THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201

PRINCIPLES OF FINANCIAL AND COST ACCOUNTING

Nadeeshani Dissanayake B.Sc. Accounting (Sp), First Class, ACA, ACMA, CPA (Aust)

CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

LEARNING OUTCOMES

At the end of this session the students should be able to: Understand the need for conceptual framework

for financial reporting Understand the objective of financial reporting Understand the fundamental assumptions in FR Describe the qualitative characteristics of

financial information Define the elements of financial statements Understand the components of financial

statements

WHAT IS A CONCEPTUAL FRAMEWORK?

“A conceptual framework is a coherent system of inter-related objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, limits of financial accounting and financial statements.” (FASB Definition)

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Objectives of the Framework1. To assist in the development of A/Ss and review of

existing standards.2. To assist in promoting harmonization of regulation,

Accounting Standards and procedures relating to Financial Reporting

3. To assist preparers of Financial Statements in applying accounting standards

4. To assist auditors in forming an opinion5. To solve new practical accounting problems quickly.6. To increase financial statements users’ understanding

and confidence in financial reporting.7. To enhance, comparability among companies’ Financial

Statements.

THE MATTERS DEALT WITHIN THE FRAMEWORK

The objectives of financial statements Underlying assumptions  Qualitative characteristics of F/Ss The elements of F/Ss  The definition and recognition of the

elements of F/Ss Measurement of the elements of the F/Ss Concepts of capital and capital

maintenance

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THE OBJECTIVE OF FINANCIAL REPORTING “ Provide financial information about the reporting entity that is useful to existing and potential investors and other creditors in making decisions about providing resources to the entity”. Financial statements prepared for this purpose meet the

common needs of most users who don’t have the right to demand information and who have a reasonable knowledge of business and economic activities

Financial statements also show the results of the stewardship of management or the accountability of management.

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FINANCIAL REPORTS AND USERS

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Underlying AssumptionsAccrual Basis – In order to meet the objectives, financial statements are prepared on the accrual basis of accounting. What is accrual basis of accounting? What is cash basis? Effects of transactions and other events are recognised when they occur ( not when cash or cash equivalents received or paid)

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Underlying AssumptionsGoing Concern –The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future.Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

QUALITATIVE CHARACTERISTICS Primary Qualitative Characteristics of Accounting Information

Relevance : Capable of making a difference in users’ decision

Information should have the predictive value (predictive role), Feedback value (Confirmatory role).

Faithfully represent /Reliability: Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error.

Completeness Neutrality (unbiased) Free from errors 11

QUALITATIVE CHARACTERISTICS Enhancing Qualitative Characteristics

Comparability: information should be presented in a manner that can be compared with the historical information of the same organization, information of the other competitive organizations, information with the industry average figures.

Verifiability knowledgeable and independent observers could reach consensus Materiality Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. Understandability: information should be presented in a manner that can be easily understood by an average man who is having a general idea about business Timeliness Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. 12

ELEMENTS OF FINANCIAL STATEMENTS

There are five elements in the Financial Statements.

Assets Liabilities Equity Income Expenses

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ASSETS. 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.

Main features • Controlled by the enterprise• Past Events• Future economic benefits

ELEMENTS OF FINANCIAL STATEMENTS

Group Work : A Printing Machine, Office Building, employees, elephant, Cash, stationery – pens/clips/pins, teak trees, bees

ELEMENTS OF FINANCIAL STATEMENTS

LIABILITIES. 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. Main features •Present obligations•Transfer economic benefits •Past Transactions or Events

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Group Work - annual reports

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INCOME. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets ordecreases of liabilities that result in increases in equity, otherthan those relating to contributions from equity participants.

EXPENSES. Expenses are decreases in economic benefits during theaccounting period in the form of outflows or depletions ofassets or incurrences of liabilities that result in decreases inequity, other than those relating to distributions to equityparticipants.

Elements of Financial Statements

Group Work - annual reports

ELEMENTS OF FINANCIAL STATEMENTS

EQUITY. The residual interest in the assets of the enterprise after deducting all its liabilities.

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Group Work - annual reports

Basic Accounting equation and double entry system

COMPONENTS OF FINANCIAL STATEMENTS

• Statement of Financial Position • Income Statement• Statement of Comprehensive Income (including other Comprehensive Income)• Statement of Changes in Equity• Statement of Cash flows• Notes

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Group Work - annual reports

Statement of Financial PositionXYZ Group – Statement of Financial position as at 31 December 2011

31 Dec 2011 31 Dec 2010ASSETS Non-current assets Property, Plant and equipment x xGoodwill x xOther intangible assets x xInvestments in associates x xFinancial assets x xTotal non-current assets x xCurrent Assets Inventories x xTrade receivables x xOther current assets x xCash and cash equivalents x xTotal current assets x xTotal assets xx xx

Continued……….

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STATEMENT OF FINANCIAL POSITION 31 Dec 2011

31 Dec 2010

EQUITY AND LIABILITIES Equity attributable to owners of the parentStated capital x xRetained earnings x xOther components of equity

x x

x XNon-controlling interest x xTotal equity x xNon –current liabilities Long –term borrowings x xDeferred tax x xLong –term provision s x xTotal non-current liabilities

x x Continued……….

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STATEMENT OF FINANCIAL POSITION Current liability Trade and other payables

x x

Short-term borrowings

x x

Current portion of long – term borrowing

x x

Current tax payable x xShort-term provisions x xTotal current liabilities

x x

Total liabilities x xTotal equity and liabilities

xx xx

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STATEMENT OF COMPREHENSIVE INCOME 2011 2010

Revenue x xCost of sales (x) (x)Gross profit x xOther income x xDistribution costs x xAdministrative expenses x xOther expenses x xFinance costs x xShare of profit of associates

x x

Profit before tax x xIncome tax expense (x) (x)Profit for the year from continuing operations

x x

Loss for the year from discontinued operations

- (x)

PROFIT FOR THE YEAR x x Continued……….

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STATEMENT OF COMPREHENSIVE INCOME 2011 2010

PROFIT FOR THE YEAR x x

Other comprehensive income:Exchange differences on translating foreign operations

x x

Investments in equity instruments x xCash flow hedges (x) (x)Gains on property revaluation x xActuarial gains (losses) on defined benefit pension plans

(x) x

Share of other comprehensive income of associates

x (x)

Income tax relating to components of other comprehensive income

x (x)

Other comprehensive income for the year, net of tax

(x) x

TOTLA COMPREHENSIVE INCOME FOR THE YEAR

x x Continued………. 23

STATEMENT OF COMPREHANSIVE INCOME

2011 2012TOTAL COMPREHENSIVE INCOME FOR THE YEAR

x x

Profit attributable to Owners of the parent x xNon-controlling interest x x

x xTotal comprehensive income attributable to:Owners of the parent x xNon-controlling interest x x

x xEarnings per share (in currency units)Basic EPS x xDiluted EPS x x 24

Statement of Changes in Equity …..

XYZ Group – Statement of changes in equity for the year ended 31 December 2011S.capital

Retained earnings

Translation

of foreig

n operations

Inve. in

equity instru.

Cash flow hedg

es

Revaluatio

n surpl

us

Total NCI

Total Equity

Balance at 1 Jan 2010 x x x x x x x x xChanges in accounting policy - (x)Restated balance x x x x x x x x xChanges in equity for 2010Dividends

Total Comprehensive Income for the yearBalance at 31 Dec 2010 x x x x x x x x xChanges in equity for 2011Issues of share capital

Dividend

Total comprehensive income for the year

x x x x x x x x

Transfer to retained earnings

Balance at 31 Dec 2011 x x x x x x x x x

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