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IASB Conceptual Framework

LÊ VŨ NGỌC THANH - HOÀNG TRỌNG HIỆP

 History
1989 – The Framework for the preparation and presentation of the Financial Statements
2010 – Framework for the Preparation and Presentation of Financial Statements
2015 - Conceptual Framework for Financial Reporting – Exposure draft

Chapter 1 Chapter 2 Chapter 3 Chapter 4

New Empty New Old

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Definition Conceptual framework
sets out the concepts that underlie the preparation and presentation of financial
statements
Accounting theory IFRS/IAS

(Conceptual Framework)

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Role of the Conceptual Framework
 to set standards
 enhances consistency across standards
 enhances consistency over time as Board members change
 provides benchmark for judgments

 to develop accounting policies in the absence of specific standard or

interpretation

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Contents of the Conceptual Framework CF 2010
Chapter 1: The objective of general purpose financial reporting
Chapter 2: The reporting entity
Chapter 3: Qualitative characteristics of useful financial information
Chapter 4: The Framework (1989): The remaining text
Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of elements of financial statements
Concepts of capital and capital maintenance

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Contents of the Conceptual Framework
CF Exposure draft 2015
Chapter 1: The objectives of general purpose financial reporting
Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
Chapter 4: The elements of financial statements
Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

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1. The objective of general purpose financial reporting

to provide financial information about the reporting entity that is useful to

existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity

buying, selling or holding equity and debt instruments, and

providing or settling loans and other forms of credit

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 Useful financial information - What?

Risk ?
Premium ?

Economic resources & claims

Changes in resources & claims
Changes in cash flows

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 Useful financial information: Where?
Statement of financial position

Liquidity

Current liability
Current asset
Non current liability

Equity
Non current asset Economic rescources & claims
Strengths & weaknesses
Liquidity & solvency

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 Useful financial information: Where?
Statement of comprehensive income
Revenue
Profit or loss from operating
Expenses activity

Financial income Profit or loss from financial

Financial expenses activity

Other income Profit or loss from other

activity
Other expenses
Profit or loss before tax Changes in resources & claims
Income tax from financial performance
Profit or loss after tax - Components of that return
 Efficiently effective use of the
Other comprehensive income reporting entity’s resources

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 Useful financial information: Where?

Statement of changes in equity

Share Retain Revaluation
Total
capital earnings surplus

Balance as at 1/1/X6
Retrospective application
Issuance of new share
Dividend
Transfers between equity components
Balance as at 31/12/X6 Changes in Resources & claims
NOT from financial performance
debt or equity instruments

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 Useful financial information: Where?

Statement of cash flows

Net cash from operating activities

Net cash from investing activities
Net cash from financing activities

Changes in cash flows

Cash generating ability
Cash usage

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2. Qualitative characteristic
 to provide useful financial information
 apply to financial information provided in financial statements

Relevance
Fundamental qualitative &  must be both
characteristics
Faithful representation

 enhance the usefulness of

Comparability information
 either individually or as a
verifiability group
Enhancing qualitative  the enhancing qualitative
characteristics characteristics cannot make
timeliness
information useful if that
information is irrelevant or not
understandability faithfully represented.

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 Fundamental qualitative characteristics- Relevance

Relevant financial information  capable of making a difference in decisions 

predictive value and confirmatory value

Revenue
What information should be reported ? Segment revenue
Gains, surplus

How information should be measured? Current value or historical cost

Materiality:
 aspect of relevance
 Information is material if omitting it or misstating it could influence decisions of users
 Based on the nature or magnitude, or both.

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 Fundamental qualitative characteristics-Faithful representation
faithfully represent the phenomena that it purports to represent

Complete Neutral Free from error

 All information necessary to  Without bias  no errors or omissions in the

understand the phenomenon  Not slanted, weighted, emphasized, description, process used to
 Descriptions & explanations de-emphasized otherwise manipulated. produce the reported information
(elected and applied).
 does not mean perfectly accurate
in all respects.

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 Applying the fundamental qualitative characteristics
Identify an economic phenomenon Investment Property

Identify the type of information Investment properties should be measured under fair value other
than historical cost, despite of measurement uncertainty
most relevant

Neutral: Present information relevant to all investment

Identify the type of information properties.
faithfully represented
Complete: describe: location, square, legal status, historical cost,
and fair value.
Free from error: fair value estimate and information used, and
any uncertainties that significantly affect the estimate

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 Enhancing qualitative characteristics
Comparability
 information is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.
 Consistency help to achieve comparability

Verifiability
 knowledgeable and independent observers could reach consensus
 Verification can be direct or indirect
Timeliness
 in time to be capable of influencing their decisions
Understandability
 Clearly and concisely.
 Complex phenomena and difficult to understand would be reported
 For users who have a reasonable knowledge of business and economic activities

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 The cost constraint on useful financial reporting

 Reporting financial information imposes costs, and it is important that those

costs are justified by the benefits of reporting that information.

 Costs and benefits to consider.

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3. Assumption
Going concern
 The reporting entity is a going concern and will continue in operation for the
foreseeable future.
 The entity has neither the intention nor the need to liquidate or cease trading.
 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 in the financial statements.

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4. The elements of financial statements Relationship

Asset Income
Liability

Equity
Expenses

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 The elements of financial statements- Definition
Asset
 is a present economic resource controlled by the entity as a result of past events.
 An economic resource is a right that has the potential to produce economic benefits.

Liability
 is a present obligation of the entity to transfer an economic resource as a result of past events.
Equity
 is the residual interest in the assets of the entity after deducting all its liabilities.
Income
 is increases in assets or decreases in liabilities that result in increases in equity, other than those
relating to contributions from holders of equity claims.
Expenses
 Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other
than those relating to distributions to holders of equity claims.

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 5. Recognition CF exposure draft 2015

What? Contributions from holders of

Assets, liabilities, equity + Income & expenses equity claims & distributions
+
at the beginning to equity claims

Increase asset, or Decrease asset, or

Decrease liability Increase liability

When?
 Meets the definition of an element
 Provides users of financial statements with relevant information and faithful representation

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Derecognition CF exposure draft 2015

when
 loses control of all or part of the asset
 no longer has a present obligation for all or part of the liability

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 6. Measurement CF 1989, 2010

 Historical cost: Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of
proceeds received in exchange for the obligation.
 Current cost: Assets are carried at the amount of cash or cash equivalents that would have to be paid if the
same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash
or cash equivalents that would be required to settle the obligation currently.
 Realizable (settlement) value: Assets are carried at the amount of cash or cash equivalents that could
currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement
values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.
 Present value: Assets are carried at the present discounted value of the future net cash inflows that the
item is expected to generate in the normal course of business. Liabilities are carried at the present
discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the
normal course of business.

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Measurement CF exposure draft 2015

 Measurement bases
 Factors to consider when selecting a measurement basis

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Measurement bases CF exposure draft 2015

Historical cost Current value

 historical cost, amortized cost, carrying amount..  fair value, value in use, fulfilment value is
 Derived from the transaction or event that updated at measurement date.
created them  capture any positive or negative changes
 Do not reflect changes in prices, do reflect
change in consumption (depreciation or
amortization), impairment, or fulfilment.
 historical cost of the asset is no longer
recoverable.

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 Factors to consider when selecting a measurement basis
CF exposure draft 2015

 Must be relevant and it must faithfully represent what it purports to represent

 Should, as far as possible, be comparable, verifiable, timely and understandable
 Benefits of the information must be sufficient to justify the cost of providing that
information

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7. Concepts of capital and capital maintenance
Concepts of capital
Concepts of capital maintenance and the determination of profit

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 Concepts of capital

Financial concept of capital Physical concept of capital

Such as invested money or invested purchasing Such as oprerating capability, capital is regarded as
power, capital is synonymous with the net assets or the productive capacity of the entity based on,
equity of the entity for example, units of output per day.

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 Concepts of capital maintenance and the
determination of profit
Financial capital maintenance Physical capital maintenance
Nominal monetary units or units of
constant purchasing power)

Profit = the net assets at the end of the period Profit = the physical productive capacity (or operating
- the financial (or money) amount of net assets at the capability) of the entity (or the resources or funds needed
beginning of the period. to achieve that capacity) at the end of the period - the
(after excluding any distributions to, and contributions physical productive capacity at the beginning of the
from, owners holders of equity claims during the period,
period). (after excluding any distributions to, and contributions
from owners holders of equity claims during the period).

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Changes in the prices of assets and liabilities
The principal difference between the two concepts of capital maintenance

Financial capital maintenance - nominal monetary units

 Profit represents the increase in nominal money capital over the period.
 Increases in the prices of assets may not be recognized until the assets are disposed of in an exchange
transaction.

Financial capital maintenance - constant purchasing power units

 Profit represents the increase in invested purchasing power over the period.
 Only that part of the increase in the prices of assets that exceeds the increase in the general level
of prices is regarded as profit. The rest of the increase is treated as a capital maintenance
adjustment and, hence, as part of equity.

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Changes in the prices of assets and liabilities (cont)
Physical capital maintenance

 Profit represents the increase in that capital over the period.

 All price changes of the assets and liabilities are viewed as changes in the measurement of the
physical productive capacity of the entity  as capital maintenance adjustments that are part of
equity and not as profit.

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 Example: Capital maintenance

On 1 Jan X0, an inventory was purchased with the price of 100 CU. On 31 Dec
X0, the purchasing power increase by 10%. The present value of the inventory
was 130 CU. The inventory was sold on 1 Jan X0 at the price of 150 CU.
Required: Calculate the carrying amount of inventory, P/L and OCI under
different capital maintenance views.

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Answer
Accounting items Nominal Purchasing Physical
monetary power
Inventory (1/1/X0) 100 100 100
Inventory 100 110 130
(31/12/X0) =[100x110%]
Changes in equity 0 10 30
31/12/X0 =[110-100] =[130-100]
P/L 31/12/X0 50 40 20
=[150 – 100] =[150 – 110] =[150 -130]

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 Relationship
Concepts of capital Financial concept of capital Physical concept of capital

Financial capital Financial capital

Capital maintenance maintenance - nominal maintenance - nominal Physical capital maintenance
monetary units monetary units

Measurement bases Historical cost General price level accounting Current cost Current value

Historical cost 1979 - 1986 1979 - 1986 Fair value

Recoverable cost
Net realizable value

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