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Summary Applying Financial Reporting Standards by Picker et al
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Summary Applying Financial Reporting Standards by Picker et al. (2013).Chapter 1: The IASB and its conceptual framework
IFRS: International Financial Reporting Standards, principles-based standards not rule-based
standards. Also includes IAS: International Accounting Standards.
IASB: International Accounting Standards Board.
Conceptual framework: establishes qualitative characteristics financial information needs to have in
order to be useful, establishes definitions and recognition criteria for the elements of financial
statements.
SAC: Standards Advisory Council
IFRIC: IFRS Interpretations Committee; issues interpretations and guidance of the requirements of
IFRSs in relation to accounting for specific transactions or events reviews newly identified financial
reporting issues that aren’t specifically dealt with in IFRSs, and issues for which unsatisfactory or
conflicting interpretations have emerged or may emerge.
FASB: Financial Accounting Standards Board.
IASB update: publication of the decisions made of a meeting
1.1 The International Accounting Standards Board (IASB)
See figure 1: Institutional structure of international standard setting p. 5.
Process for issuing IFRSs, six stages:
1. Setting the agenda; information relevant and reliable, resource constraints, quality of
standards etc.
2. Planning the project: itself or with another standard setter (FASB)
3. Developing and publishing the discussion paper: not mandatory
4. Developing and publishing the exposure draft (ED): mandatory
5. Developing and publishing the standard: may re-expose the ED
6. Procedures involving consultation and evaluation after an IFRS has been issued; post
implementation reviews, regular meetings with interested parties.
1.2 The purpose of a conceptual framework
To provide a coherent set of principles.
1. To assist standard setters to develop a consistent set of accounting standards for the
preparation of financial statements
2. To assist preparers of financial statements in the application of accounting standards and in
dealing with topics that aren’t the subject of an existing applicable accounting standard
3. To assist auditors in forming an opinion about compliance with accounting standards
4. To assist users in the interpretation of information in financial statements
The IASB’s conceptual framework comprises four chapters:
1. The objective of general purpose financial reporting; financial statements intended to meet
the information needs common to a range of users who are unable to command the preparation
of reports tailored to satisfy their own particular needs. Financial statements should reflect the
perspective of the entity rather than the perspective of the entity’s equity investors. Key users of
financial statements are capital providers.
2. The reporting entity
3. The qualitative characteristics of useful financial reporting; relevance and faithful
representation. Information is relevant when it’s capable of making a difference in the decisions
made by the capital providers as users of financial information, has predictive value,
, confirmatory value or both and is capable of making a difference whether the users use it or not.
Predictive value occurs when information is useful as an input into the users’ decision models
and affects their expectations about the future. Confirmatory value arises when the information
provides feedback that confirms or changes past or present expectations based on previous
evaluations. Information is material if its omission or misstatement could influence the decisions
that users make about a specific reporting entity. What is material for one entity may be
immaterial for another. Faithful representation: is attained when the depiction of an economic
phenomenon is complete, neutral (free of bias) and free from material error. This results in the
depiction of the economic substance of the underlying transaction. A depiction is complete if it
includes all information necessary for faithful representation. Note: the measurement base that
provides the most relevant information about an asset will not always provide the most faithful
representation. First apply relevance then faithful representation. The two characteristics work
together. Either irrelevance (the economic phenomenon isn’t connected to the decision to be
made) or unfaithful representation (the depiction is incomplete, biased or contains error) results
in information that isn’t decision useful.
Four enhancing qualitative characteristics; complementary to the fundamental characteristics,
establish more useful information.
1. Comparability; quality of information that enables uses to identify similarities in and
differences between two sets of economic phenomena.
2. Verifiability; quality of information that helps assure users that information faithfully
represents the economic phenomena it purports to represent independent researchers all
reach the same general conclusions.
3. Timeliness; having information available to decision makers before it loses its relevance.
4. Understandability; quality of information that enables users to comprehend its meaning.
Information may be more understandable if it’s classified, characterised and presented clearly
and concisely. Provision of information incurs costs, benefits of supplying information must be
greater than the costs to undertake it.
4. The framework; remaining text
1.3 Going concern assumption
Entity will continue to operate for the foreseeable future, until at least long enough to carry
out its existing commitments. Result is that goodwill and prepaid expenses are on the
balance sheet even though they have little sales value. Besides, some justify the use of
historical costs in accounting for non- current assets and for the allocation of the
depreciation expense over their useful lives.
1.4 Definition of elements in financial statements
Assets: resources controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity. The resource must contain future economic
benefits (can be exchanged for another asset, used to settle a liability, used to produce goods or
services to be sold by the entity). Entity must have control over the future economic benefits
(capacity to benefit from the asset in the pursuit of the entity’s objectives and regulate the access of
others to those benefits). Must have been a past event; an event that gave rise to the entity’s control
over the future economic benefits. It isn’t essential that an asset is legally owned by the reporting
entity.
Liabilities: present obligation of the entity arising from past events, the settlement of which is
, expected to result in an outflow from the entity of resources embodying economic benefits. A
liability isn’t restricted to being a legal debt. A present obligation may arise as an obligation imposed
by notions of equity or fairness (equitable obligation) and by custom or normal business practices
(constructive obligation). A decision by management to buy an asset in the future doesn’t give rise to
a present obligation. A liability must result in giving up of resources embodying economic benefits
that require settlement in the future. Settlement of a present obligation: cash, transferring other
assets, providing services, replacing it with another obligation, converting obligation to equity,
creditor waiving or forfeiting its rights. Liability must have resulted from a past event or transaction
Equity: residual interest in the assets of the entity after deducting all its liabilities. Equity= assets –
liabilities. Equity may be subclassified into contributed funds from owners, retained earnings, other
reserves representing appropriations of retained earnings and reserves representing capital
maintenance adjustments.
Income: increase in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases in liabilities that result in increases in equity, other than those
relating to contributions from equity participants. If income arises as a result of an increase in
economic benefits, it is necessary for the entity to control that increase in economic benefits. If a
control doesn’t exist, than no asset exists. Income = revenues + gains. Revenues: gross inflow of
economic benefits during the period arising in the course of the ordinary activities of an entity when
those inflows result in increases in equity, other than increases relating to contributions from equity
participants. Gains: income that doesn’t necessarily arise from the ordinary activities of the entity.
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. The purchase of an asset doesn’t decrease equity and
therefore doesn’t create an expense. An expense arises whenever the economic benefits in the asset
are consumed, expire or are lost. Losses are expenses that may not arise in the ordinary course of the
entity’s activities.
1.6 Recognition (item must satisfy the definition of an element) of elements of financial statements
Asset recognition: when the probability and the reliable measurement criteria are satisfied. For
example: goodwill is hard to measure reliably, not recognised as an asset.
Liability recognition: when it is probable that an outflow of resources embodying economic
benefits will result from settling the present obligation and the amount at which the settlement will
take place can be measured reliably.
Income recognition: in the statement of profit and loss and other comprehensive income when an
increase in future economic benefits relating to an increase in an asset or a decrease in a liability can
be measured reliably. Revenues must be measured at fair value.
Expense recognition: recognised when a decrease in future economic benefits related to a
decrease in an asset or an increase in a liability can be measured reliably (simultaneously). No longer
matching.
1.7 Measurement of the elements of financial statements
Measurement is a process of determining the monetary amounts at which the elements of the
financial statements are to be recognized and carried in the balance sheet. And income statement.
The process by which valuation takes place on all elements reported in financial statements.
*Historical costs: asset is recorded at the amount of cash or cash equivalents paid or the fair value of
the consideration given to acquire it at its acquisition date. Liabilities are recorded at the amount of
proceeds received in exchange for an obligation, or at the amount of cash to be paid out in order to
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