1. Concepts – Evolution of a Global Conceptual Framework
Chapter 10
Concepts – Evolution of a Global Conceptual Framework

2. By the end of the chapter, you should be able to:
discuss how financial accounting standards have evolved
discuss the accounting principles set out in
the International Framework
the UK Statement of Principles
FASB Statements of Financial Accounting Concepts
comment critically on rule-based and principles-based approaches.

3. Development of standards
Numerous accounting standards
International – IASB
European – EU Directives
National standard setters – FASB in USA; ASB in UK.
Later standards aimed at transparency for investors
Emphasis on provision of information useful for making economic decisions
Reliability of information only apparent if management changes.
Early standards aimed at consistency to protect the auditors
and were seen as a mechanism to avoid conflicting rules and practices.
Developed in answer to existing problems

4. Conceptual framework
The framework does not create standards. It aims to assist:
auditors who can refer to the Framework principles, and
stakeholders when interpreting the financial statements.
standard setters to develop standards on a rational basis
preparers with a principles basis for decisions where there are no standards

5. Framework content
Objectives of General Purpose Financial Reports (GPFRs)
Qualitative characteristics of information
Assumptions underlying preparation of financial statements
Influences on preparation of statements
Definition, recognition and measurement of accounting elements

6. Concepts of Accounting

7. Statement No. 1 :
Objectives of Financial Reporting by Business Enterprises
Statement No. 2 : Qualitative Characteristics of Accounting Information
Statement No. 6 : Elements of Financial Statements
Statement No. 5 : Recognition and Measurement in Financial Statements of Business Enterprises.

8. IASB framework for presentation and preparation of financial statements
Objective:
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

9. Qualitative Characteristics
The qualitative characteristics:
are the attributes that make the information in financial statements useful to investors, creditors, and others
Understandability
presented in such a way that it can be recognised for what it is and be understood by users who have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.
Comparability
between accounting periods and entities in similar businesses

10. Relevance
Timely - users have the information when it is needed and useful
Predictive - allow users to either make their own prediction about the economic viability of the entity or assess predictions and assurances given by management as to the future success or otherwise of the entity
Feedback - on the way in which past events have affected the entity during the period being reported on, and the outcome of earlier predictions on which the entity’s management based its decisions

11. Influences on Quality Materiality is subjective judgement call.
Balance between characteristics
Relevance – timely
Reliable – verifiable and accurate
Prudence
Caution with estimates
Not overly conservative
No secret reserves

12. Assumptions in information
Period reporting
Common time periods (normally a year)
Allows for performance comparison
Interim financial reports
Accrual basis accounting
Going concern basis

13. Definition of elements
Assets
resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise
Liabilities
present obligations 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

14. Definition of elements
Expenses - 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
Income - 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

15. Recognition and Measurement
Measurement involves using monetary amounts at which the elements are to be recognised and reported.
Elements are recognised in the financial statements when the following criteria are satisfied:
It is probable that any future economic benefit associated with the item will flow to or from the enterprise;
The item's cost or value can be measured with reliability.
A number of measurement bases can be used including:
Historical cost
Current cost
Net realisable (settlement) value
Present value (discounted)

16. Conceptual framework – IASB-FASB convergence project
Framework to be developed over eight phases
Phase A: Objective and qualitative characteristics (Final chapter published)
Phase B: Elements and recognition
Phase C: Measurement
Phase D: Reporting entity (ED Q2 2010)
Phase E: Presentation and disclosure
Phase F: Purpose and status of framework
Phase G: Applicability to not-for-profit entities
Phase H: Other issues, if necessary.

17. Phase A – the objective of financial reporting
The fundamental objective is to provide financial information that is useful to present and potential equity investors when making investment decisions and assessing stewardship.
Stewardship not specifically mentioned.
BUT reviewing past performance has an implication for assessing future cash flows.
Presumption that general purpose financial statements will satisfy the information needs of other stakeholders.

18. Phase A – qualitative characteristics
Two fundamental qualitative characteristics
Relevance and faithful representation
Other characteristics that may make the
information more useful are:
Comparability
Consistency, verifiability
Timeliness and understandability.

19. References
Elliott, Barry, Elliott Jamie, Financial Accounting and Reporting
18th Edition chapter 10