FAC3764 NOTES
LEARNING UNIT 1
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Purpose of Learning Unit 1
This unit focuses on understanding and applying the Conceptual Framework for financial reporting.
It lays the foundation for International Financial Reporting Standards (IFRS) and helps in solving
complex accounting problems.
Why is it Important?
• It guides the development of IFRS standards and accounting policies.
• It ensures consistency, transparency, and comparability in financial statements.
• It helps accountants and decision-makers understand what information should be included
in financial statements and why.
🏛 The Conceptual Framework: Key Elements
The Conceptual Framework is NOT an IFRS Standard but provides a logical structure for financial
reporting.
Objective of General Purpose Financial Reporting
Who uses financial reports? Investors, lenders, and other creditors.
Why? To make informed decisions about providing resources to an entity.
The 5 Elements of Financial Statements
❖ Assets – Present economic resources controlled by the company that provide future benefits
as a result of past events. An economic resource is a right that has the potential to produce
economic benefits (e.g., cash, buildings).
❖ Liabilities – Obligations of the company that will result in an outflow of resources (e.g., loans,
accounts payable).
❖ Equity – The owner’s stake in the company, calculated as Assets - Liabilities.
❖ Income – Revenue and gains (e.g., sales revenue, investment returns).
❖ Expenses – Costs incurred in earning income (e.g., rent, salaries).
Qualitative Characteristics of Useful Financial Information
Primary Characteristics
✔ Relevance – The information should influence decisions.
✔ Faithful Representation – The information must be complete, neutral, and free from error.
, Enhancing Characteristics
Comparability – Information should be comparable across companies and time periods.
Verifiability – Others should be able to confirm the accuracy of the data.
Timeliness – Information should be available when needed.
Understandability – Financial information should be clear and concise for users.
Recognition & Derecognition in Financial Statements
Recognition (When to Include an Item?)
A financial element (e.g., asset or liability) is included in the financial statements if:
✔ It is probable that it will bring future economic benefits or obligations.
✔ Its value can be measured reliably.
Derecognition (When to Remove an Item?)
An asset or liability is removed when:
✔ The company no longer controls the asset or is no longer liable for the obligation.
Measurement Bases in Financial Reporting
Financial information is measured using different methods:
Historical Cost – The original price paid for an asset.
Fair Value – The current market price of an asset or liability.
Current Cost – The cost required to replace an asset today.
Value in Use – The present value of future cash flows an asset will generate.
Presentation & Disclosure
• Presentation – Organizing financial statements in a meaningful way.
• Disclosure – Providing additional explanations in financial statements to help users
understand the data.
, Conceptual Framework
(Mindmap)
|
---------------------------------------------------------------------------------------------
| | | |
Elements Characteristics Recognition & Measurement
Derecognition Bases
|
-----------------------------------------------------------------------------------
| | | | |
Assets Liabilities Equity Income Expenses
Primary Characteristics:
- Relevance
- Faithful Representation
Enhancing Characteristics:
- Comparability
- Verifiability
- Timeliness
- Understandability
Measurement:
- Historical Cost
- Fair Value
- Current Cost
- Value in Use
Recognition & Derecognition:
- Include when probable & measurable
- Remove when no longer controlled
Presentation & Disclosure:
- Clear organization
- Additional explanations for understanding
, LEARNING UNIT 2:
INCOME TAXES
Purpose of Learning Unit 2
This unit focuses on the correct accounting treatment for income taxes under IFRS,
specifically IAS 12 (Income Taxes). It covers both current tax and deferred tax,
helping students understand how taxes affect financial statements.
🏛 Key Topics Covered
IAS 12: Income Taxes
IAS 12 provides the guidelines for recognizing income tax expenses, deferred tax
assets, and deferred tax liabilities in financial statements.
Types of Income Tax
Current Tax – Tax payable or recoverable on taxable profits of the current period.
Deferred Tax – Tax impact of temporary differences between accounting profit and
taxable profit, expected to reverse in future periods.
Learning Outcomes
By the end of this unit, you should be able to:
✔ Calculate and account for current and deferred tax.
LEARNING UNIT 1
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Purpose of Learning Unit 1
This unit focuses on understanding and applying the Conceptual Framework for financial reporting.
It lays the foundation for International Financial Reporting Standards (IFRS) and helps in solving
complex accounting problems.
Why is it Important?
• It guides the development of IFRS standards and accounting policies.
• It ensures consistency, transparency, and comparability in financial statements.
• It helps accountants and decision-makers understand what information should be included
in financial statements and why.
🏛 The Conceptual Framework: Key Elements
The Conceptual Framework is NOT an IFRS Standard but provides a logical structure for financial
reporting.
Objective of General Purpose Financial Reporting
Who uses financial reports? Investors, lenders, and other creditors.
Why? To make informed decisions about providing resources to an entity.
The 5 Elements of Financial Statements
❖ Assets – Present economic resources controlled by the company that provide future benefits
as a result of past events. An economic resource is a right that has the potential to produce
economic benefits (e.g., cash, buildings).
❖ Liabilities – Obligations of the company that will result in an outflow of resources (e.g., loans,
accounts payable).
❖ Equity – The owner’s stake in the company, calculated as Assets - Liabilities.
❖ Income – Revenue and gains (e.g., sales revenue, investment returns).
❖ Expenses – Costs incurred in earning income (e.g., rent, salaries).
Qualitative Characteristics of Useful Financial Information
Primary Characteristics
✔ Relevance – The information should influence decisions.
✔ Faithful Representation – The information must be complete, neutral, and free from error.
, Enhancing Characteristics
Comparability – Information should be comparable across companies and time periods.
Verifiability – Others should be able to confirm the accuracy of the data.
Timeliness – Information should be available when needed.
Understandability – Financial information should be clear and concise for users.
Recognition & Derecognition in Financial Statements
Recognition (When to Include an Item?)
A financial element (e.g., asset or liability) is included in the financial statements if:
✔ It is probable that it will bring future economic benefits or obligations.
✔ Its value can be measured reliably.
Derecognition (When to Remove an Item?)
An asset or liability is removed when:
✔ The company no longer controls the asset or is no longer liable for the obligation.
Measurement Bases in Financial Reporting
Financial information is measured using different methods:
Historical Cost – The original price paid for an asset.
Fair Value – The current market price of an asset or liability.
Current Cost – The cost required to replace an asset today.
Value in Use – The present value of future cash flows an asset will generate.
Presentation & Disclosure
• Presentation – Organizing financial statements in a meaningful way.
• Disclosure – Providing additional explanations in financial statements to help users
understand the data.
, Conceptual Framework
(Mindmap)
|
---------------------------------------------------------------------------------------------
| | | |
Elements Characteristics Recognition & Measurement
Derecognition Bases
|
-----------------------------------------------------------------------------------
| | | | |
Assets Liabilities Equity Income Expenses
Primary Characteristics:
- Relevance
- Faithful Representation
Enhancing Characteristics:
- Comparability
- Verifiability
- Timeliness
- Understandability
Measurement:
- Historical Cost
- Fair Value
- Current Cost
- Value in Use
Recognition & Derecognition:
- Include when probable & measurable
- Remove when no longer controlled
Presentation & Disclosure:
- Clear organization
- Additional explanations for understanding
, LEARNING UNIT 2:
INCOME TAXES
Purpose of Learning Unit 2
This unit focuses on the correct accounting treatment for income taxes under IFRS,
specifically IAS 12 (Income Taxes). It covers both current tax and deferred tax,
helping students understand how taxes affect financial statements.
🏛 Key Topics Covered
IAS 12: Income Taxes
IAS 12 provides the guidelines for recognizing income tax expenses, deferred tax
assets, and deferred tax liabilities in financial statements.
Types of Income Tax
Current Tax – Tax payable or recoverable on taxable profits of the current period.
Deferred Tax – Tax impact of temporary differences between accounting profit and
taxable profit, expected to reverse in future periods.
Learning Outcomes
By the end of this unit, you should be able to:
✔ Calculate and account for current and deferred tax.
