The International Accounting Standards Board (IASB) issued its “Framework for the Preparation and Presentation of Financial Statements” which was approved by the IASC in April 1989 and then adopted by the IASB in April 2001. The IASB Framework sets out the concepts that shape the preparation and presentation of financial statements for external users. The basic purpose of the IASB Framework is to provide assistance and guidance to the IASB in developing new or revised standards in addition to assisting the preparers of financial statements in applying the standards and dealing with issues which are not explicitly dealt with by the standards. However, the Framework does not have the force of an IFRS. Therefore, in case of a conflict between the Framework and an IFRS, the IFRS should be followed.
The Framework comprises seven section which cover areas as:
• The objective of financial statements (provide information about financial position, performance, and changes in financial position) • Underlying assumption (accruals basis and going concern) • Qualitative characteristics of financial statements (understandability, relevance, reliability, comparability) • The elements of financial statements (assets, liabilities, equity, income, expenses) • Recognition of the elements of financial statements (it is probable that any future economic benefit related to the item will flow to or from the reporting entity; the item has cost or value that can be measured reliably) • Measurement of the elements of financial statements ( historical cost, current cost, realisable value, present value) • Concepts of capital and capital maintenance (financial concept of capital, physical concept of capital)
The Conceptual Framework and IASB’s Framework for Preparation and Presentation of Financial Statements have impacted not only the accounting for an item on the Financial statements but also the overall financial statements such as historical cost for assets. The historical cost which must record and account for most assets and liabilities at purchase or acquisition price. In other words, businesses have to record an asset on their balance sheet for the amount paid for the asset. The asset cost or price is then never adjusted for changes in the market or economy and changes due to inflation. The historical cost is chosen to use because it is reliable and objective. For example, in 2001, Heineken purchased a buiding for €20 million. Total, some 50 plus years later, Heineken is still in business. The period between 2001 and 2007 was the building, in general, witnessed high increases in its market value with €50 million due to low interest rate. The original building is still on the Statement of Financial Position €20 million. In recent years, IASB has become more open to fair value which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in arm’s length transaction. However, in 2013, property price have plummeted (or inclined), in assumptions, Heineken may have to revalue building’s price. In this case, Heineken chose prudence concept to substitute historical cost because prudence concept set that assets or revenue are not overstated and liabilities or expenses are not understated. The treatment of revaluation gains and losses can be seen as a clear example of the prudence concept. Revaluation gains are not included in arriving at the profit for the year, but revaluation losses are charged as an expense. Revaluation Gains
If an asset’s carrying amount is increased as a result of a revaluation, the increase will be recognised in the Other Comprehensive Income (OCI) section of the Statement of Comprehensive Income (SOCI) and included in the Equity section of the Statement of Financial Position (SOFP) under the heading of a revaluation surplus. Example
In 2013, Heineken revalued the above building from €20 million to €30 million. Previously, the same building had been revalued downward from €26 million...
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