Framework for The Preparation and Presentation of Financial Statements

IASC (predecessor of IASB) attempted to develop concept that could be used for the preparation and presentation of financial statement (FS). The framework was a response to the IASC’s commitment to narrow the differences by seeking to harmonise regulation, accounting standars, and procedures.

Purpose of the framework :
 Assist the IASB in the review of existing IFRSs and the development of future IFRSs
 Guide national standard setting bodies in developing national standards
 Assist whose prepare FS to apply IFRS
 Assist auditor in forming an opinion whether FS conform with the IFRS
 Assist user to interpret FS

Application of The Framework – while the framework is the foundation of many of the IFRSs, it it important to remember that it is not a IFRS nor have the same authority as an IFRS. However, many of the concepts in the framework are now being intergrated into IFRS, such as IAS 1 : Presentation of Financial Statements. The IASC recognized that in some circumstances there may be conflict between the framework and IFRSs. In such cases the requirements on the specific IFRS always prevail over the framework.

Issues Covered in The Framework
1. Scope
Framework is concerned with general purpose of FS. Prepared and presented at least annually. Directed towards the common information needs of a wide range of users. Special purpose of FS, such as prospectuses and computation prepared for tax are outside the scope of framework.

2. User of FS
 Investor
 Employee
 Lenders
 Supplier and customer
 Government
 Public
All users needs will not be satisfied. However, by providing information satisfying the needs of investor, most of the needs of other users will be satisfied. This is WHY IFRS are described as being investor-oriented.

3. Objectives of FS
 Information about financial position
 Information about financial performance
 Information on changes in financial position

4. Underlying assumptions of FS
 Accrual basis – The effect of transaction and other events are recognized when they occur, NOT when cash or its equivalent is received or paid.
 Going concern principle – The entity has neither intention nor the need to liquidate or curtail materially the scale of its operations.

5. Qualitative characteristic of FS
 Understandability – Users assumed will have a reasonable knowledge of business, economic actitivities, and accounting. However, this does not mean complex information that is relevant to the economic decision-making needs of these user can be excluded from FS on the ground that it may be too difficult for the to understand.
 Relevance – Information influences the economic decisions of user. The relevance of information affected by its nature and materiality.
 Reliability – Information must be free from material error and bias.
Faithfull representation
Substance over form
Neutrality
Prudence
Completeness
 Comparability – FS comparable through time and with different entities.

6. Element of FS
 Financial position : assets, liabilities, equity
Assets is defined as a resource controlled by an entity as a result of past events from which economic benefits are expected to flow to the entity.

Liabilities is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefit.

Equity is the residual interest in the entity’s assets after deducting all of its liabilities

 Financial performance : income, expense, profit
Income is defined as increase economic benefit during the accounting period in the form of inflows, enhancement in assets or decrease in liabilities that result in increase in equity other than those relating to contributions from shareholder.

Expense is defined as a decrese in economic benefits during the accounting period in the form of outflows, depletion of assets or incurrence of liabilities that result in decrese in equity other than those relating to distribution to shareholders.

7. Recognition criteria of the element of FS – An item that meets the definition of an element (asset, liability, equity, income, expense) should be recognized if :
 It is probable that economic benefit associated with the item will flow to or from the entity and
 The item has a cost or value that can be measured with reliability

8. Measurement criteria of the element of FS – is the process of determining the monetary amount at which the element of FS are to be recognized and carried in the statement of financial position and statement of comprehensive income.
 Historical cost – assets or liabilities recorded at the amount of cash paid or received.
 Current cost – assets or liabilities recorded at the amount of cash if acquired or settled currently.
 Reliasable (settelement) cost – assets or liabilities recorded at the amount of cash if selling the assets or settled liabilities in normal courses of business.
 Present value – assets or liabilities recorded at the present discounted value of the future net cash inflows or outflows that is expected in the normal courses of business.
 Fair value – assets or liabilities recorded at the amount which an asset could be exchange or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

9. The concept of capital and capital maintenance