FINANCIAL REPORTING 1

BACT 303
CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
LECTURER:
MR. LEXIS TETTEH
(MPHIL IN ACCOUNTING, CA-GHANA)
 Meaning of Conceptual Framework
• Conceptual Framework for financial reporting has to do with generally
accepted theoretical principles and concepts that form the basis for
preparation of financial Statements.

• The theoretical principles provide the basis for the development of new
standards and the evaluation of those already existing

• The conceptual framework will form the theoretical basis for determining
which events should be accounted for, how they should be measured and
how they should be communicated to the user.
Need for the Conceptual Framework
Dangers of not having Conceptual Framework
Standards tend to be produced in a haphazard and fire fighting approach

Fundamental principles are tackled more than once in different standards

thereby producing contradictions and inconsistencies in basic concept (prudence
and matching).

It leads to ambiguity and it affects the true and fair concept of financial
reporting

CF can bolster standard setters against political pressure from various lobby
groups and interested parties.

The lack of CF has become clear in the USA because of their application of the
US GAAP.
 Importance/Advantage of IASB
Conceptual Framework
to assist the IASB in the development of future accounting standards
and in its review of existing accounting standards, ensuring consistency
across standards

to assist auditors in forming an opinion on whether financial statements

comply with international accounting standards; and

to provide those who are interested in the work of the IASB with
information about its approach to the formulation of accounting
standards.

to assist national standard-setting bodies in developing national

accounting standards;
 Importance/Advantage of IASB
Conceptual Framework
to assist preparers of financial statements in applying international
financial reporting standards and in dealing with topics that have yet to form
the subject of an accounting standard.

to assist users of financial statements in interpreting the information

contained in financial statements prepared in compliance with international
financial reporting standards

to assist the IASB in promoting harmonisation of regulations, accounting

standards and procedures relating to the presentation of financial
statements by providing a basis for reducing the number of alternative
accounting treatments permitted by accounting standards,
 ISSUES TO NOTE
 Keep in mind this Conceptual Framework is not an accounting standard
itself, and it doesn’t override the requirements of any existing accounting
standard.

 Occasionally, an accounting standard may conflict with the Conceptual

Framework, although this is rare. When this happens the requirements of
the accounting standard override the requirements of the Conceptual
Framework.
 Disadvantage of IASB Conceptual
Framework
• Financial statements are intended for a variety of users and it is
not certain that a single CF can be devised which will suit all
users
• There may be a need for a variety of accounting standards each
produced for a different purpose (and with different concepts a
basis)
• It is not clear that a conceptual framework makes the task of
preparing and then implementing standards any easier than
without a framework
Coverage of the Conceptual Framework
The Framework deals with:
 The Objective of General Purpose Financial Statement
 Financial statements and the reporting entity
 Underlying assumptions and Concepts
 The qualitative characteristics of financial information
 Elements of financial statements
 Recognition of the elements of financial statements
 Measurement of the elements of financial statements and
 Concepts of capital and capital maintenance (not covered here)
 Objectives of Financial Reporting

To provide financial information that is useful

to to a wide users in making decisions
relating to providing resources to the entity
 Objectives of Financial Reporting
Users’ decisions involve decisions about

buying, selling or holding providing or settling loans and other

equity or debt forms of credit
instruments

voting, or otherwise influencing

management’s actions

Specific
Objectives 10
 Objectives of Financial Reporting
To make these decisions, users assess

prospects for future net cash

inflows to the entity

management’s stewardship
of the entity’s economic
resources

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Objectives of Financial Reporting
To make the two assessments discussed earlier,
users need information about both

the entity’s economic resources, claims

against the entity and changes in those
resources and claims

how efficiently and effectively management

has discharged its responsibilities to use the
entity’s economic resources

Specific
Objectives 12
 Financial Statements and the
Reporting Entity
Reporting entity :
•It is an entity that is required, or chooses, to prepare financial
statements

• not necessarily a legal entity-could be a portion of an entity or

comprise more than one entity

Financial statements:
a particular form of financial reports that
provide information about the reporting
entity’s assets, liabilities, equity, income and
expenses

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Financial Statements and the Reporting Entity

Consolidated financial statements :

provide information about assets, Unconsolidated financial statements :
liabilities, equity, income and provide information about assets, liabilities,
expenses of both the parent and its equity, income and expenses of the parent
subsidiaries as a single reporting only
entity

Combined financial statements:

provide information about assets, liabilities, equity,
income and expenses of two or more entities that
are not all linked by a parent- subsidiary
relationship

Specific
Objectives 14
 Underlying Assumptions
Accruals basis
The effects of transactions and other events are recognised when they
occur(and not as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the financial
statements of the periods to which they relate.

Going Concern
The entity is viewed as continuing in operation for the foreseeable future.
It is assumed that the entity has neither the intention nor the necessity of
liquidation or of curtailing materially the scale of its operations
 CONCEPT

Business Entity

The entity assumption assumes that a proprietorship,

partnership, or corporation’s financial activities are
distinguished from other financial organizations in
keeping its own financial records and reports.

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 CONCEPT

Period of Time

In accordance with the period-of-time assumption, a

company prepares financial statements at the end of
each year and includes them its annual report. The
period-of-time assumption is the basis for the adjusting
entry process at period-end.

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 CONCEPT

Monetary Unit
This assumption states that there must be some basis
for measuring exchange of goods or services. The Ghana
Cedis (GH₵) is considered to be the monetary unit for
preparing a company’s financial statements in Ghana.

The IASB encourages companies to prepare

supplemental disclosures about the impact of changing
prices.

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 CONCEPT

Historical Cost
Usually, the exchange price is retained in the accounting
records as the value of an item until it is removed from the
records.

Cost
GH₵18,000

Replacement Cost Market Value

GH₵15,000 GH₵17,500

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 CONCEPT

Historical Cost

Which amount
should be used?

20
 CONCEPT

Matching

The matching
Accrual principle
accounting states of
is the process that to determine
relating the financialthe
effectsof
profit of a
transactions,
company events,
for anand circumstances
accounting havingthe
period,
cash consequences to the period in which they occur
company computes
rather than to when thethe
cashtotal expenses
receipt or payment involved
occurs. in
obtaining the revenues of the period and relates
these total expenses to the total revenues recorded in
the period.

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 The Qualitative Characteristics Of
Financial Information
Fundamental Qualitative Characteristics
• Relevance
• Faithful Representation

Enhancing Qualitative Characteristics

• Comparability
• Verifiability
• Timeliness
• Understandability
 The Qualitative Characteristics Of
Financial Information
Relevance:
•Accounting information is relevant if it can make a difference in a decision.

•The Relevance of information is affected by its nature and its materiality.

•Materiality is an aspect of relevance which is entity-specific.

•It means that what is material to one entity may not be material to another.
It is relative. Information is material if it is significant enough to influence the
decision of users.

•Example, the financial statements must show the profit of a division which
has been closed.
 The Qualitative Characteristics Of
Financial Information
Faithful Representation:
Faithful Representation is the second Fundamental Qualitative Characteristic.
The financial information in the financial reports should represent what it purports to
represent. Meaning, it should show what really are present (Example: Position of Assets and
Liabilities) and what really happened (Example: Position of Income and expenditure), as the
case may be.
There are three characteristics of faithful representation:
1. Completeness: Presentation of all necessary information for a user to understand the
events being depicted. It includes all necessary descriptions and explanations (adequate or
full disclosure of all necessary information),

2. Neutrality: Presentation of Financial information must not be bias or manipulated in any

way in order to influence the decision of users. (fairness and freedom from bias). We often
refer to a term called True and Fair View in Accounting.

3. Free from error: There should not be material errors and inaccuracies in the preparation
the financial statements. That does not mean no inaccuracies can arise, particularly in case
of making estimates. The standards expect that the estimates are made on a realistic basis.
 The Qualitative Characteristics Of
Financial Information
• The enhancing qualitative characteristics (i.e. understandability, comparability,
verifiability and timeliness) can improve decision usefulness when the
fundamental qualitative characteristics are established.
• However, they cannot determine financial reporting quality on their own.
• Comparability: Comparability of accounting information enables users to identify
and explain similarities and differences between two or more sets of economic
facts.
• Information about a reporting entity is more useful if it can be compared with
similar information about other entities and with similar information about other
entities and with similar information about the same entity for another period or
date.

• Verifiability: A company's accounting results are verifiable when they are

reproducible, so that, given the same data and assumptions, an independent
accountant can produce the same result the company did.
 The Qualitative Characteristics Of
Financial Information
• Timeliness: The timeliness of accounting information refers to the
provision of information to users quickly enough for them to take action.

• Information becomes obsolete and useless if it is not reported within time.

In Ghana, the companies code specifies the time for preparation and
presentation of Financial reports.

• Understandable: Accounting information should be understandable to

users who have a reasonable knowledge of business and economic
activities and who are willing to study the information carefully.
 The Elements of Financial Statements
Statement of Financial Position
• Assets: is a 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: present obligation of the entity to transfer an economic resource as a result

of past events
• An obligation is a duty or responsibility that the entity has no practical ability to
avoid

• Equity: the residual interest in the assets of the entity after deducting all its
liabilities.
 The Elements of Financial Statements
Statement of Profit or Loss and other
Comprehensive Income
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 contribution from equity participants.

Expenses: Decrease in economic benefits during the accounting period in the form of
outflow or depletions of assets that result in decreases in equity other than those relating
to distribution to equity participants.
 Recognition of the Elements
Recognition
it is the process of capturing for inclusion in the statement of financial
position or the statement(s) of financial performance an item that meets the
definition of an asset, a liability, equity, income or expenses

Recognition is appropriate if it results in both relevant information about

assets, liabilities, equity, income and expenses and a faithful
representation of those items, because the aim is to provide
information that is useful to investors, lenders and other creditors
 Recognition of the Elements
According to the Framework, an item that meets the definition of an element
should be recognized (i.e., incorporated in the financial statements) if:

•Relevance:
it is probable that any future economic benefit associated with the item will flow
to or from the entity with certainity

Faithful representation:
the item has a cost or value that can be measured with reliability.

The recognition processes are of three stages:

•Initial recognition,
• subsequent measurement and
•de-recognition (e.g. disposal or destruction).
 Measurement of the elements of
financial statements
Historical cost measurement bases
•Historical cost provides information derived, at least in part, from the price of
the transaction or other event that gave rise to the item being measured.

• Historical cost of assets is reduced if they become impaired and historical

cost of liabilities is increased if they become onerous.
(onerous liability is a obligation in which the aggregate cost required to settle
it is higher than the economic benefit to be obtained from it)

• one way to apply a historical cost measurement basis to financial assets and
financial liabilities is to measure them at amortised cost
Measurement of the elements of
financial statements
Current value measurement bases
Current cost:
Assets are carried at the amount of cash or cash equivalents that would have to be paid
if the same asset was acquired now.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would have to be required to settle the obligation now.

Fair Value:
The price that would be received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement date

Value in use:
Reflects entity-specific current expectations about the amount, timing and uncertainty
of future cash flows