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Regulatory & Conseptual Framework

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Introduction
Learning out come
Explain the Conceptual Framework
for Financial Accounting
Explain the
Regulatory
Framework
Explain the Recogonition and
Measurement
of elements of
financial statements
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Definition of Financial Accounting


& Reporting

Regulatory & Conseptual Framework Compiled by


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Regulatory & Conseptual Framework Compiled by


Nsama Musawa Njebele

Divided in 2
1. the regulatory and the
2. conceptual frame work.

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The regulatory framework

Question

Refers to the Laws and


regulations that outline the
legal requirements to be met in
reporting
accounting
information.

Why are Laws and regulations


needed in reporting accounting
information

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Framework for financial reporting

It is the process of identifying,


measuring and communicating
economic information to
Others for decisions making on
the basis of that information
and assess the stewardship of
the entitys management.
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Harmonization of Accounting
standards
Accounting standard have
been harmonized to apply
internationally.
This
means
that
all
Accountants
should
be
governed by same standards

Solution
to ensure that relevant and
reliable financial reporting is
achieved to meet the needs of
shareholders and other users

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Benefits of Harmonization

Disadvantages of harmonization

Easy to prepare and consolidate


accounts for multinational entities
Easy for Investors to compare
results of entities internationally

(1)It is difficult to introduce, apply and

maintain or enforce in different countries,


as each has a range of social, political,
economic and business factors to consider;
(ii) Different legal systems may prevent the
application of certain accounting practices
and restrict the options available;

tax liabilities of investors are easier


to calculate
Easy to audit
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financial
reporting between countries.
(iv) Countries may be unwilling to
accept another countrys standards
(i.e. nationalism);
(v) Its Costly to develop a fully
detailed set of accounting
standards.

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Each country has a national accounting

(iii)Different purposes of

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National standard setters

Disadvantages of harmonization

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standard setter .
It deals with domestic barriers to

adopting or converging with IFRS.


In Zambia, the national standard setter

is the Zambia Institute of Chartered


Accountants (ZICA)
ZICA is committed to a framework of
accounting standards based on IFRS.
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The standard setting process

IFRS Foundation

Structure of the International Regulatory System

is the supervisory body for the


IASB and is responsible for
governance issues
develop a set of
global
accounting standards

THE IFRS
FOUNDATION
IASB

IFRS AC

IFRS IC

The IFRS refers to the International Financial Reporting Standard


IASB refers to the International Accounting standards Board
IFRS AC refers to the International Financial Reporting Standard Advisory Council
IFRS IC refers to the International Financial Reporting Standard Interpretations Committee

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International Accounting
Standards Board (IASB)
solely responsible for issuing
International Accounting
Standards (IASs) now called
International Financial
Reporting Standards (IFRSs)
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IFRS Interpretations Committee


(IFRS IC)
Issues rapid guidance on accounting

matters
where
divergent
interpretations of IFRSs have arisen.
The interpretations cover both:
Newly identified financial reporting issues;
or Issues where unsatisfactory or

conflicting interpretations have developed,

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Development of an IFRS

The IFRS Advisory Council (IFRS IC)


provides a forum for the IASB to
consult a wide range of
interested parties affected by
the IASBs work, with the
objective of advising the Board
on agenda
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IASB identifies a
subject

IASB publishes an
exposure draft for
public comment

final IFRS

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List of IFRSs and IASs

List of IFRSs and IASs


IAS 18 Revenue
IAS 19 Employee Benefits
1AS 20 Accounting for Government Grants and Disclosure of Government
Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 28 Investments in Associates

Date of issue
IAS 1 Presentation of Financial Statements
2007
IAS 2 Inventories
2003
IAS 7 Statement of cash flow
1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003
IAS 10 Events after the Reporting Period
2007
IAS 11Construction Contracts
1993
IAS 12 Income Taxes
2000
IAS 16 Properties, Plant and Equipment
2003
IAS 17 Leases
2003
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List of IFRSs and IASs


IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
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IAS 41 Agriculture
IFRS1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Explorations for and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
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List of IFRSs and IASs


IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
IFRS 15 Revenue and Construction Contracts

1995
2003
2008
2003
1995
2003
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List of IFRSs and IASs

1995
2003
2003
1998
2004
1998
2004
2004
2003

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1993
2004

2001
2003
2004
2008
2008
2004
2004
2005
2006

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Approaches to accounting
2 main approaches to accounting

2009
2013
2013
2013
2013
2014

1.

2.

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Rules-based approach (list of detailed


rules that must be followed when
preparing financial statements)
Principles-based
or
conceptual
framework approach (set of key
objectives are set out to ensure good
reporting)
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Approaches to accounting

Conceptual Framework

The principles based is the


approach used in the UK and by
the
International
Accounting
Standards Board (IASB).
The rules based is used is the USA
by the Financial accounting
standards board (FASB)

Is defined as an attempt to codify


existing
generally
accepted
accounting practice (GAAP) in order
to reappraise current accounting
and produce new standards.
This forms the frame of reference
for
financial
reporting
and
accounting

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It forms a theoretical basis for


determining
which event should be accounted
for, (recognition)
how they should be measured and
how they should be communicated
to the users (presentation)
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Arguments in favour of the


conceptual framework

Conceptual Framework

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It helps to avoids fire-fighting

;whereby accounting standards are


developed in a piecemeal way in
response to specific problems or
abuses
Lack of a conceptual framework may
mean that certain critical issues are not
addressed, e.g. definition of basic
terms such as asset liability.
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Arguments in favour of the


conceptual framework

Arguments against the conceptual


framework

It makes it less likely that the


standard-setting process can be
influenced by vested interests (e.g.
large companies/business sectors).
Principles are harder to circumvent
and therefore preferable to a rulesbased approach

Financial statements are intended for a

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variety of users and it is not certain


that a single conceptual framework can
be devised which will suit all users
It is not clear that a conceptual
framework makes the task of preparing
and implementing standards any
easier than without
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Regulatory & Conseptual Framework

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Main Contents of Conceptual


Framework for Financial Reporting

Main Contents of Conceptual


Framework for Financial Reporting

7 major contents
1. The
objective
of
financial
reporting
2. The qualitative characteristics of
financial information
3. The
elements
of
financial
statements

4.The recognition of the elements of


financial statements
5.The measurement of the elements
of financial statements
6.Concepts of capital and capital
maintenance
7.The underlying assumptions

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1 Objective of Financial Reporting

2. Qualitative Characteristic

to provide financial information


about the reporting entity that
is useful to existing and
potential investors

4 principal qualitative characteristics

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2. Qualitative Characteristic
3.Relevance, it influences
economic decisions of users

the

4.Comparability-Users must be able


to compare an entity's financial
statements:
(a) Through time to identify trends.
(b) With other entities statements
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1. understandability, -Users must be


able to understand financial
statements
2. Reliability -user must be able to
depend on it being a faithful
representation of affairs. free
from material error
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3.Elements of Financial
Statements
5 classes namely
1. Assets,
2. liabilities,
3. equity
4. Income
5. Expenses.
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3.Elements of Financial
Statements

Question

Assets
These are resources controlled by
the entity as a result of past events
from which future economic
benefits are expected to flow to the
entity
It is cash or the right to cash in
future
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1. Trade Kings plc has purchased a patent for

K80, 000. The patent gives the company sole


use of a particular manufacturing process
which will save K12, 000 a year for the next
five years.
2. Auto world plc paid Toyota K40, 000 to set
up a car repair shop, on condition that
priority treatment is given to cars from the
company's fleet.
State whether there is an asset or not
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1. This is an asset, an intangible one.

2.Liabilities
These are an entitys present
obligations to transfer economic
benefits as a result of past
transactions or events
An Obligation is a duty or
responsibility to act or perform in a
certain way

There is a past event, control and


future economic benefit (through cost
saving).
2. This cannot be classed as an asset. Auto
world plc has no control over the car
repair shop and it is difficult to argue
that there are future economic benefits

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Question

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Solution

Game plc provides a warranty


with every washing machine
sold
is this a liability or not

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3.Elements of Financial
Statements

Solution

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This is a liability. The business


has an obligation to fulfill the
terms of the warranty. The
liability would be recognized
when the warranty is issued
rather than when a claim is
made
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3.Elements of Financial
Statements
3.Equity interest
is the residual amount found by
deducting all liabilities of the entity
from all of the entitys assets. It is
the residual of assets less liabilities,
so the amount at which it is shown
is dependent on the measurement
of assets and liabilities.
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3.Elements of Financial
Statements
4.Income
Income is an increase in
economic benefits during the
accounting period in the
form
of
inflows
or
enhancements of assets or
decreases in liabilities

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3.Elements of Financial
Statements

4. Recognition of elements in
financial statements

5.Expenses
Decreases in economic benefits
during the accounting period in
the form of outflows or depletions
of assets or incurrence of liabilities

Recognition is the process of


incorporating in the Statement of
Financial Position or income
statement an item that meets the
definition of an element and
satisfies
the
criteria
for
recognition.
It is the time when items are
recorded in the books

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Recognized in
Statement
Financial
Position

When

Liability

Statement
Position

It is probable that an outflow of resources embodying economic


benefits will result from the settlement of a present obligation and
the amount at which the settlement will take place can be
measured reliably.

Income

income statement

An increase in future economic benefits related to an increase in


an asset or a decrease of a liability has arisen that can be
measured reliably.

Expenses

income statement

A decrease in future economic benefits related to a decrease in


an asset or an increase of a liability has arisen that can be
measured reliably.

Asset

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Financial

It is probable that the future economic benefits will flow to the


entity and the asset has a cost or value that can be measured
reliably.

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5.Measurement in financial
statements

Summary of recognition criteria


Item

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For an item or transaction to be


recognised in an entity's financial
statements it needs to be
measured
as
a
monetary
amount.
the IASB Framework identifies
four measurement bases
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5.Measurement in financial
statements

5.Measurement in financial
statements

1.Historical cost.

2.Current cost.

Assets are recorded at the amount of

Assets are carried at the amount of cash

cash or cash equivalents paid or the fair


value of the consideration given to
acquire them at the time of their
acquisition.
Liabilities are recorded at the amount of
proceeds received in exchange for the
obligation,

or cash equivalents that would have to


be paid if the same or an equivalent
asset was acquired currently.
Liabilities
are
carried
at
the
undiscounted amount of cash or cash
equivalents that would be required to
settle the obligation currently.

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5.Measurement in financial
statements

4.Present value.
A current estimate of the present
discounted value of the future net
cash flows in the normal course of
business
Historical cost is the most
commonly adopted measurement
basis

cash equivalents that could currently be


obtained by selling an asset in an orderly
disposal.
Settlement value is the undiscounted
amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities
in the normal course of business.
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6.Capital and capital maintenance


2 types
1. Financial capital maintenance
2. Physical capital and capital
maintenance

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5.Measurement in financial
statements

3.Realisable (settlement) value.


Realisable value is the amount of cash or

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6.Capital and capital maintenance


Financial capital maintenance
capital is synonymous with the net assets or

equity of the entity.


Physical capital maintenance:
Under a physical concept of capital, capital is

regarded as the productive capacity of the


entity , units of output per day
The financial concept of capital is adopted by
most entities
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7.The underlying assumptions

7.The underlying assumptions


Accrual basis- transactions are
recognised when they occur, not
when the related cash flows into or
out of the entity are received.

2 underlying assumptions
1. The accrual basis of accounting

2. The going concern

Cash basis - transactions are


recognised when cash is received ,
not when they occur
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7.The underlying assumptions


Going concern basis - financial
statements are prepared on the
assumption that the entity will
continue in operation for the
foreseeable future

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