The new accounting conceptual accounting framework
Prudence and neutrality In response to numerous stakeholders, prudence is reintroduced in support of the principle of neutrality for the purposes of faithful representation. We will see at point 5 below that the IASB no longer includes reliable measurement in its recognition criteria for assets and liabilities.
The concept of financial performance, which is not defined, is addressed through the classification of income and expenses in either: The statement of profit or loss, or Other comprehensive income OCI.
However an exemption may be provided from this principle if, for example, there is no clear basis for identifying the period in which recycling to profit or loss would enhance the relevance and faithful representation of the information in that statement.
The requirements as presented in the framework are driven by two aims: the assets and liabilities retained after the transaction or other event that led to derecognition must be presented faithfully and the change in the entity's assets and liabilities as a result of that transaction or other event must also be presented faithfully.
Conceptual framework for financial reporting 2018 pdf
Chapter 4: Elements of the financial statements This chapter extensively deals with the definitions of individual elements of the financial statements. The Board might consider revising the description and discussion of capital maintenance in the future if it considers such a revision necessary. Prudence is defined as the exercise of caution when making judgements under conditions of uncertainty. They do not change existing generally accepted accounting principles GAAP. Instead, it is measured exactly by the formula: Total carrying amount of all assets, less Total carrying amount of all liabilities. Thus if sales are recognized per transaction, the concept of probability of occurrence means that it is more relevant to calculate the guarantee provision for these sales on the basis of the total sales. Further, a right that does not create rights for the entity beyond those that exist for other parties will generate no economic benefits. Unconsolidated financial statements can be useful to users if only because, in some jurisdictions, dividends are based on the distributable reserves of the parent and not that of the group. However, should new provisions depart from the Conceptual Framework, the IASB has undertaken to explain the reasons in the Basis for Conclusions on that standard. Key points The recognition of assets and liabilities must satisfy the fundamental characteristics of useful financial information relevance and faithful representation in all the financial statements, subject to the cost constraint. Chapter 3 - Financial Statements and the reporting entity.
Selecting a measurement basis A measurement basis must be selected for both the statement of financial position and the statement s of financial performance. Thus, you need to select the measurement basis, or the method of quantifying monetary amount for elements in the financial statements.
This chapter focuses on the concept of control, making no reference to joint control or significant influence.
The new accounting conceptual accounting framework
Physical capital — this is the productive capacity of the entity based on, for example, units of output per day. The main difference between these concepts is how the entity treats the effects of changes in prices in assets and liabilities. These amendments concerning the Conceptual Framework are effective for annual periods beginning on or after 1 January except in cases where earlier application is permitted. This definition is unchanged. The concept of present obligation Apart from locating its origin in past events — meaning that the entity has already obtained economic benefits or taken an action and, as a consequence, will or may have to transfer an economic resource that it would not otherwise have had to transfer — in order for an obligation to be present, the entity must have no practical ability to avoid a transfer. The expression "economic resource" instead of simply "resource" stresses that the IASB no longer thinks of assets as physical objects but as sets of rights. Again, the Framework discusses the derecognition in a greater detail. When this chapter in was drafted in , the IASB considered that the concept of reliability was understood differently by stakeholders in particular, as a synonym for verifiability or free of material error. The definition of the elements of the financial statements has been separated from the recognition criteria. All the income and expenses for the period are accounted for in this statement, unless doing so does not provide relevant information or a faithful representation of performance. The Framework points out that it can be appropriate to measure some components of equity directly e. Special For You! Key points The concepts of prudence, measurement uncertainty and the primacy of substance over form are reintroduced, alongside explanations of the qualitative characteristics of useful financial information. The challenge will be determining what to do if the company retains some rights after the transfer. Link between obligation to transfer and right to receive Although asymmetry in the recognition of assets and liabilities is not required by the concept of prudence see above, point 2 , the Conceptual Framework states that, if one entity has an obligation to transfer an economic resource, it follows that another entity has a right to receive that economic resource.
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