A conceptual and regulatory framework

Definition A conceptual framework is a statement of generally accepted theoretical principles, which form the frame of reference for a particular field of enquiry. (Qualitative characteristics are the attributes that make information provided in the financial statements useful to others) The Framework identifies four qualitative characteristics: Relevance Reliability Comparability Understandability

Elements of the financial statements Assets Assets are: Resources controlled by the entity As a result of past events From which economic benefits are expected to flow to the entity

Liabilities Liabilities are: an entitys obligations To transfer economic benefits As a result of past transaction or events

Equity Interest Equity interest is the residual amount found by deducting all liabilities of the entity from all of the entitys assets. Equity = Net Assets = (Share Capital + Reserves)

Income an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities Transactions that result in increases in equity, other than those relating to contributions from equity participants. This definition follows a statement of financial position approach rather that the more traditional income statement approaches to recognizing income. Expenses Expenses are: decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities Transactions that result in decreases in equity, other than those relating to distributions to equity participants. Advantages of Conceptual Framework (a) A consistent conceptual base should lead to standardised consistent accounting practices. (b) The development of standards is less subject to political pressure. (c) A consistent balance sheet driven or income statement driven approach is used. Disadvantages of Conceptual Framework (a) Different users have different needs. The needs of all users cannot be considered. (b) Different purposes or uses may require different conceptual bases. (c) A conceptual framework does not necessarily make preparing standards any easier, and may hamper their development. The objective of financial statements The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

The needs of users will generally be satisfied normally by a balance sheet, income statement and cash flow statement, but additional information may also be beneficial to some users. Underlying assumptions Accruals basis The effects of transactions and other 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 period to which they relate. Going concern The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed. Recognition of the elements of financial statements An item is recognised in the balance sheet or the income statement when: (a) It meets the definition of an element of the financial statements; and (b) It is probable that any future economic benefit associated with the item will flow to or from the entity; and (c) The item has a cost or value that can be measured with reliability. Hence, recognition relies heavily upon a good assessment of probability of whether economic benefits will flow to or from the entity. Measurement of the elements of financial statements Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement. The choices available for measurement are: Historical cost Realisable value Current cost Present value.

True and fair view A true and fair view is referred to in IFRS as a 'fair presentation'. It requires a faithful representation of transactions and events in accordance with IFRS, unless it would be so misleading as to not comply with the Framework objective of financial statements. The need for a regulatory framework A regulatory framework for accounting is needed for two principal reasons: (a) To act as a central source of reference of generally accepted accounting practice (GAAP) in a given market, and (b) To designate a system of enforcement of that GAAP to ensure consistency between companies in practice. Principles-based versus rules-based approach Principles-based IFRSs are written using a 'principles-based' approach. This means that they are written based on the definitions of the elements of the financial statements, recognition and measurement principles, as set out in the Framework for the Preparation and Presentation of Financial Statements Rules-based 'Rules-based', are other GAAP for example US GAAP which means that accounting standards contain rules which apply to specific scenarios. Advantages and disadvantages of a principles vs rules-based approach Advantages (a) principles-based approach based on a single conceptual framework ensures standards are consistent with each other. (b) Rules can be broken and 'loopholes' found. Principles offer a 'catch all' scenario. (c) Principles reduce the need for excessive detail in standards. Disadvantages (a) Principles can become out of date as practices (e.g. the current move towards greater use of 'fair values') change. (b) Principles can be overly flexible and subject to manipulation.

The IASB The IASB issues IFRSs and revised IASs and was set up in 2001, replacing the International Accounting Standards Committee. The IASB's structure The trustees of the IASC Foundation appoint the members of the IASB. IFRIC issues Interpretations of Standards where necessary. The Standards Advisory Council advise the IASB on the development of Standards. The standard setting process A Discussion Paper is issued first to identify the issues, following by a draft standard, an Exposure Draft and finally an IFRS or revised IAS. The IASB's relationship with other standard setters The IASB works closely with the US's FASB and signed a Memorandum of Understanding identifying a 'roadmap' for convergence. The IASB also works with partner national standard setters on joint projects.