The IASB and its Conceptual Framework

1
Chapter 1
The IASB and its Conceptual Framework
2
Learning Objectives

• Describe organizational structure of IASB
• Describe the purpose of a conceptual framework
• Qualitative characteristics that make information
  useful
• Assumption underlying the preparation of
  financial statements

3
Learning Objectives

• Define the basic elements in financial statements
• Explain the recognition criteria of the basic
  elements
• Distinguish between alternative measurement bases
• Outline concepts of capital maintenance

4
The International Accounting Standards Board
(IASB)

• Replaced IASC in 2001
• Full time board
• Standards Advisory Council appointed
• Initially adopted IAS with some modifications
• Issues IFRSs

5
The International Accounting Standards Board
(IASB)
6
IFRIC Advisory Bodies

• IFRIC Two key roles
• Reviews newly identified financial reporting
  issues that are not dealt with by IFRSs
• Overviews emerging interpretation issues
• Advisory bodies
• IFRS Advisory Council
• Capital Markets Advisory Group
• Emerging Economics Group
• Global Preparers Forum
• SME Interpretation Group

7
The Purpose of The Conceptual Framework

• To assist in developing a consistent set of
  standards dealing with topics not covered by a
  standard
• To assist preparers of financial statements
• To assist auditors in forming an opinion
• To assist users in the interpretation of
  information

8
The Objective of Financial Reporting

• 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
  creditors (primary users) in making decisions
  about providing resources to the entity.3
• Consequently, primary users need information to
  help them assess the prospects of future net cash
  inflows to an entity.
• To assess an entitys prospects for future cash
  inflows, primary users need information about the
  resources of the entity, claims against the
  entity and how efficiently and effectively the
  entitys management and governing board have
  discharged the responsibilities to use the
  entitys resources.
• 3SFAC No. 8, Conceptual Framework for Financial
  Reporting, Chapter 1, The Objective of General
  Purpose Financial Reporting, OB2.

9
The Objective of Financial Reporting

• Continued
• General purpose financial reports do not and
  cannot provide all the information that primary
  users need, therefore, pertinent information from
  other sources needs to be considered, such as
  general economic conditions, political events and
  climate and industry outlook.
• General purpose financial statements are not
  designed to show the value of the reporting
  entity, are not designed for the sole use of
  management and are not directed towards
  regulators or other parties that are not primary
  users.
• 4SFAC No. 8, Conceptual Framework for Financial
  Reporting, Chapter 1, The Objective of General
  Purpose Financial Reporting, OB11.

10
The Objective of Financial Reporting

• This objective reflects value judgements made by
  IASB FASB
• Key objectives
• Financial statements should reflect the
  perspective of the entity
• The key users of financial statements are capital
  providers

11
Qualitative Characteristics of Useful Financial
Information
Pervasive constraint Costs
Comparability, verifiability, timeliness and
understandability
Enhancing characteristics
Fundamental characteristics Relevance and
faithful representation
Costs
Costs
Pervasive constraint Costs
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Fundamental Qualitative Characteristics of Useful
Financial Information

• Relevance
• Capable of making a difference in the decisions
  made by users.
• Capable of making a difference in decisions if it
  has predictive value, confirming value or both.
• Materiality
• Materiality is an element of relevance and is
  entity-specific based on the nature or magnitude
  or both of the items to which the information
  relates, in the context of an individual entitys
  financial report.14
• Information is material if omitting it or
  misstating it could influence decisions that
  users make on the basis of the financial
  information of a specific reporting entity.15
• 14SFAC No. 8, Conceptual Framework for Financial
  Reporting, Chapter 3, Qualitative
  Characteristics of Useful Financial Information,
  QC11.
• 15Ibid.

13
Fundamental Qualitative Characteristics of Useful
Financial Information

• Faithful representation Financial reports
  represent economic phenomena in words and
  numbers. To be useful, financial information
  must be relevant but also must faithfully
  represent the phenomena that it purports to
  represent.16
• Completeness all information that is necessary
  for a user to understand the phenomena being
  depicted.17
• Neutrality there should not be bias in the
  selection or presentation of financial
  information. Financial information should not be
  slanted, weighted, emphasized, de-emphasized or
  otherwise manipulated to increase the probability
  that financial information will be received
  favorably or unfavorably.
• Free from error no errors or omissions in the
  description of the phenomenon, and the process
  used to produce the reported information.18
• 16SFAC No. 8, Conceptual Framework for Financial
  Reporting, Chapter 3, Qualitative
  Characteristics of Useful Financial Information,
  QC12. 7Ibid, QC13. 18Ibid, QC15.

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Enhancing Qualitative Characteristics of Useful
Financial Information

• Enhance the usefulness of information that is
  relevant and faithfully represented.
• Comparability Enables users to identify and
  understand similarities and differences among
  items.
• Consistency is not the same as comparability
  although related and is described as the use of
  the same methods for the same item either from
  period to period within a reporting entity or in
  a single period across entities.
• Verifiability
• Assures users that information faithfully
  represents the economic phenomena it purports to
  represent.
• Means that different and knowledgeable and
  independent observers could reach consensus,
  although not necessarily complete agreement, that
  a particular depiction is a faithful
  representation.
• 23SFAC No. 8, Conceptual Framework for Financial
  Reporting, Chapter 3, Qualitative
  Characteristics of Useful Financial Information,
  QC33. 24Ibid, QC21.25Ibid, QC22.26Ibid, QC26.
  27Ibid.

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Enhancing Qualitative Characteristics of Useful
Financial Information

• Timeliness providing information to decision
  makers in time to be capable of influencing their
  decisions.
• Understandability Classifying, characterizing,
  and presenting information clearly and
  concisely.28
• Pervasive constraint on useful financial
  information costs, which are a pervasive
  constraint on financial information, should be
  assessed as to whether the benefits of reporting
  particular information are likely to justify the
  costs incurred to provide and use the
  information.
• 28SFAC No. 8, Conceptual Framework for Financial
  Reporting, Chapter 3, Qualitative
  Characteristics of Useful Financial Information,
  QC30.

16
Assumption Underlying Financial Statements

• Financial statements are prepared under the going
  concern assumption
• Implications of going concern
• Allocation of depreciation over useful life
• Supports inclusion of good will in statement of
  financial position
• Set aside if management intends to liquidate the
  entitys operations

17
Definition of Elements in Financial Statements

• Assets
• Controlled resources expected to reap future
  benefits that have arisen from a past event
• Three essential characteristics
• Future economic benefits
• The entity must have control
• There must be a past event

18
Definition of Elements in Financial Statements

• Liabilities
• A present obligation arising from a past event
  requiring resources to settle
• Three essential characteristics
• A present obligation
• Must result in the giving up of resources
• Must have resulted from a past transaction or
  event

19
Definition of Elements in Financial Statements

• Equity
• The residual interest in assets less liabilities
• Increases as a result of profitable operations
• Is influenced by the measurement system adopted
• May be sub classified in the statement of
  financial position

20
Definition of Elements in Financial Statements

• Income
• Increases in economic benefits from inflows,
  asset enhancements or decreased liabilities
• Note connection with assets and liabilities
• Expenses
• Decreases in economic benefits from outflows,
  asset depletions or incurrences of liabilities

21
ConvergencePhase B Elements and Recognition
Proposed Changes

• Asset is a present economic resource to which
  an entity has a right or other access that others
  do not have, which is
• Present at date of financial statements.
• Economic resource scarce, provides cash.
• A right or other access that others do not have
  legally enforceable or equivalent.

• Liability is a present economic obligation for
  which the entity is the obligor, which is
• Present at date of financial statements.
• Economic obligation to provide resources.
• Entity is the obligor enforceable against
  entity.
• The Boards are to reconsider the definition of a
  liability.
• A Discussion Paper was expected in 2011???

22
Recognition of Elements of Financial Statements

• Asset recognition
• Probable that future economic benefits will flow
• Can be measured reliably
• Liability recognition
• Probable that an outflow of economic benefits
  will occur
• Settlement amount can be measured reliably

23
Recognition of Elements of Financial Statements

• Income recognition
• When an increase in future economic benefits
  relating to an increase in an asset or decrease
  in a liability can be measured reliably
• Expense recognition
• When a decrease in future economic benefits
  relating to a decrease in an asset or increase in
  a liability can be measured reliably
• Matching is no longer the recognition criterion

24
Measurement of the Elements of Financial
Statements

• Measurement involves assigning valuations on all
  elements reported in financial statements
• Measurement bases
• Historical cost
• Current cost
• Realisable or settlement value
• Present value

25
Concepts of Capital

• Financial capital concept
• Capital is synonymous with the net assets or
  equity of the entity
• Profit exists only after the entity has
  maintained its capital
• Physical capital concept
• Viewed as the operating capability of the
  entitys assets
• Profit exists only after the entity has set aside
  enough capital to maintain the operating
  capability of its assets

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Convergence with FASB

• In 2002 the FASB and the IASB agreed to make
  their accounting standards compatible, including
  the Conceptual Framework.
• Framework broken into eight phases as follows
• Phase A Objectives and Qualitative
  Characteristics issued Sept. 2010
• Phase B Elements and Recognition Discussion
  Paper expected soon????
• Phase C Measurement Discussion Paper expected
  soon????
• Phase D Reporting Entity Concept Discussion
  Memorandum out
• Not started yet
• Phase E Presentation and Disclosure
• Phase F Framework Purpose and Status in US GAAP
• Phase G Applicability to the Not-for-Profit
  Sector
• Phase H Remaining Issues

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Homework

• Exercise 1.11
• DUE THURSDAY, SEPTEMBER 12