BA606 FINANCIAL ACCOUNTING

1
BA606 FINANCIAL ACCOUNTING

• Professor Garry Carnegie
• Lectures 3 and 4

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Lectures 3 and 4 Fundamentals of general purpose
financial reporting

• Introduction
• Qualitative characteristics of financial
  information
• Elements of financial statements
• Profit

3
Introduction

• The fourth level of the conceptual framework
  deals with the fundamentals of financial
  reporting and comprises two parts
• Qualitative characteristics of financial
  information
• Elements of financial statements, especially the
  identification and definition of the elements
  that comprise the financial statements

4
Qualitative characteristics of financial
statements

• What qualities should exist in financial
  information in order for that information to be
  useful for economic decision making?
• These qualities or qualitative characteristics
  are detailed and discussed in the Framework for
  the Preparation and Presentation of Financial
  Statements (the Framework) paras. 24 to 46 of
  the Framework

5
Qualitative characteristics of financial
statements

• The four principal qualitative characteristics
  are as follows
• Understandability
• Relevance
• Reliability
• Comparability

6
Qualitative characteristics of financial
statements

• Understandability
• Information is to be readily understandable to
  users
• Users are assumed to be financially literate
• Complex or detailed information should be
  included in financial statements because of its
  relevance to economic decision making

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Qualitative characteristics of financial
statements

• Relevance
• To be useful, information must be relevant to the
  needs of decision makers
• Feedback (or confirmatory) role (otherwise known
  as feedback value)
• Predictive role (otherwise known as predictive
  value)
• Materiality

8
Qualitative characteristics of financial
statements

• Reliability
• To be useful information must also be reliable
• Information should be free from material error
  and bias
• Faithful representation
• Substance over form
• Neutrality
• Prudence
• Completeness

9
Qualitative characteristics of financial
statements

• Comparability
• Users should be able to compare financial
  statements across time
• Users should be able to compare the financial
  statements of different entities
• Consistency in accounting policies and practices
  is desired in order to intra-firm and inter-firm
  comparability
• Reporting corresponding information for preceding
  periods

10
Qualitative characteristics of financial
statements

• Balance between qualitative characteristics
• A balancing or trade-off between qualitative
  characteristics is often necessary, such as
  balancing relevance and reliability
• Aim is to achieve an appropriate balance among
  the characteristics
• The trade-off is a matter of professional
  judgement in the specific circumstances

11
Qualitative characteristics of financial
statements

• True and fair view/fair presentation
• the application of the principal qualitative
  characteristics and of appropriate accounting
  standards normally results in financial reports
  that convey what is generally understood as a
  true and fair view of, or as presenting fairly
  such information (para. 46)

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Elements of financial statements

• Financial statements portray the effects of
  transactions and other events by grouping them
  into broad categories according to their economic
  characteristics paras. 47 to 80 of the
  Framework
• Balance sheet or statement of financial position
  (reflecting financial position)
• Assets
• Liabilities
• Equity

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Elements of financial statements

• Income statement or profit and loss statement
  (reflecting financial performance)
• Income Revenue
• Expenses

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Elements of financial statements

• Definitions of the elements
• An 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 para. 49(a)

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Elements of financial statements

• Characteristics of an asset
• Future economic benefits
• Control by the entity
• The result of a past event (i.e. a past
  transaction or other past event).

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Elements of financial statements

• Definitions of the elements
• A liability is a present obligation of the
  entity arising from past events, the settlement
  of which is expected to result in an outflow from
  the entity of resources embodying economic
  benefits para. 49(b)

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Elements of financial statements

• Characteristics of a liability
• The existence of a present obligation to another
  entity
• A future sacrifice of economic benefits
• The result of a past event

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Elements of financial statements

• Definitions of the elements
• Equity is the residual interest in the assets of
  the entity after deducting all its liabilities
  para. 49(c)

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Elements of financial statements

• Definitions of the elements
• Income revenue is increases in economic
  benefits during the accounting period in the form
  of inflows or enhancements of assets or decreases
  of liabilities that result in increases in
  equity, other than those relating to
  contributions from equity participants para.
  70(a)

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Elements of financial statements

• Characteristics of income revenue
• It is a flow
• That takes the form of an increase in assets or a
  decrease in liabilities
• Results in an increase in equity

21
Elements of financial statements

• Definitions of the elements
• Expenses are decreases in economic benefits
  during the accounting period in the form of
  outflows or depletions of assets or incurrences
  of liabilities that result in decreases in
  equity, other than those relating to
  distributions to equity participants para.
  70(b)

22
Elements of financial statements

• Characteristics of expenses
• They are flows
• That take the form of a decrease in assets or
  increases in liabilities
• Result in a decrease in equity

23
Profit

• Profit is a key measure of performance, as
  measured by the difference between income and
  expenses
• Profit is a basis for other performance measures,
  such as return on assets/investment or earnings
  per share
• Profit is derived after maintaining capital under
  an appropriate concept of capital
• Concepts of capital paras. 102 and 103 and also
  para. 81 of the Framework