IASBâ€™S FRAMEWORK

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Advance Financial Accounting (FIN-611)

LESSON # 25

IASB'S FRAMEWORK

IASB stands for International Accounting Standard Board; it is an independent,

privately funded accounting standard setter organization. IASB develops Accounting

Standards that harmonize the accounting practices globally.

Objective:

Main objective of the framework is to provide a rational and sensible guide for

preparing accounting standards and applying them accordingly. This framework is

used preparation and preparation of financial statements.

Purpose of IASB's Framework:

It provides assistance in:

· Development of new IFRS (International Financial Reporting Standards)

· Review of existing IAS (International Accounting Standards)

· Promoting Harmonization

· Developing National Standards

Components of Financial Statements and their objectives

The framework is concerned with "general purpose financial statements".

Components of financial statements include:

1. Balance Sheet

Balance sheet is prepared to know the financial position

2. Income Statement

Income statement shows financial performance/profitability

3. Statement of Changes in Equity

This statement is prepared to show the movement in different

heads of owners' equity

4. Cash Flow Statement

It is prepared to know the cash inflows and outflows during the

year divided into operating, investing and financing activities

5. Notes

Notes are prepared to disclose significant accounting policies

selected and applied in preparing the financial statement. It also

contains some imperative disclosures to make financial statements

understandable.

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Advance Financial Accounting (FIN-611)

Users of the financial statements

Communication of the financial information flows towards the users of the financial

statements.

Shareholders (assess the ability of enterprise to pay the dividend)

Lenders (determine the ability of enterprise to pay their loan and interest)

Employees (concerned about their pay, retirement benefits etc.)

Govt. agencies (determine tax, regulate the activities )

Public (enterprises make substantial contribution to the local economy)

Suppliers (evaluate whether the entity will be fine as a customer and pay its

dues)

Customers (decide whether the company will be able to continue producing

and supplying goods with the same quality)

Underlying Assumptions

1) Accrual Basis

Accrual concept is used to measure the incomes and expenses of the entity. According

to the accrual concept incomes and expenses are not measured at the amount of cash

received or paid during the year but for incomes the measurement basis are earnings

and for expenses measurement basis are incurrence.

2) Going Concern

Going concern means that the entity will continue its operations for the foreseeable

future and there is no intention to liquidate it or to significantly curtail its operations.

Qualitative Characteristics of Financial Statements

Qualitative characteristics are the attributes that make the information provided in

financial statements useful to the users.

Qualitative characteristics that make the financial information useful

Materiality

It is threshold quality which must be checked before studying the further qualitative

characteristics.

Information is material if its omission/misstatement could influence the economic

decisions of users taken on the basis of financial statements.

1) Relevance

Information must be relevant to the decision making needs of users. It helps users to

evaluate past, present or future events. It also helps users to confirm or correct past

evaluations.

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Advance Financial Accounting (FIN-611)

What makes financial information relevant?

Predictive role

Current level/structure of asset holding issued to predict the ability of the

entity to take advantages of opportunities and its ability to react to adverse

situation.

Confirmative role

Some information plays confirmatory role as outcome of the planned

operations. Information about financial position and past financial performance

is used as predicting future financial position and performance.

2) Reliability

Information may be relevant but so unreliable in nature that its recognition may be

potentially misleading.

What makes financial information reliable?

Faithful representation

Information must represent faithfully the transactions it purport to represent in

order to be reliable.

Substance over form

It is the principle that transactions and other events are accounted for and

presented in accordance with their economic substance (economic reality) and

not merely their legal form.

Neutrality

Information must be free from bias and should not be focused on

predetermined results.

Prudence

Financial information presented in the financial statements relating to the assets

and incomes should not be overstated and relating to the liabilities and

expenses should not be understated.

Completeness

Financial information must be complete in terms of cost measurement and

documentation. Omission may cause information to be misleading.

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Advance Financial Accounting (FIN-611)

Qualitative characteristics that make the presentation useful

1) Comparability

Users should be able to compare an entity's performance over time and to compare

one entity's performance with other.

Consistency

To make the financial statements comparable accounting policies and

classification should be consistent over the years. Requirements of the

applicable accounting standards should also be applied consistently.

Disclosure of accounting policies

Significant accounting policies should be disclosed in the notes this makes the

financial statements comparable with financial statements of other entities.

2) Understandability

Financial statements should be presented in such a way that these are understood by a

user having average knowledge of commerce and business.

Readily understandable by users

Users are assumed to have basic knowledge of accounting to understand the

published financial statements.

Aggregation and classification

Presentation of financial information in the financial statements should be

aggregated if these are not material. Information relating to the same class

should be classified in one group.

Constraints to relevancy and reliability of financial information

Quality of relevancy and reliability depends upon three constrains:

1) Balance between qualitative characteristics

Relevance and reliability are often in conflict. For example; market values of fixed

tangible assets more relevant than historical cost, but these are less reliable.

2) Timeliness

If there is unjustified delay in the reporting of information it may lose its relevancy.

Information may be reported on a timely basis when all aspects of the transaction are

not known, thus compromising reliability.

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Advance Financial Accounting (FIN-611)

3) Balance between cost and benefit

When information is provided, its benefits must exceed the costs of obtaining and

presenting it.

What makes financial information useful?

Materiality

Relevance

Reliability

Comparability

Understandability

Information

Similarities

The

that has the

that is a

and

significance of

ability to

complete and

differences

the

influence

faithful

can be

information

decisions

representation

discerned and

can be

evaluated

perceived

Substance

over - form

Users

Predictive

Aggregation

Prudence

ability

Value

Neutral

and

Faithful

Disclosure

Classification

Confirmative

Consistency

represe

Complete

Value

-ntation

What limits the application of the qualitative characteristics?

Balance Between the Qualitative

Characteristics

Balance between the Benefit and Cost

Timeliness

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