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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
LESSON # 25
IASB'S FRAMEWORK
IASB stands for International Accounting Standard Board; it is an independent,
privately funded accounting standard setter organization. IASB develops Accounting
Standards that harmonize the accounting practices globally.
Objective:
Main objective of the framework is to provide a rational and sensible guide for
preparing accounting standards and applying them accordingly. This framework is
used preparation and preparation of financial statements.
Purpose of IASB's Framework:
It provides assistance in:
 Development of new IFRS (International Financial Reporting Standards)
 Review of existing IAS (International Accounting Standards)
 Promoting Harmonization
 Developing National Standards
Components of Financial Statements and their objectives
The framework is concerned with "general purpose financial statements".
Components of financial statements include:
1. Balance Sheet
Balance sheet is prepared to know the financial position
2. Income Statement
Income statement shows financial performance/profitability
3. Statement of Changes in Equity
This statement is prepared to show the movement in different
heads of owners' equity
4. Cash Flow Statement
It is prepared to know the cash inflows and outflows during the
year divided into operating, investing and financing activities
5. Notes
Notes are prepared to disclose significant accounting policies
selected and applied in preparing the financial statement. It also
contains some imperative disclosures to make financial statements
understandable.
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Advance Financial Accounting (FIN-611)
VU
Users of the financial statements
Communication of the financial information flows towards the users of the financial
statements.
Shareholders (assess the ability of enterprise to pay the dividend)
Lenders (determine the ability of enterprise to pay their loan and interest)
Employees (concerned about their pay, retirement benefits etc.)
Govt. agencies (determine tax, regulate the activities )
Public (enterprises make substantial contribution to the local economy)
Suppliers (evaluate whether the entity will be fine as a customer and pay its
dues)
Customers (decide whether the company will be able to continue producing
and supplying goods with the same quality)
Underlying Assumptions
1) Accrual Basis
Accrual concept is used to measure the incomes and expenses of the entity. According
to the accrual concept incomes and expenses are not measured at the amount of cash
received or paid during the year but for incomes the measurement basis are earnings
and for expenses measurement basis are incurrence.
2) Going Concern
Going concern means that the entity will continue its operations for the foreseeable
future and there is no intention to liquidate it or to significantly curtail its operations.
Qualitative Characteristics of Financial Statements
Qualitative characteristics are the attributes that make the information provided in
financial statements useful to the users.
Qualitative characteristics that make the financial information useful
Materiality
It is threshold quality which must be checked before studying the further qualitative
characteristics.
Information is material if its omission/misstatement could influence the economic
decisions of users taken on the basis of financial statements.
1) Relevance
Information must be relevant to the decision making needs of users. It helps users to
evaluate past, present or future events. It also helps users to confirm or correct past
evaluations.
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Advance Financial Accounting (FIN-611)
VU
What makes financial information relevant?
Predictive role
Current level/structure of asset holding issued to predict the ability of the
entity to take advantages of opportunities and its ability to react to adverse
situation.
Confirmative role
Some information plays confirmatory role as outcome of the planned
operations. Information about financial position and past financial performance
is used as predicting future financial position and performance.
2) Reliability
Information may be relevant but so unreliable in nature that its recognition may be
potentially misleading.
What makes financial information reliable?
Faithful representation
Information must represent faithfully the transactions it purport to represent in
order to be reliable.
Substance over form
It is the principle that transactions and other events are accounted for and
presented in accordance with their economic substance (economic reality) and
not merely their legal form.
Neutrality
Information must be free from bias and should not be focused on
predetermined results.
Prudence
Financial information presented in the financial statements relating to the assets
and incomes should not be overstated and relating to the liabilities and
expenses should not be understated.
Completeness
Financial information must be complete in terms of cost measurement and
documentation. Omission may cause information to be misleading.
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Advance Financial Accounting (FIN-611)
VU
Qualitative characteristics that make the presentation useful
1) Comparability
Users should be able to compare an entity's performance over time and to compare
one entity's performance with other.
Consistency
To make the financial statements comparable accounting policies and
classification should be consistent over the years. Requirements of the
applicable accounting standards should also be applied consistently.
Disclosure of accounting policies
Significant accounting policies should be disclosed in the notes this makes the
financial statements comparable with financial statements of other entities.
2) Understandability
Financial statements should be presented in such a way that these are understood by a
user having average knowledge of commerce and business.
Readily understandable by users
Users are assumed to have basic knowledge of accounting to understand the
published financial statements.
Aggregation and classification
Presentation of financial information in the financial statements should be
aggregated if these are not material. Information relating to the same class
should be classified in one group.
Constraints to relevancy and reliability of financial information
Quality of relevancy and reliability depends upon three constrains:
1) Balance between qualitative characteristics
Relevance and reliability are often in conflict. For example; market values of fixed
tangible assets more relevant than historical cost, but these are less reliable.
2) Timeliness
If there is unjustified delay in the reporting of information it may lose its relevancy.
Information may be reported on a timely basis when all aspects of the transaction are
not known, thus compromising reliability.
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Advance Financial Accounting (FIN-611)
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3) Balance between cost and benefit
When information is provided, its benefits must exceed the costs of obtaining and
presenting it.
What makes financial information useful?
Materiality
Relevance
Reliability
Comparability
Understandability
Information
Information
Similarities
The
that has the
that is a
and
significance of
ability to
complete and
differences
the
influence
faithful
can be
information
decisions
representation
discerned and
can be
evaluated
perceived
Substance
over - form
Users
Predictive
Aggregation
Prudence
ability
Value
Neutral
and
Faithful
Disclosure
Classification
Confirmative
Consistency
represe
Complete
Value
-ntation
What limits the application of the qualitative characteristics?
Balance Between the Qualitative
Characteristics
Balance between the Benefit and Cost
Timeliness
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet