Conceptual framework for financial reporting
Objectives 2.1 Why a conceptual framework? 2.2 IASB Framework for the Preparation and Presentation of Financial Statements 2.2.1 The objective of financial statements 2.2.2 Stewardship as an objective of financial statements: the current debate 2.2.3 Underlying assumptions 2.2.4 A note on the ‘going concern’ assumption 2.2.5 Qualitative characteristics of financial reporting information 2.2.6 Constraints on financial reporting 2.3 Elements of financial statements 2.4 Measurement of the elements of financial statements 2.4.1 Fair value 2.4.2 Alternatives to fair value 2.5 Concepts of capital and capital maintenance Appendix to Chapter 2: Use of present value in accounting Summary Research and references Discussion questions Notes
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2: Conceptual framework for financial reporting
When you have completed this chapter you should be able to: • • • • • • • • • Understand what a framework for financial reporting is Understand the purpose of the IASB Framework Describe the primary groups of users at which general-purpose financial statements are aimed Understand the accrual basis and going concern assumptions which underlie the preparation of financial statements Identify the qualities that make financial statements useful Define the basic elements of financial statements – assets, liabilities, equity, income and expenses Explain the criteria which determine whether or not an element should be recognised in the financial statements Explain the measurement bases which are identified in the Framework Distinguish between the concepts of financial capital maintenance and physical capital maintenance.
Why a conceptual framework?
The conceptual framework is a recent concept. In fact, many accounting standard setters have historically operated without having a conceptual framework in place. This resulted in accounting standards often being haphazard in nature and largely a response to the issues or scandals of the day – reactive rather than proactive. The lack of an agreed conceptual framework also increases the risk that standards are inconsistent with each other and that there is no overall objective for the preparation of ﬁnancial statements. A statement of the functions of ﬁnancial statements included in a framework document increases the robustness of the standard-setting process, ensures consistency and assists in the development of future standards. The framework can assist users in interpreting information contained within ﬁnancial statements as it provides an understanding of the principles on which they are prepared. Each national standard-setting body has its own conceptual framework providing the foundations on which its accounting standards are based. Many commentators believe that harmonising these frameworks should be the priority in developing globally accepted standards. In theory, the conceptual framework should drive the development of accounting standards. In practice, social, economic and political factors often play a role
The IASB Framework for the Preparation and Presentation of Financial Statements
and inﬂuence the guidance provided by standards. The requirements of capital markets and regulators and the public’s reactions to accounting scandals and the credit crunch, which started in 2007, will continue to inﬂuence the standard-setting process.
IASB Framework for the Preparation and Presentation of Financial Statements The Framework for the Preparation and Presentation of Financial Statements was issued in 1989 by the IASC and adopted by the IASB in 2001. It deals with: (a) the objective of ﬁnancial statements; (b) the qualitative characteristics that determine the usefulness of information in ﬁnancial statements; (c) the deﬁnition, recognition and measurement of the elements from which ﬁnancial statements are constructed; and (d)...