Академический Документы
Профессиональный Документы
Культура Документы
Conceptual Framework
FOCUS
This session covers the following content from the ACCA Study Guide.
B. The Financial Reporting Framework
1. The applications, strengths and weaknesses of an accounting
framework
a) Evaluate the valuation models adopted by standard setters.
b) Discuss the use of an accounting framework in underpinning the
production of accounting standards.
c) Assess the success of such a framework in introducing rigorous and
consistent accounting standards.
2. Critical evaluation of principles and practices
a) Identify the relationship between accounting theory and practice.
Session 3 Guidance
Understand the importance of the conceptual framework, both in real life and on the examination.
Pay particular attention to the definitions of elements given in the framework (s.1.4.1) and the
recognition criteria of when these elements should be recognised in the financial statements (s.1.4.2).
It is highly likely that you will need to consider these elements somewhere within the exam.
Revise the IASB's Conceptual Framework for Financial Reporting (s.2).
Learn the definitions relevant to IFRS 13 Fair Value Measurement, the valuation techniques and the
hierarchy of inputs (s.5).
(continued on next page)
P2 Corporate Reporting (INT)
VISUAL OVERVIEW
Objective: To set out the concepts underlying the preparation and presentation of financial
statements for external users.
DISCUSSION
PAPER
Background
Introduction
Assets and Liabilities
Presentation and
Disclosure
Other Issues
FRAMEWORK
Purpose and Scope
NOT-FOR-PROFIT
ORGANISATIONS
Primary
Objectives
Value for
Money
Accounting
QUALITATIVE
CHARACTERISTICS
MEASUREMENT
Bases
IASB Stance
Economic Phenomena
Fundamental
Characteristics
Relevance
Faithful Representation
Enhancing Characteristics
Cost Constraint
SUBSTANCE
OVER FORM
Introduction
Recognition of Assets
and Liabilities
Creative Accounting
Accounting Theory
v Practice
IAS 41
Objective and Scope
Terminology
Recognition and
Measurement
Presentation and
Disclosure
FAIR VALUE
Background
Terminology
Non-financial Assets
Valuation Techniques
Hierarchy of Inputs
Disclosure
Benefits and
Limitations
Session 3 Guidance
Be aware that this session includes some of the new documentation issued by the IASB and
could be the subject of the examiner's current issues question. Pay particular attention to the
Discussion Paper (s.8).
Understand that biological assets can arise other than by purchase and undergo physical
transformation (s.7.2).
Be able to measure biological assets at fair value and account for gains and losses arising
(s.7.3.2).
2014 DeVry/Becker Educational Development Corp. All rights reserved.
3-1
Framework
1.1
1.1.1
Purpose*
1.1.2
Scope
3-2
1.2
Financial Position
Affected by:
economic resources
control;
financial structure;
liquidity and solvency;
and
capacity to adapt to
changes.
STATEMENT
OF FINANCIAL
POSITION
1.3
Financial Performance
In particular profitability.
To predict capacity to
generate cash flows from
an existing resource
base.
To form judgements
about effectiveness
with which additional
resources might be
employed.
STATEMENT OF
COMPREHENSIVE
INCOME
SEPARATE
STATEMENT
Underlying Assumption
There is only
one underlying
assumption of
financial statements
going concern.
3-3
1.4
1.4.1
Terminology
Liability:
Equity:
Income:
Expenses:
3-4
1.4.2
Recognition
1.4.3
Recognition Criteria
1.5
Measurement Bases
Assets
Liabilities
Historical
cost
Current cost
Realisable
(settlement)
value
Present cost
3-5
1.6
Success or Failure?
3-6
*Consider, for
example, the parallels
between IAS 16 and
IAS 38.
*This is of course
mitigated, however,
by the standards
themselves, where
they prescribe the
bases to use.
*Absence of an actual
liability conflicts with
the Framework's
definition of a liability.
Deferred tax is not
only recognised
according to different
criteria but also
measured differently
(it is not discounted).
3-7
Qualitative Characteristics
2.1
"Economic Phenomena"
2.2
Fundamental Characteristics
2.3
comparability;
verifiability;
timeliness; and
understandability.
Relevance
3-8
*Predictive and
confirmatory values
are interrelated (e.g.
the same information
may confirm a
previous prediction and
be used for a future
prediction).
Materiality
It provides a threshold or
cut-off point rather than
being a primary qualitative
characteristic.
2.4
Faithful Representation
*There is no
specific standard on
accounting for a Van
Gogh painting, but an
entity must faithfully
represent the fact that
they have acquired a
painting.
3-9
2.5
Enhancing Characteristics
2.5.1
Comparability
2.5.2
Verifiability
2.5.3
2.5.4
Understandability
2.6
*Older information is
generally less useful
(but may still be useful
in identifying and
assessing trends).
Cost Constraint
3-10
3.1
Introduction
3.2
3.3
Creative Accounting
the way they account for certain transactions. This has led to
abuses of the accounting entries recording these transactions
and the financial statements not reflecting the economic reality
of the situation. Listed here are some of the main areas in which
management have been creative in their accounting treatment.
3.3.1
payment but has been able to keep the obligation (debt) off
the statement of financial position. A sale and repurchase
transaction, if accounted under its legal form, is an example
of off balance sheet financing.
3.3.2
3-11
Illustration 1 Profit
Manipulation
"Hollywood accounting" is a form of profit manipulation technique
used in the film industry. Many actors and screenwriters have
contracts entitling them to a share of the profits of a film; many
studios ensure the film makes a loss by allocating overheads against
the film even though there may be no relationship between the film
and the overhead. The film Forrest Gump is an example of this form
of profit manipulation. The film made millions in the box office, but
when the accountants got hold of the finances, they managed to turn
it into a loss-making film, depriving the author of his share of any
profits from the film.
3.3.3
Window Dressing
3.4
3-12
manner that shows the entity in this "best" light, even if this is
contrary to accounting theory. For example:
Hotel chains have been averse to charging depreciation on
hotel properties. Management has argued that to do so
would be "double charging" profits and that the recoverable
amount of the hotel would exceed its carrying value.
WorldCom classified revenue expenditure as capital
expenditure, and so capitalised costs that should have been
charged to the statement of comprehensive income.
Enron excluded special purpose vehicles from its statement
of financial position. To have included them would have
shown a much higher level of debt, one that could not be
sustained.
Accounting theory cannot capture all situations that can affect
an entity's results. Accounting standards do not cover every
event.*
Seasonal trends will also play a large part in how companies
apply these principles. Holiday firms, historically, have been
geared to selling summer holidays in the early part of the
year. Should the revenue be recognised in the January/
February period, or when the client actually takes the holiday
in the summer months?
*How should a
Van Gogh painting
purchased as an
investment be
accounted for? As
there is no standard
for this type of asset,
a degree of subjective
judgement has to be
made; different people
will apply different
degrees of subjectivity.
3-13
4 Measurement
4.1 Bases
Accountants are at present spoilt for choice as to the
3-14
4.2
IASB Stance
Illustration 3 Measurement
Bases
Measurement bases that may be used for assets and liabilities
included in the statement of financial position include the following:
Historical cost
Land
Inventory
Depreciated historical cost
Buildings
Investment property
Plant and machinery
Patents
Revalued amount
Land and buildings
Fair value
Financial assets and liabilities
Investment property
Amortised cost
Financial assets and liabilities
Net realisable value
Inventory
Present value
Decommissioning costs
Equity accounting
Investment in associate or joint venture
*There is no "one
model fits all".
3-15
There has been much debate over the past 40 years about the
3-16
Fair Value
5.1
Background
5.2
Terminology
The definition of fair value is based on an exit price (taking the asset
or liability out of the entity) rather than an entry price (bringing the
asset or liability into the entity).
3-17
5.3
Non-financial Assets
5.4
Valuation Techniques
5.4.1
*The definition of
highest and best use
will not reflect illegal
activities in the use of
the asset; it will reflect
what is economically
viable, taking account
of any financial
constraints.
*If the entity uses
the asset on its own,
but the best use of
the asset by market
participants would
be combined with
other assets then the
valuation would be
based on using the
asset in combination
with others,
irrespective of how
the entity is currently
using the asset.
Market Approach
5.4.2
Cost Approach
5.4.3
Income Approach
5.5
Hierarchy of Inputs
3-18
5.5.1
Level 1 Inputs
5.5.2
Level 2 Inputs
These are inputs other than quoted prices that are observable
5.5.3
Level 3 Inputs
5.6
Disclosure
5.7
5.7.1
Benefits
3-19
5.7.2
Limitations
3-20
Not-for-Profit Organisations
6.1
Primary Objectives
6.2
3-21
6.3 Accounting
Most of these types of organisation enter into accounting
3-22
IAS 41 Agriculture
7.1
7.2
Terminology
Agricultural Activity
*Activities include
raising livestock,
forestry, annual
cropping and
cultivation of orchards
and plantations.
biologically transformed.
Management of changeby enhancing or stabilising conditions
(e.g. temperature, moisture, nutrient levels and light).
Measurement of changethe change in quality (e.g. ripeness,
density, fat cover, genetic merit) or quantity (e.g. number of
fruits, weight, size).
3-23
7.3
7.3.1
Recognition
7.3.2
*IAS 41 presumes
that fair value can be
measured reliably.
Measurement
*FRS 13 applies.
5,000
1,000
1,500
7,500
3-24
7.3.4
Any changes in fair value less costs to sell arising at the end of
each reporting period are similarly recognised in profit or loss
for the period.
7.3.5
Government Grants
*A condition may be
that an entity does not
engage in specified
agricultural activity.
3-25
171
As at 31 December 2015:
165
(b)
Solution
(a)
31 December 2014
Mature plantation =
Immature plantation =
(ii) 31 December 2015
Mature plantation =
Immature plantation =
(b)
Analysis of Gain
(i) Price change
Reflects the change in price on the biological asset over the period.
$
Prior year estimate restated at current price
Less
Prior year estimate (at prior year price)
Gain/(Loss)
(ii) Physical change
Reflects the change in the state of maturity of the biological asset at current
price.
$
Current year estimate (at current price)
Less
Prior year estimate restated at current price
Gain/(Loss)
3-26
3-27
Discussion Paper
8.1
Background
was first published in 1989 and little changed until 2010, when
it was superseded by the Conceptual Framework for Financial
Reporting.
In 2004, the IASB and FASB set up a working party with the
intention of a thorough updating of the entire Framework.
However, the revised Framework updated only two parts:
1. Objectives of general purpose financial reporting.
2. The qualitative characteristics of useful financial
information.
The remainder of the project was halted as other more
pressing issues were identified.
In 2013, the IASB decided to revisit the conceptual framework
project and issued a discussion paper (DP) inviting comments
on the issues raised by the board in the DP.*
The DP does not seek to completely "reinvent the wheel" but
resumes the issues relating to the Framework from where the
2010 revisions left off. It is split into nine sections, which are
considered in the following sections.
8.2
*A discussion paper
is a precursor to an
ED. It raises issues,
proposes possible
treatments and
asks for input from
interested parties.
When the comment
period expires the
board meets to discuss
the comments received
before issuing an ED.
This will usually lead
to a new publication,
which will then become
part of GAAP.
Introduction
3-28
*For example,
companies are now
drilling into polar ice
fields in the hope of
mining ice (frozen
water), a valuable
natural resource. In
the absence of a
specific accounting
standard, the
Framework provides
a source of reference
for developing a
policy that faithfully
represents this asset
as an economic
resource.
8.3
8.3.1
Definitions of Elements
8.3.2
*And hence to
withdraw also the
probability threshold
on the flow of
economic benefits.
*Thus IFRS will
maintain its "balance
sheet" approach to the
recognition of income,
profits, etc.
3-29
8.3.5
Measurement
3-30
8.4
8.4.1
General Requirements
*The number of
models should,
however, be kept
to the minimum
necessary to provide
relevant information.
Unnecessary changes
should be avoided.
3-31
8.4.2
8.5
Other Issues
Section 9 deals with the other remaining issues that do not fit
3-32
Session 3
Summary
The purpose of the Framework is primarily to assist the IASB in developing and reviewing
IFRSs and promoting harmonisation.
Qualitative characteristics are attributes that make information useful to primary users.
IFRS 13 does not prescribe when an entity should use fair value but how fair value should
be used.
Many not-for-profit organisations and public sector entities follow a value for money (VFM)
approach, which considers economy, efficiency and effectiveness.
Recognition means including in the financial statements items that meet the definition of an
element and satisfy the recognition criteria.
Fundamental characteristics are relevance and faithful representation.
Financial statements must reflect the economic substance of transactions if they are to show
a true and fair view.
3-33
Session 3 Quiz
Estimated time: 40 minutes
1.
2.
3.
4.
Explain what is meant by the term "economic phenomena", which is used in the
Framework. (2.1)
5.
6.
Describe how accountants have been creative in their methods of accounting. (3.3)
7.
Describe the methods available to the accountant when valuing an asset. (4.2)
8.
When assessing the fair value of non-financial assets, explain what is meant by "highest
and best use". (5.3)
9.
When assessing fair value, state where the best place to get a Level 1 input valuation
is. (5.5.1)
10. State THREE benefits and THREE limitations of fair values. (5.7)
11. List the THREE Es considered under value for money. (6.2)
12. Explain the presumption of reliable measurement in relation to IAS 41. (7.3.3)
13. List the issues addressed in the IASB's discussion paper on the Conceptual Framework for
Financial Reporting. (8)
Priority
Q3
Estimated Time
Completed
20 minutes
Additional
Q6
3-34
Creative Accounting
EXAMPLE SOLUTIONS
Solution 1Changes in Fair Value
(a)
31 December 2014
17, 100
1.0620
= 5,332
Analysis of Gain
16, 500
1.0619
= 5,453
16, 500
1.0620
$
=
5,145
Less
Prior year estimate (at prior year price) per (a)(i)
Loss
5,332
(187)
5,453
Less
Prior year estimate restated at current price ((b)(i))
Gain
5,145
308
3-35