Understanding the Conceptual Framework of Financial Reporting

 
[[insert heading]]
 
Conceptual Framework - 2019
 
1
 
Conceptual Framework - Introduction
 
Revised Chapters:
 
Chapter 1: The objectives of financial reporting
 
Chapter 2: Qualitative characteristics of useful
financial information
 
Chapter 3: Financial statements and the reporting
entity
 
Chapter: 4 The elements of financial statements
 
Chapter 5: Recognition and de-recognition
 
Chapter 6: Measurement
 
Chapter 7: Presentation and disclosure
 
Chapter 8: Concept of capital and capital
maintenance
 
Conceptual Framework - 2019
 
2
 
Framework - Rationale
 
 
The Conceptual Framework is not a standard, and
none of the concepts override the concepts in any
standards.
 
General purpose financial statements are
prepared to meet the common needs of most
users for making economic decisions:
Buy, hold or sell equity instruments
Assess stewardship or accountability of
management
Assess the ability of the entity to pay and
provide other benefits to employees
Assess the security for amounts lent to the
entity
Determine taxation policies
Determine distributable profits and dividends
Prepare and used for national income
statistics
Regulate the activities of entities
 
 
Conceptual Framework - 2019
 
3
 
Objectives of Financial Statements
 
The objective of financial statements is to
present information about the entity and its
activities (results) which are useful to users to
make economic conditions – focused on the
treasury and reporting functions.
 
The revised Framework includes the need to
provide information on the principle of
stewardship in order to enable users to assess
allocation of resources and effective decision-
making processes (governance) to achieve the
strategic goals of the business
Efficiency and effectiveness with which
management discharged their
responsibilities over the economic
resources of the entity
 
Conceptual Framework - 2019
 
4
 
Objectives of Financial Statements
 
The objective of financial statements is to provide
financial information about the reporting entity’s
assets, liabilities, equity, income and expenses
that is useful to users of financial statements in
assessing the prospects for future net cash inflows
to the reporting entity and in assessing
management’s stewardship of the entity’s
economic resources.
Treasury function: management of the
financial resources of the organization to
ensure the solvency and liquidity of the
business; and reporting to the stakeholders
 
Stewardship function: management is
accountable for the utilization of the resources
of the organization to achieve the business
objective in maximizing shareholders’ wealth
 
Conceptual Framework - 2019
 
5
 
Qualitative Characteristics
 
Fundamental qualitative characteristics:
Relevance – capable of influencing or
making a difference to the decisions of
users (confirmatory and predictive values)
Faithful representation – faithfully
represent the substance of what is
purports to represent (complete, neutral
and free from errors)
 
Clarity was provided on what makes financial
statements useful:
Information must be relevant and faithfully
represent the substance of the financial
information
 
 
Conceptual Framework - 2019
 
6
 
Qualitative Characteristics
 
Re-introduced the concept of Prudence to
reduce confusion – supports neutrality of
information and described it as “the exercise of
caution when judgements under conditions of
uncertainty”
Introduced the concept of “Measurement
uncertainty” as a factor that can significant
affect faithful representation – level of
uncertainty directly affects the relevance of the
information
 
Re-instatement of the principle of “substance
over form” as a phenomenon that affects
faithful representation
 
Conceptual Framework - 2019
 
7
 
Definition of Assets
 
The major change focuses on:
The “resource” – it changes to economic
resources which include a set of rights
The “realization of the future economic
benefit” – there is no longer the need for
certainty or the likely of the benefits flowing
to the entity
 
Conceptual Framework - 2019
 
8
Previous definition:
A resource controlled by the entity as a result of
past events and from which future economic
benefits are expected to flow to the entity
Revised definition:
A present 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.
 
Definition of Assets
 
Effect of the change:
Previous Operating Leases were
recognized as expenses, but the change
resulted them being recognized as assets
– capitalization of the rights in the
economic resource (Only for Full IFRS)
 
Similar, the same may apply to contracts
which entitles the entity to have certain
rights in economic resources
 
 
 
 
 
Conceptual Framework - 2019
 
9
 
Definition of Liabilities
 
Conceptual Framework - 2019
 
10
Previous definition:
A present obligation of the entity arising from past
events, the settlement of which is expected to
result in an outflow from the entity of resources
embodying economic benefits
Revised definition:
A present obligation of the entity to transfer an
economic resource as a result of past events.  An
obligation is a duty of responsibility that the entity
has no practical ability to avoid.
 
Definition of Liabilities
 
The major change focuses on:
The “economic benefits” - changes from
the outflow to the transfer of economic
benefits (no needs for the expected
outflow of benefits)
Inclusion of clarity on “obligation” –
represents the responsibility of the entity
to avoid fulfilling its obligations (onerous
contracts)
The factors used to assess “no practical
ability to avoid” depends on the nature of
the entity’s duties and responsibilities –
requires professional judgement
 
 
Conceptual Framework - 2019
 
11
 
Recognition & De-recognition
 
Transactions can only be recognized in the
accounting records if they meet the definition
of an element, and when their recognition
provides users of financial statements with
information about the items that is both
relevant and faithfully represented (ie meets
the qualitative characteristics of useful
information).
Derecognition aims to faithfully represent
both:
any assets and liabilities retained after the
transaction or other event that led to the
derecognition (including any asset or
liability acquired, incurred or created as
part of the transaction or other event)
the change in the entity’s assets and
liabilities as a result of that transaction or
other event.
 
Conceptual Framework - 2019
 
12
 
  
@SAIPAcomms
 
  
South African Institute of Professional
 
Accountants
 
  
SAIPA-South African Institute of
 
Professional Accountants
 
JOIN THE CONVERSATION
AND BE 
#SAIPAproud
 
13
 
Conceptual Framework - 2019
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The Conceptual Framework of Financial Reporting for 2019 outlines key chapters focusing on objectives, qualitative characteristics, financial statements, elements, recognition, measurement, presentation, and capital maintenance. It emphasizes the importance of providing information on stewardship and resource allocation to aid decision-making processes and achieve strategic goals. The framework serves to meet the diverse needs of users for making economic decisions and evaluating an entity's financial performance.


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  1. [[insert heading]] Conceptual Framework - 2019 1

  2. Conceptual Framework - Introduction Revised Chapters: Chapter 1: The objectives of financial reporting Chapter 2: Qualitative characteristics of useful financial information Chapter 3: Financial statements and the reporting entity Chapter: 4 The elements of financial statements Chapter 5: Recognition and de-recognition Chapter 6: Measurement Chapter 7: Presentation and disclosure 2 Chapter 8: Concept of capital and capital maintenance Conceptual Framework - 2019

  3. Framework - Rationale The Conceptual Framework is not a standard, and none of the concepts override the concepts in any standards. General purpose financial statements are prepared to meet the common needs of most users for making economic decisions: Buy, hold or sell equity instruments Assess stewardship or accountability of management Assess the ability of the entity to pay and provide other benefits to employees Assess the security for amounts lent to the entity Determine taxation policies Determine distributable profits and dividends Prepare and used for national income statistics Regulate the activities of entities 3 Conceptual Framework - 2019

  4. Objectives of Financial Statements The objective of financial statements is to present information about the entity and its activities (results) which are useful to users to make economic conditions focused on the treasury and reporting functions. The revised Framework includes the need to provide information on the principle of stewardship in order to enable users to assess allocation of resources and effective decision- making processes (governance) to achieve the strategic goals of the business Efficiency and effectiveness with which management discharged their responsibilities over the economic resources of the entity 4 Conceptual Framework - 2019

  5. Objectives of Financial Statements The objective of financial statements is to provide financial information about the reporting entity s assets, liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and in assessing management s stewardship of the entity s economic resources. Treasury function: management of the financial resources of the organization to ensure the solvency and liquidity of the business; and reporting to the stakeholders Stewardship function: management is accountable for the utilization of the resources of the organization to achieve the business objective in maximizing shareholders wealth 5 Conceptual Framework - 2019

  6. Qualitative Characteristics Fundamental qualitative characteristics: Relevance capable of influencing or making a difference to the decisions of users (confirmatory and predictive values) Faithful representation faithfully represent the substance of what is purports to represent (complete, neutral and free from errors) Clarity was provided on what makes financial statements useful: Information must be relevant and faithfully represent the substance of the financial information 6 Conceptual Framework - 2019

  7. Qualitative Characteristics Re-introduced the concept of Prudence to reduce confusion supports neutrality of information and described it as the exercise of caution when judgements under conditions of uncertainty Introduced the concept of Measurement uncertainty as a factor that can significant affect faithful representation level of uncertainty directly affects the relevance of the information Re-instatement of the principle of substance over form as a phenomenon that affects faithful representation 7 Conceptual Framework - 2019

  8. Definition of Assets Previous definition: A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity Revised definition: A present 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. The major change focuses on: The resource it changes to economic resources which include a set of rights The realization of the future economic benefit there is no longer the need for certainty or the likely of the benefits flowing to the entity 8 Conceptual Framework - 2019

  9. Definition of Assets Effect of the change: Previous Operating Leases were recognized as expenses, but the change resulted them being recognized as assets capitalization of the rights in the economic resource (Only for Full IFRS) Similar, the same may apply to contracts which entitles the entity to have certain rights in economic resources 9 Conceptual Framework - 2019

  10. Definition of Liabilities Previous definition: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Revised definition: A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty of responsibility that the entity has no practical ability to avoid. 10 Conceptual Framework - 2019

  11. Definition of Liabilities The major change focuses on: The economic benefits - changes from the outflow to the transfer of economic benefits (no needs for the expected outflow of benefits) Inclusion of clarity on obligation represents the responsibility of the entity to avoid fulfilling its obligations (onerous contracts) The factors used to assess no practical ability to avoid depends on the nature of the entity s duties and responsibilities requires professional judgement 11 Conceptual Framework - 2019

  12. Recognition & De-recognition Transactions can only be recognized in the accounting records if they meet the definition of an element, and when their recognition provides users of financial statements with information about the items that is both relevant and faithfully represented (ie meets the qualitative characteristics of useful information). Derecognition aims to faithfully represent both: any assets and liabilities retained after the transaction or other event that led to the derecognition (including any asset or liability acquired, incurred or created as part of the transaction or other event) the change in the entity s assets and liabilities as a result of that transaction or other event. 12 Conceptual Framework - 2019

  13. JOIN THE CONVERSATION AND BE #SAIPAproud @SAIPAcomms South African Institute of Professional Accountants SAIPA-South African Institute of Professional Accountants Conceptual Framework - 2019 13

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