Lecture notes
Lecture notes AF3203 Advanced Financial Accounting (AF3203)
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- City University (City)
Lecture notes of 10 pages for the course AF3203 Advanced Financial Accounting at City (a)
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AF3203 Advanced Financial Accounting NotesWeek 1: The IASB Conceptual Framework
Accounting Theory is a set of broad principles in order to provide a general frame of
reference for practices and guide any new development.
Deductive Approach: A normative approach which starts from basic assumptions of
accounting principles and tested by determining whether these are acceptable in practice.
Inductive Approach: Hypotheses about casual explanations (formed by inference) which are
then tested with reference to statistical likelihood of the same results obtained in the
future.
Conceptual Frameworks are the result of a pragmatic regulatory approach to the
formulation of accounting principles.
2018 IASB Conceptual Framework
IASB published in 1989, revised in 2010 and current version used from 2018.
This describes the objective of, and concepts for, general purpose financial
accounting.
This is used to assist the board in the development of new standards and review
current standards, assist preparers to develop consistent accounting policies when
there are choices involves, and assist all parties to understand and interpret
accounting standards.
Chapter 1: The Objective of General Purpose Financial Reporting
To provide information about the reporting entity which is useful to existing and
potential investors, lenders and other creditors in order to make decisions about
providing resources to the entity.
To make decisions, users must assess future net cash flows and management’s
stewardship.
To make assessments, users need information on resources and their uses.
Chapter 2: Qualitative Characteristic of Useful Financial Information
Relevant Financial Information: Capable of making a difference in the decisions
made by users and has a predictive/conformity value.
Material Information: Entity-specific aspect of relevance depending on the nature
and magnitude of the item. There is no specific threshold and is up to management
judgement as to what is material.
Faithful Representation: Financial information must be complete, neutral and free
from error.
Chapter 5: Recognition and De-recognition
, Recognition: The process of capturing for inclusion in the SoFP or P+L an item which
meets the definition of one of the elements of financial statements. An item is only
recognised if recognition provides useful information.
De-recognition: The removal of all or part of a recognised asset or liability from
SoFP.
Chapter 6: Measurement
This is the process of determining the monetary amounts at which the elements of the
financial statements are to be recognised and carried. There are 4 measurement bases
which are:
Historical Cost
Fair Value
Value in use and Fulfilment Value
Current Cost
Week 2: Concepts and Measurement of Capital and Income
Economic Income and Capital
Economic Capital: Present value of future cash flows that the capital is expected to
generate.
Economic Income: Interests generated from employing capital or a flow of benefits arising
over a period of time.
Fisher’s Economic Income (Y) = r x K0.
K0 is the capital at the start of the period and r is interest rate.
Hick’s view: Y = C + (K1 - K0). Unlike Fisher’s formula, this takes saving into account.
K1 is the capital at year end whereas K0 is capital at year start.
Hick’s Model for a Business: Y = D + (K1 - K0).
D is distributions (or dividends) made by the business and K is economic capital
invested in the business.
No pay-out (100% reinvestment) results in an increase in capital, some reinvestment
level guarantees capital maintenance, 100% pay-out (no reinvestment) results in
capital eroding.
Accounting Income and Capital
Accounting Capital: NA1 = NA0 + Y – D.
NA is Net Assets, Y is profit and D is dividends.
Accounting Capital = Equity.
Traditionally, measurement of net assets is based on historical transactions.
This is reported in the SoFP.
Accounting Income: Y = D + NA1 – NA0.
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