Financial Reporting Framework Rangajewa Herath B Sc Accountancy

Financial Reporting Framework Rangajewa Herath B. Sc. Accountancy and Financial Management(Sp. )(USJ) MBA-PIM(USJ), ACA

Learning Outcomes At the end of this chapter, you should be able to: • Explain what a conceptual framework is; • Describe the evolution of the conceptual framework of financial reporting; • Outline the structure and components of the framework; • Explain the benefits and criticisms of the framework; and • Discuss the regulatory framework applicable to financial reporting.

What is Financial Reporting?

What is a Conceptual Framework? A set of guiding principles that influence and direct decisions in a particular area. In accounting - provides guidance and apply in relation to a range of issues relating to preparation of financial statements. General purpose financial reporting, which meets the needs of external users of information.

Evolution of Conceptual Framework Studies commenced in 1960 s FASB, USA Framework (1978), first conceptual framework to develop IASB Framework (First time in 1989) IASB Revised Framework (2010)

Conceptual Framework of Financial Reporting…

The Structure and Components of the IASB Conceptual Framework of Financial Reporting � The objective of general purpose financial reporting � The underlying assumption qualitative characteristics of useful financial information � The elements of the financial statements � The recognition and measurement of the elements of financial statements

The objective of general purpose financial reporting 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.

Qualitative characteristics Fundamental Qualitative characteristics Relevance Faithful representation Comparability Timeliness Enhancing Verifiability Understandability

Elements of Financial Statements �Asset �Liability �Equity �Income �Expenses

Definition of Assets

Definition of Liabilities

Definition of Equity

Definition of Income

Definition of Expenses

Recognition of Elements in the Financial Statements Recognition is the process of incorporating in the Statement of Financial Position or Statement of Comprehensive Income an item that meets: The definition of an element of the financial statements and The criteria for recognition; ▪ It is probable that any future economic benefit associated with the item will flow to or from an entity. (The probability of future economic benefit) ▪ The item has a cost or value that can be measured reliably. (Reliability of measurement)

Measurement The measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the Statement of Financial Position and the Statement of Comprehensive Income.

Measurement Bases • Historical Cost • Current Cost • Realizable (Settlement) Value • Present Value

The Benefits of the Conceptual Framework � Accounting standards are more consistent and logical � Standard-setters become accountable for their decisions � Communication � The process is enhanced development of accounting standards become more economical � Emphasize reports the ‘decision usefulness’ role of financial

Perceived Disadvantages of the Conceptual Framework • Burden on small organizations. • Economic in focus of Conceptual framework. • Representation of a codification of existing practice rather than prescribing an ‘ideal’ or logically derived approach to accounting.