12/20/2024 IFRS Handout

By/ Ahmed Elsayed,CPA

Ahmed Elsayed,CPA
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What is meant by a conceptual framework?

A conceptual framework is a statement of generally accepted theoretical principles which form the frame of
reference for financial reporting. These theoretical principles provide the basis for IASB’s development of
new accounting standards and the evaluation of those already in existence. Therefore, a conceptual
framework will form the theoretical basis for determining which events should be accounted for, how they
should be measured, and how they should be communicated to the user. Although it is theoretical in nature,
a conceptual framework for financial reporting has highly practical final aims.
What is the purpose of the conceptual framework?
1.Assist the IASB to develop IFRS accounting standards that are based on consistent concepts.
2.Assist preparers of accounts to develop accounting policies in cases where there is no IFRS accounting
standards applicable to a particular transaction or where a choice of accounting policy exists.
3.Assist all parties to understand and interpret IFRS accounting Standards.
Advantages of IFRS standards.
1. A business can present its financial statement on the same basis as its foreign competitors, making
the comparison easier.
2. Cross-border listing will be facilitated making it easier to raise capital abroad.
3. Companies with foreign subsidiaries will have a common, company-wide accounting language.
4. Foreign companies which are targets for takeovers or mergers can be more easily appraised.

Disadvantages of IFRS standards.

1. The cost of implementing IFRS standards.
2. The belief by some that there is a lower level of detail in IRS standards (compared with US GAAP).
3. Countries that have national standards that are very prescriptive are worried about the principles-
based approach in IFRS standards that require the application of judgment.
The conceptual framework is divided into chapters.
Chapter 1 The objective of general-purpose financial reporting.
Chapter 2 Qualitative characteristics of useful financial information.
Chapter 3 Financial statements and the reporting entity.
Chapter 4 The element of financial statement.
Chapter 5 Recognition and derecognition.
Chapter 6 Measurement.
Chapter 7 presentation and disclosure.
Chapter 8 Concepts of all capital and the capital maintenance
Chapter 1 The objective of general-purpose financial reporting.
The conceptual framework states that the objective of financial reporting is to provide financial information
about the reporting entity’s assets, liabilities, equity, income, and expenses that is useful to the existing and
potential investors, lenders and other creditors in making the decision about providing resources to the
entity.

By/ Ahmed Elsayed,CPA

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Existing and potential investors, lenders and other creditors are referred to as the “primary users” of the
financial statement. To make decisions, the primary users' needs information about:
1. The economic resources of the entity, claims against the entity and changes in those resources and the
claims.
2.Management stewardship: how efficiently and effectively the entities management and the governing board
have discharged their responsibilities to use the entity’s economic resources.
Chapter 2 Qualitative characteristics of useful financial information.
Relevance and faithful representation are the fundamental qualitative characteristics. Comparability,
verifiability, timeliness and understandability are the enhancing qualitative characteristics.
Information is useful if it is relevant and faithfully represents what it purports to represent.
Relevant information is capable of making a difference in decisions made by users if it has predictive value,
confirmatory value, or both.
A faithful representation reflects economic substance rather than legal form and is: Complete: all
information necessary for understanding.
Neutral: means that the information should be provided without bias, which is supported by exercise of
prudence.
Free from error. Processes and descriptions without error, does not remain perfect.
The enhancing qualitative characteristics are
Comparability: Is the qualitative characteristic that enables users to identify and understand similarities in,
and differences among items.
Comparability is not the same as uniformity. Accounting policies should be changed if the change will
result in information that is reliable and more relevant, or where the change is required by an IFRS accounting
standard.
Verifiability: The Verifiability Help assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily Complete agreement, that a particular depiction
is a faithful representation.
Timeliness: Timelines means having information available to decision makers and time to be capable of
influencing their decisions. Generally, the older information is that is useful it is.
Understandability: Means classifying, characterizing, and presenting information clearly and concisely
makes it understandable.
Chapter 3 Financial statements and the reporting entity.

Financial Statements provide information about an entity's assets, liabilities, equity, income and
expenses that is useful to the users of Financial Statement in assessing the prospects of future net cash
inflows and management stewardship of an interest. Economic resources.

Reporting entity. A reporting entity is an entity that is required, or chooses, to prepare financial
statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one
entity. A reporting entity is not necessarily a legal entity.

By/ Ahmed Elsayed,CPA

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Chapter 4 The elements of financial statements.

Assets, liabilities, equity, income and expenses are the elements of the financial statement.
Asset: 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 benefit.
Liability: A present obligation of the entity to transfer an economic resource as a result of past events.
Obligation: A duty or responsibility that the entity has no practical ability to avoid.
Equity: The residual interest in the assets of the entity after deducting all its liabilities.
Income: Increase in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.
Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those
relating to distributions to holders or equity claims.
Chapter 5 Recognition and derecognition.
An item is recognized in the financial statements if it meets the definition of an element of the financial
statements and recognition of that item provides information that is useful to the users of those financial
statements.
An item is derecognized when control over an asset is lost, or an obligation no longer exists for liability.
Recognition is the process of capturing for inclusion in the statement of financial position or the statements
of financial performance an item that meets the definition of one of the elements of financial statements-an
asset, a liability, equity income or expense.
An item is recognized in the financial statements if:
A) The item meets the definition of an element (Asset, liability, income, expense or equity), and
Recognition of that element provides users of the financial statement with information that is . ie
with.
• Relevant information about the element, and
• A faithful representation of that element.
Recognition is subject to cost constraints: The benefit of the information provided by
recognizing an element should justify the costs of recognizing that element.
Derecognition normally occurs

• For an asset- when control is lost.

• For a liability- when there is no longer a present obligation.

Chapter 6 Measurement.
Historical cost and the current value are the two main measurement bases in the conceptual framework.
Current value includes fair value, value in use, fulfillment value and the current cost.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement rate.
Value in use is the present value of the cash flows, or other economic benefits that an entity expects to
derive from the use of an asset and from its ultimate disposal.

By/ Ahmed Elsayed,CPA

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Fulfillment value Is the present value of the cash or other economic resources, that an entity expects to be
obligated to transfer as it fulfills a liability.
The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs that would be incurred
at that time.
Current cost of liability is the consideration that would be received for an equivalent liability as the
measurement date minus the transaction costs that would be incurred at that date.
The definition of Fair value on the conceptual framework is consistent with that in IFRS13 Fair value
measurement.
Chapter 7 presentation and disclosure.
The statement of profit or loss is the primary source of information relating to an entity's performance.
Other comprehensive income is used where it provides more relevant information or more faithful
representation. Financial statements should present fairly the financial position, financial performance and
the cash flows of an entity.
Effective presentation and disclosure require
• Focusing on presenting and disclosure objectives and principles rather than on rules.
• Classifying information by grabbing the similar items and separating dissimilar items.
• Aggregating information appropriately so that it is not obscured by unnecessary detail or excessive
aggregation.
Chapter 8 Concepts of all capital and the capital maintenance
Financial capital maintenance is concerned with the financial amount of net assets of an entity. Physical
capital maintenance is concerned with the productive capacity of an entity.
There are two concepts.
1. Financial capital maintenance.
• Capital refers to the net assets or equity of the entity.
• Profit is made if the financial amount of net assets at the end of the reporting period is greater than
the financial amount at the start, after excluding contributions from, and distributions to, owners.
2. Physical capital maintenance.
Capital refers to the productive capacity of the entity.

• This requires the use of the current cost basis of measurement.

• Profit is made if the operating capability at the end of a reporting period is greater than that at the
start, For example over and above increases due to changes in prices.
• If primary users are concerned mainly with the maintenance of nominal invested capital, then the
financial concept of capital should be used. Most entities are adopted are financial concept of
capital
• If primary users are concerned mainly with the operating capability of the entity, a physical concept
of capital should be adopted.

By/ Ahmed Elsayed,CPA