1 The Accounting Process Accounting is a system of gathering financial information about a business and reporting this information to users. The six main steps of the accounting process are: Analyzing - looking at events that have taken place and thinking about how they affect the business Recording - entering financial information about the events in the accounting system. Classifying - sorting and grouping similar items together. Summarizing - bringing the various items of information together to determine a result. Reporting - telling the results. Interpreting - deciding the meaning and importance of the information in the various reports. This may include percentage analyses and use of ratios to help explain how pieces of information are related.

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3 IASB Framework’s History April 1989, Framework was approved by the IASC Board July 1989, Framework was published April 2001, Adopted by the IASB. Now referred to by IASB as the IASB Framework. IASB – International Accounting Standards Board

4 IASB Framework’s Purpose The Framework describes the basic concepts by which financial statements are prepared. The Framework serves as a guide to the Board in developing accounting standards and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard. However, the Framework is not, itself, an IASB Standard. Therefore, it does not define standards for any particular accounting recognition, measurement, or disclosure matter. Nor does the Framework override any specific IASB Standard if there appears to be a conflict.

5 IASB Framework’s Scope defines the objective of financial statements; identifies the qualitative characteristics that make information in financial statements useful; and defines the basic elements of financial statements and the concepts for recognizing and measuring them in financial statements.

6 IASB Framework Objective of financial statements –To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

7 IASB Framework Underlying assumptions –Accrual Basis. The effects of transactions and other events are recognized when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate. –Going Concern. The financial statements presume that an enterprise will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required.

8 IASB Framework (Cont’d) Qualitative characteristics of financial statements - the attributes that make the information in financial statements useful to investors, creditors, and others. The Framework identifies four principal qualitative characteristics: Understandability Relevance –Materiality, Timeliness Reliability –Faithful Representation, Substance Over Form, Neutrality, Prudence, Completeness Comparability True and Fair View/Fair Presentation – adherence to the above four ensures ‘True and Fair’

9 IASB Framework (Cont’d) Understandability –Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.

10 IASB Framework (Cont’d) Relevance –Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by (a) helping them evaluate past, present, or future events relating to an enterprise and by (b) confirming or correcting past evaluations they have made. Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users. Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions.

11 IASB Framework (Cont’d) Reliability –Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Information is not reliable when it is purposely designed to influence users' decisions in a particular direction. –There is sometimes a tradeoff between relevance and reliability - and judgment is required to provide the appropriate balance.

12 IASB Framework (Cont’d) Comparability –Users must be able to compare the financial statements of an enterprise over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises. Disclosure of accounting policies is essential for comparability.

13 IASB Framework (Cont’d) The elements of financial statements –Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements.

14 IASB Framework (Cont’d) The elements directly related to financial position (balance sheet) are: Assets Liabilities Equity The elements directly related to performance (income statement) are: Income Expenses The cash flow statement (as well as the changes in equity) reflect both income statement elements and changes in balance sheet elements.

15 IASB Framework (Cont’d) Definitions of the elements relating to financial position –Asset - a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. –Liability - a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. –Equity - the residual interest in the assets of the enterprise after deducting all its liabilities.

16 IASB Framework (Cont’d) Definitions of the elements relating to performance –Income. Income 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. –Expense. 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.

17 IASB Framework (Cont’d) The definition of income: – encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IASB Framework.

18 IASB Framework (Cont’d) The definition of expenses: –encompasses losses as well as those expenses that arise in the course of the ordinary activities of the enterprise. Expenses that arise in the course of the ordinary activities of the enterprise include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the enterprise. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Hence, they are not regarded as a separate element in this Framework.