MODULE 1

CONCEPTUAL FRAMEWORK & IAS1.

"Accountants are like reporters, they always report

what happened last month, last year or last decade. The
exciting part is that sometimes, they predict the future,
but nobody listens."
 PURPOSE

• What is a conceptual framework?

– A conceptual framework is essentially a theoretical structure of assumptions,
principles and rules that holds together the ideas comprising a broad concept.

• So why would we need a conceptual framework in

accounting (SP1.1)?
– To assist the IASB in the development of future IFRS’s and the review of
existing IFRS’s that are based on consistent concepts;
– To assist preparers to develop consistent accounting policies if no Standard
applies or when a policy choice is allowed; and
– Assist all parties understand and interpret the Standards.
 OBJECTIVE

• 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 CF1.2. Those decisions involve
decisions about:
– Buying selling or holding equity and debt instruments;

– Providing or settling loans and other forms of credit; or

– Exercising rights to vote on, or otherwise influence, management’s

actions that affect the use of the entity’s economic resources.
 OBJECTIVE

• These users need information about future net cash inflow

to the entity and management’s stewardship CF1.3
• What about ethical issues such as sustainability, integrated
reporting etc.! Asbestos mines harming people??? IAS 1.14
 OBJECTIVE

• Impossible to meet needs of all users – therefore general

purpose financial reports aim to provide the set of financial
information that meets the needs of the widest group of users
CF1.8
• General purpose financial reports not designed to show
value of entity but to provide info that can be used to
estimate value CF1.7
 QUALITATIVE
CHARACTERISTICS
• Provides characteristics of the type of information that will
be useful to users to make decisions
• Two tiers
– Fundamental; and

– Enhancing
 FUNDAMENTAL vs
ENHANCING
• Relevance

• Faithful representation (complete, neutral & free from error)

– Not necessarily perfect in all respects – what about estimates? QC15

• Comparability (provides context)

• Verifiability

• Timeliness

• Understandability
 UNDERLYING
ASSUMPTION
• Going Concern CF3.9:
– Assumption that the entity will continue in operation into the
foreseeable future and will not intend nor need to liquidate (if intends
to liquidate prepare on different basis and disclose this)
– The assessment of the future covers at least (but is not limited to) the
next 12 months IAS 1 p.26
 ACCRUAL BASIS OF
ACCOUNTING
• Accrual basis of accounting CF1.17 – 1.19
– Accrual basis of accounting provides information about cash still to
be received (debtors) and claims against the resources of the company
(liabilities)

• Cash flow information CF1.20

– Gives info. regarding entity’s cash management
 ELEMENTS

Financial Position:
•Assets

•Equity

•Liabilities

= Same as Accounting Equation!!!

Performance
•Income

•Expenses
 FINANCIAL
POSITION
Assets CF4.2 – 4.25:
•Present economic resource – a right that has the potential to
produce economic benefits
•Control CF4.20 – entity has the right to restrict access to
benefits & direct use of economic resource
•Past event
Remember valuations in finance where the value of an asset is often the
present value of future cash flow (DCF model, Gordon’s Dividend
Model) – How does goodwill meet this requirement?
 FINANCIAL
POSITION
Liabilities CF4.2 & 4.28 – 4.47:
•Present obligation of the entity– legal or constructive

•To transfer an economic resource – settle in cash or assets

other than cash –opportunity cost – can no longer realize the
asset for its potential cash inflow (def of asset))
•As a result of past events – obligating event – no realistic
alternative but to settle (remember going concern assumption
excludes the option of liquidation)
 PERFORMANCE

Income:
•Increases in assets (ultimately culminates in cash) (SFP item);
or
•Or decreases of liabilities (SFP item); that

•Results in increases in equity

•Other than those relating to contributions from holders of

equity claims.
 PERFORMANCE

Expenses:
•Decreases in assets (ultimately culminates in cash outflow)
(SFP item);
•Or increases in liabilities (SFP item); that

•Result in decreases in equity;

•Other than those relating to distributions to holders of equity

claims.
 PERFORMANCE

Both depend on movements in the SFP (movements in assets

and liabilities) therefore performance statements are functions
of the SFP – appears as if SFP runs everything

SFP is simply the Accounting Equation rearranged

Performance statement culminates in some kind of profit – who

does the profit go to:

EQUITY

Equity is residual of assets over liabilities (SFP item)

 PERFORMANCE

A = E + L

Profit or loss: Transactions with equity

= Retained Earnings Share issues

OCI: Dividends

Revaluation surplus, = Statement of changes

Marked-to-market reserves, etc. In equity directly!

 UNIT OF ACCOUNT

When deciding to recognize an and measure elements, often we

have to decide what exactly is the asset and/or liability. For
instance:
•Is the motor vehicle one big asset or is it made up of many
smaller assets ie. is the body a separate asset, the engine a
separate asset, the tyres separate assets, etc.?
 UNIT OF ACCOUNT

Similarly, one transaction can simultaneously develop rights

and obligations. Are those separate assets and liabilities or one
separate element?

The entity must select the unit of account that provides useful
information CF4.51(a – see detail in next slide) that faithfully
represents the substance of the transaction from which they
have arisen CF4.51(b).
 UNIT OF ACCOUNT

CF4.51:
a)A grouping or separation that provides the most relevant information;

For example treating a group of rights and obligations as one unit of

account if:
–They are unlikely to be the subject of separate transactions;

–Cannot or are unlikely to expire in different patterns;

–Have similar economic characteristics and implications for the prospects of future
net cash inflows;
–Used together by the entity to produce cash flows and are measured by reference
to those cash flows.
 EXECUTORY
CONTRACT
Executory contract: a contract, or a portion of a contract, that is
equally unperformed – neither party has fulfilled any of its
obligations, or both parties have partially fulfilled their
obligations to an equal exten (non-cancellable order for
inventory).

Creates both rights and obligations that are interdependent and

cannot be separated (CF4.57) ie. single unit of account. Show
asset if favourable and liability if unfavourable.
 RECOGNITION

Recognition – capturing for inclusion in the financial

statements, an item which meets the definition of an element. It
involves depicting the item in words and by a monetary
amount.

Recognize an item that meets a definition if it provides users

with financial information that is useful, ie CF5.7:
•Relevant; and

•Faithfully represented.
 RECOGNITION

Probability and measurability are two considerations when

deciding whether the information to be recognized is relevant
and faithfully represented CF 5.12 and CF5.19.
•Low probability does not mean no recognition CF5.16 unless it detracts
from relevance.
•Measurement uncertainty does not prevent recognition CF5.20, a
reasonable estimate might suffice CF2.19 but in limited circumstances,
all relevant measures that are available might not faithfully represent the
economics and so no recognition takes place CF5.22.
 MEASUREMENT

The CF provides different measurement basis often used in

IFRS and provides guidance on when it might be appropriate to
select each measurement base. The basic principle is to always
consider whether the information that is presented provides:
•Relevant; and

•Faithfully represented information.

Consideration should be given to both the asset and liability

being recognized and the effect on subsequent income and
expenses.
 MEASUREMENT

The following measurement basis are identified:

•Historical cost (CF6.4) including amortised cost: the value of the cost
incurred in creating or acquiring the asset. Might be most appropriate to
identify and predict future margins applied by the entity (consider inventory).
Also, might be more appropriate for stewardship;
•Fair value (CF6.32): 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. Might be most appropriate for business model where
expected economic benefits come from an exit price on sale;
 MEASUREMENT

• Value in use and fulfilment value (CF6.37): shows cash flows from use
and expected disposal of asset or present value of cash flows needed to
fulfill a liability. Might be most appropriate for assets or liabilities that
will be held to end of its useful life or for a while and then sold; and
• Current cost (CF6.40): provides entry price if another asset was acquired
or liability was assumed. Might be most appropriate for calculating future
margins than historical cost where changes in prices are rapid and
significant.
 PRESENTATION

We have agreed on all of our principles and assumptions

(remember Conceptual Framework), how do we present these
in a complete document (FS)??? What comprises set of FS:
[Link] of financial position as at the end of the period;

[Link] of profit or loss & other comprehensive income;

[Link] of changes in equity;

[Link] of cash flows;

[Link]; and

[Link] at beginning of earliest comparative for retrospective/reclass

 PRESENTATION

Let’s look at how to compile the FS. All FS must display

(IAS 1 p.51):

[Link] name of the reporting entity (and any changes to name)

[Link] FS relates to group or individual entity

[Link] of end or period covered by FS

[Link] currency (eg. US$, Rand)

[Link] of rounding (many round to million so: R’000)

 GENERAL
PRESENTATION
Offsetting (p.32):
•May not offset unless permitted or required by IFRS which will usually
allow the offsetting when offsetting reflects the substance of the transaction
eg. IAS 32 p.42

Comparative Information (p.38)

•Disclose comparative info of at least the previous period unless
reclassification or retrospective adjustment then show SFP for end of current
year, prior year & beg previous year
 SFP

Line items to be presented (refer p.54)

Current vs Non-current classification (p.60):

•All assets & liabilities to be classified into current or non-current unless
presentation in order of liquidity results in Faithful Representation
•NB! This is the exception
 SFP

Current assets & liabilities are (p.66 & p.69)

•Expected to be realized or settled in normal operating cycle (initial acq to
cash) similar to working capital cycle p.68
•Held primarily for trading

•Realize or settle in 12 months

•Cash (for assets)

•No unconditional right to defer settlement beyond 12 months (liabilities)

If it’s not a current asset or liability then must be a… (p.66 &

p.69)
 SOP/L&OCI

Single statement:
•Profit or loss & OCI presented as two sections in one statement

•Profit or loss first and then OCI

Two separate statements:

•Profit or loss first

•Followed directly by OCI

•OCI section must begin with profit or loss line item (p.10A)

Line items to be presented in SOP/L&OCI (p.81A – 82A)

 SOP/L&OCI

Profit or loss to be presented either on basis of:

•Nature (p.102); or
– For eg. Depreciation expense as separate line item

•Function (p.103)
– For eg. Depreciation expense allocated to the functions of the entity
for instance depreciation allocated btwn Cost of Sales and Operating
Costs
– When on function basis, still disclose nature of items like
depreciation, amortisation and employee benefits expenses
 SOP/L&OCI

All items meeting the definition of income or expense to be

presented in P/L unless an IFRS requires or permits otherwise
(p.88)

OCI to be classified into those (p.82A):

•that will not be reclassified subsequently to P/L eg.
revaluation surplus IAS 16 p.41 requires direct trsf to R/E
•that will be reclassified subsequently to P/L
 SOP/L&OCI

OCI items may be presented:

•Net of tax; or

•Before tax
 SOCE

Line items included (p.106)

NB! Separately disclose changes resulting from

•P/L;

•OCI; &

•Transactions with owners in their capacity as owners (dividends etc.)

 NOTES

• Please go through the notes on your own. We will focus on

each note as we go through the IAS standards in detail.

Notes to be presented in a systematic manner

• P.112 what goes into the notes

• P.114 the usual order of how the notes are presented

– Specific reference to measurement basis especially if different basis
used for different classes of assets or liabilities and within classes of
assets and liabilities like IAS 16 cost less accum dep and revalued
 Homework

Even though solutions has been uploaded and

this is a revision topic, please go through :
•2.7 , 2.10 and 2.12.

•Homework 1 (new question )