2 CONCEPTUAL FRAMEWORK S E T O U T C O N C E P T T H A T U N D E R L I E T H E P R E P A R A T I O N A N D P R E S E N T A T I O N O F G E N E R A L P U R P O S E O F F I N A N C I A L S T A T E M E N T S THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING DESCRIBES THE OBJECTIVE OF AND THE CONCEPTS FOR, GENERAL PURPOSE FINANCIAL REPORTING.PURPOSE OF CONCEPTUAL FRAMEWORKIS TO: Assist the MASB to develop MFRS Standards (Standards) that are based on consistent concepts. Assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event, or when a Standard allows a choice of accounting policy. Assist all parties to understand and interpret the Standards. ADD A FOOTER 3 FUNDAMENTAL QUALITATIVE CHARACTERISTICS Predictive Confirmatory value value financial information RELEVANCE is capable of Materiality making a difference in the decisions made by users Completeness Neutrality FAITHFUL faithfully represent the REPRESENTATION substance of the Free From phenomena that it purports to represent. error FUNDAMENTAL :Qualitative Characteristics of Accounting Information It can be used as an input to processes employed by Predictive users to predict future outcomes. Financial information value with predictive value is employed by users in making their own predictions. RELEVANCE Confirmatory ASPIRATION It provides feedback about (confirms or changes) value previous evaluations. Information is material if omitting it or misstating it Materiality could influence decisions that the primary users of general purpose financial reports.  Predictive Confirmatory value value Financial information with predictive value is employed by users in making their own predictions. Financial information has confirmatory value if it provides feedback about (confirms or changes) previous evaluations. The predictive value and confirmatory value of financial information are interrelated. I Information that has predictive value often also has confirmatory value. For example, revenue information for the current year, which can be used as the basis for predicting revenues in future years, can also be compared with revenue predictions for the current year that were made in past years. The results of those comparisons can help a user to correct and improve the processes that were used to make those previous predictions. FUNDAMENTAL :Qualitative Characteristics of Accounting Information It must include all information necessary for a Completeness user to understand it. FAITHFUL Fairness and freedom from bias. Neutrality is supported by the exercise of prudence. REPRESENTATION Neutrality Prudence is the exercise of caution when making judgements under conditions of uncertainty. Does not allow misstatements Free From There are no errors or omissions in the description of the phenomenon error The process used to produce the reported information has been selected and applied with no errors in the process. ENHANCING QUALITATIVE CHARACTERISTICS COMPARABILITY VERIFIABILITY TIMELINESS UNDERSTANDABILITY  COMPARABILITY COMPARABILITY Comparable information enables comparisons within the entity and across entities. Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. CONSISTENCY Closely related to comparability is the notion that consistency of accounting practices over time permits valid comparisons between different periods. Consistency refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the goal; consistency helps to achieve that goal. Comparability is not uniformity Comparability is achieved when like things are accounted for in the same way. Comparability is not achieve when accounting rules require unlike things be accounted for in the same way  VERIFIABILITY When information can be verified, it gives assurance that the information faithfully represents the economic phenomena being represented. For information to be verifiable, it means that different knowledgeable and independent parties could reach consensus (although not necessarily complete agreement) that a particular depiction is a faithful representation. Verification can be direct or indirect. Direct verification means verifying an amount or other representation through direct observation, for example, by counting cash. Indirect verification means checking the inputs to a model, formula or other technique and recalculating the outputs using the same methodology. An example is verifying the carrying amount of inventory by checking the inputs (quantities and costs) and recalculating the ending inventory using the same cost flow assumption (for example, using the first- in, first-out method).  TIMELINESS Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. The sooner information is available, the more useful it is. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need information to identify and assess trends.  UNDERSTANDABILITY Classifying, characterising and presenting information clearly and concisely makes it understandable. Some phenomena are inherently complex and cannot be made easy to understand. Excluding information about those phenomena from financial reports might make the information in those financial reports easier to understand. However, those reports would be incomplete and therefore possibly misleading. Financial reports are intended for use by users with a reasonable knowledge and the Conceptual Framework accepts that even knowledgeable users may need to seek advice to aid their understanding of more complex issues.  Accounting assumptions and concepts 13 Assumptions and other concepts. GC Going Concern - Company to last long enough to fulfill objectives 01 and commitments. HC The Historical Cost - Indicates that assets and liabilities 02 be recorded at their equivalent cost. EE Economic Entity –Company keeps its activity separate 03 from its owners and other businesses MM 04 Money measurement- Money is the common denominator. 14 01 GOING CONCERN Assumes a business will continue to trade for foreseeable future Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading. Important assumption of accounting as it provide a basis of showing the value of assets and liabilities in the statement of financial position. ◦ Allows fixed assets to be written off proportionally over their useful life ◦ Provides a more realistic value of business assets If the continuity of an entity is in doubt, a liquidation approach is taken, the assets and liabilities are valued as if the entity were to be liquidated in the near future The financial statements may have to be prepared on a different basis. If so, the financial statements describe the basis used. 02 HISTORICAL COST Historical cost is the original cost of an asset, as recorded in an entity's accounting records. This concept is clarified by the cost principle, which states that you should only record an asset, liability, or equity investment at its original acquisition cost. A historical cost can be easily proven by accessing the source purchase or trade documents. However, historical cost has the disadvantage of not necessarily representing the actual fair value of an asset, which is likely to diverge from its purchase cost over time. For example, the historical cost of an office building was RM10 million when it was purchased 20 years ago, but its current market value is higher that the figure. If it is not a going concern, the historical cost basis cannot be used. 03 ECONOMIC ENTITY CONCEPT An economic entity is a unit separate from all other entities — whether individual or a business Recorded activities of a business entity should be kept separate from the recorded activities of its owner(s) Regardless whether a business is a sole proprietorship, partnership or as a company. 04 MONEY MEASUREMENT CONCEPT ◦ A business should only record an accounting transaction if it can be expressed in terms of money. ◦ The use of monetary terms, assuming it is stable ◦ Money is the common denominator ◦ Appropriate basis for accounting measurement and analysis ◦ Most effective means of expressing to interested parties changes in capital and exchanges of goods and service Thank You 19