The objective of financial statements

To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

Information about financial position is primarily provided in the balance sheet. Information about performance is primarily provided in income statement. Information about changes in financial position is held primarily in cash-flow statement.

‘Financial statements prepared for this purpose meet the common needs of most users’. They show the results of stewardship and accountability of management.

The component parts of the financial statements interrelate because they reflect different aspects of the same transactions. Each depends on the other.

Conceptual Framework – Contents

Framework has seven chapters:

• The objective of financial statements.
• Underlying assumptions.
• Qualitative characteristics of financial information.
• Elements of financial statements.
• Recognition of the elements of the financial statements.
• Measurement of the elements of financial statements.
• Concepts of capital and capital maintenance.

Conceptual Framework – Scope

Applies to general-purpose financial statements of both private and public enterprises.

Full set of financial statements using IASs include:

• Balance sheet;
• Income statement;
• Statement of changes in financial position;
• Cash-flow statement;
• Notes to the accounts.

Framework identifies the following users of financial statements:

• Investors – risk and return provided by their investments.
• Employees – concerned about stability and profitability of their employers and ability to provide remuneration and benefits.
• Lenders – loans and interest can be repaid.
• Suppliers and creditors – whether they will be paid when due.
• Customers – continuance with the business especially if long-term.
• Government and agencies – allocation of resources and information on policies;
• Public – information about economy.

Framework acknowledges that not all the needs will be met and does not indicate which is most important. Framework points out that satisfying needs of investors in general meet needs of other users.

Framework

Framework (conceptual) assists the IASB in:

• Development of future IFRSs and in its review of existing standards.
• Promoting the harmonisation of regulations, financial reporting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.

Framework may assist:

• National standard-setting bodies in developing national standards.
• Prepares of financial standards in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS.
• Auditors in forming an opinion as to whether financial statements conform with IFRSs.
• Users of financial statements in interpreting the information contained in financial statements prepared in conformity with IFRSs.
• Those who are interested in the work of IASB, providing them with information about its approach to the formulation of IFRS.

Framework does not define standards for any particular measurement/disclosure issue. In case of conflict with IFRS. IFRS will win.

The need for a conceptual framework

Gives guidance on the broad principles on how items should be recorded and how they should be presented.

Conceptual framework provides point of reference for prepares of financial information. Framework can provide guidance on how like items are treated and give definitions and criteria that can be used in deciding the recognition and measurement of the item.

Existence of conceptual framework removes the need to address underlying issues over and over again.

Process of creating a new accounting standard can be a long one but where conceptual frameworks exists the issue can be dealt with temporarily by providing short term solution until a specific standard is developed.

Definition of a conceptual framework

‘Constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards which prescribe the nature, functions and limits of financial accounting an financial statements’.

Theoretical principles which would provide the basis for the development of new accounting standards and the evaluation of those already in existence.

Conceptual Framework

The qualitative characteristics of financial information are those that make the information useful to the users. The four principle characteristics are:

• Understandability
• Relevance (including materiality)
• Reliability
• Comparability.

Recognition of the elements of financial statements

Definition of an element plus 2 criteria below:

• It is possible that any future economic benefit will flow to/from enterprise.
• Cost/value can be measured with reliability.

The effects of trading operations on the balance sheets

Assets = Equity + (-) Profit (loss) + Liabilities

Elements of Financial Statements

Assets: a resource controlled by the enterprise as a result of past events expected to result in inflow of economic benefits.

Liability: a present obligation arising out of past events expected to result in outflow of economic benefits.