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Conceptual Framework
Wiley: Chapter 1 & 2
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LO1: Describe and explain the sources and authorities of
GAAP in HK
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LO5: Define the elements of the FSs and the concepts for
recognizing and measuring them in the FSs
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1. Introduction
2. Sources and authorities of GAAP in HK
3. HKICPA’s Conceptual Framework
4. Fundamental assumptions and principles of accounting
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Financing activities
Investing activities
Operating activities
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Activities that result in changes in the:
Size and Composition of equity capital and borrowings of
the entities
Examples:
◦ Issue of new shares
◦ New loans from bank
◦ Loan repayments
◦ Issue of debentures
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Activities to obtain the resources or assets in order to
operate the business
Examples:
Acquisition of PPE for operation of the business
Sales of PPE when they are no longer needed
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The principal revenue-producing activities of the
enterprise that are not investing or financing activities
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HKAS 1 (Revised) Presentation of Financial Statements
(effective for annual periods beginning on or after 1 Prior to HKAS 1 (Revised)
January 2009)
(a) a statement of financial position as at the end of the (a) a balance sheet as at the end of the
period; period;
(b) a statement of profit or loss and other comprehensive
income for the period; either:
- one single comprehensive statement, or
- two statements: a separate income statement and a (b) an income statement for the period;
second statement (statement of comprehensive
income) beginning with profit or loss and displaying
components of other comprehensive income
(c) a statement of changes in equity for the period; (c) a statement of changes in equity for
the period;
(d) a statement of cash flows for the period; (d) a cash flow statement for the
period; and
(e) notes, comprising a summary of significant accounting (e) notes, comprising a summary of
significant accounting policies and
policies and other explanatory information; and other explanatory notes.
(f) a statement of financial position as at the beginning of
the earliest comparative period when an entity applies
an accounting policy retrospectively or makes a
retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial
statements. 10
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Financial statements are prepared in conformity with a
common set of standards, guidelines, and procedures called
generally accepted accounting principles (GAAP).
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The Companies Ordinance
◦ the maintenance of accounting records,
◦ the content of financial statements, and
◦ the audit of company incorporated in HK
◦ Requires directors to present “true and fair “ accounts
Listing Rules
◦ for publicly listed companies on the Main Board and the GEM
issued by the Stock Exchange of Hong Kong
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HKICPA’s Framework
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“Conceptual Framework for Financial Reporting”
Set out the concepts that underlie the preparation and
presentation of FSs for external users
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The objectives of FSs
Elements of FSs
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The objective of general purpose financial reporting is to
provide financial information about the reporting entity
that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing
resources to the entity
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If financial information is to be useful, it must be relevant and
faithfully represents what it purports to represent. The
usefulness of financial information is enhanced if it is
comparable, verifiable, timely and understandable.
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Relevance - information is capable of making a difference in the
decisions made by users
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Faithful Representation - faithfully represent the economic
phenomena that it purports to represent
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Comparability – Similar economic phenomena are reported in
the same manner, both across entities and across time.
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Elements for the measurement of financial position:
ASSETS = LIABILITIES + EQUITY
(resources) (obligations) (residual interest)
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Asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the entity.
Liability is a present obligation of the entity to transfer
an economic resource as a result of past events.
Equity is the residual interest in the assets of the entity
after deducting all its liabilities.
Income is the increases in assets, or decreases in
liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity
claims.
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Income is the increases in assets, or decreases in
liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity
claims.
Expense is the decreases in assets, or increases in
liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.
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An item that meets the definition of an element should be
recognized if:
1. Probable economic benefits – flow to or from the entity; and
2. Measurement reliability – the item’s cost or value can be
measured reliably
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1. Historical Cost
• E.g. an asset - cash or cash equivalent paid or the fair value of the
consideration given to acquire it at acquisition date
2. Current Cost
• E.g. an asset – the amount of cash or cash equivalents that would be paid
if the same or equivalent asset was acquired currently
3. Realizable or settlement value
• E.g. an asset - the amount of cash or cash equivalents that could currently
be obtained by selling the asset in an orderly disposal.
4. Present value
• E.g. PV of an asset – discounted future cash flows
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1. Economic entity assumption:
Company’s business activities should be separated from
owner’s personal activities.
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3. Monetary unit assumption:
Accounting transactions are recorded and reported in
monetary units, assumed to be stable over time.
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5. Accrual basis of accounting:
Under the accrual basis of accounting, transactions and
events are recognised when they occur (and not as cash
or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the
financial statements of the periods to which they relate
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Measurement principles: “mixed-attributes” system
◦ Cost Principle: Assets and liabilities are held at their
acquisition price (historical cost), generally used when the
fair value of an asset cannot be reliably measured.
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2. Revenue recognition principle:
Income is recognized in the income statement when 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.
Revenue Recognition
At end of At point
production of sale
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3. Expense recognition principle:
Expenses are recognized in the income statement when
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. Often expenses are
‘matched’ to revenues.
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1. Materiality - if omitting it or misstating it
could influence decisions that users make
on the basis of financial information about
a specific reporting entity.
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True and fair view
Substance over form
Matching principle
Conservatism principle
Reliability
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