FRAMEWORK FOR THE PREPARATION OF THE FINANCIAL STATEMENTS by gI9lrI

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									                  THE FRAMEWORK FOR THE
    PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

                           HISTORY OF THE FRAMEWORK

April 1989       Framework for the Preparation and Presentation of Financial Statements
                 (the Framework) was approved by the IASC Board

July 1989        Framework was published

April 2001       Framework adopted by the IASB.

                            RELATED INTERPRETATIONS

         Issues Relating to The Framework that IFRIC Did Not Add to Its Agenda


             AMENDMENTS UNDER CONSIDERATION BY THE IASB

         IASB Project on Conceptual Framework.



                 PURPOSE AND STATUS OF THE FRAMEWORK

The IASB's Framework for the Preparation and Presentation of Financial Statements
describes the basic concepts by which financial statements are prepared. The
Framework serves as a guide to the Board in developing accounting standards and as
a guide to resolving accounting issues that are not addressed directly in an International
Accounting Standard or International Financial Reporting Standard or Interpretation.

In the absence of a Standard or an Interpretation that specifically applies to a
transaction, management must use its judgement in developing and applying an
accounting policy that results in information that is relevant and reliable. In making that
judgement, IAS 8.11 requires management to consider the definitions, recognition
criteria, and measurement concepts for assets, liabilities, income, and expenses in the
Framework. This elevation of the importance of the Framework was added in the 2003
revisions to IAS 8.

                                THE IASB FRAMEWORK



The Framework:

         Defines the objective of financial statements;
         Identifies the qualitative characteristics that make information in financial
         statements useful; and
         Defines the basic elements of financial statements and the concepts for
         recognising and measuring them in financial statements. [Framework,
         paragraph 1, hereafter abbreviated F.1]

General Purpose Financial Statements
The Framework addresses general purpose financial statements that a business
enterprise (including a state-owned business enterprise) prepares and presents at least
annually to meet the common information needs of a wide range of users external to
the enterprise. Therefore, the Framework does not necessarily apply to special purpose
financial reports such as reports to tax authorities, reports to governmental regulatory
authorities, prospectuses prepared in connection with securities offerings, and reports
prepared in connection with business combinations.

Users and their Information Needs

The principal classes of users of financial statements are present and potential
investors, employees, lenders, suppliers and other trade creditors, customers,
governments and their agencies and the general public. All of these categories of users
rely on financial statements to help them in decision making. [F.9]

The Framework also concludes that because investors are providers of risk capital to
the enterprise, financial statements that meet their needs will also meet most of the
general financial information needs of other users. Common to all of these user groups
is their interest in the ability of an enterprise to generate cash and cash equivalents and
of the timing and certainty of those future cash flows. [F.10]

The Framework notes that financial statements cannot provide all the information that
users may need to make economic decisions. For one thing, financial statements show
the financial effects of past events and transactions, whereas the decisions that most
users of financial statements have to make relate to the future. Further, financial
statements provide only a limited amount of the non-financial information needed by
users of financial statements.

While all of the information needs of these user groups cannot be met by financial
statements, there are information needs that are common to all users, and general
purpose financial statements focus on meeting these needs.

Responsibility for Financial Statements

The management of an enterprise has the primary responsibility for preparing and
presenting the enterprise's financial statements. [F.11]

The Objective of Financial Statements

The objective of financial statements is to provide information about the financial
position, performance and changes in financial position of an enterprise that is useful to
a wide range of users in making economic decisions. [F.12-14]

Financial Position

The financial position of an enterprise is affected by the economic resources it controls,
its financial structure, its liquidity and solvency, and its capacity to adapt to changes in
the environment in which it operates. [F.16]

The balance sheet presents this kind of information. [F.19]

Performance

Performance is the ability of an enterprise to earn a profit on the resources that have
been invested in it. Information about the amounts and variability of profits helps in
forecasting future cash flows from the enterprise's existing resources and in forecasting
potential additional cash flows from additional resources that might be invested in the
enterprise. [F.17]

The Framework states that information about performance is primarily provided in an
income statement. [F.19] IAS 1 adds a fourth basic financial statement, the statement
showing changes in equity.

Changes in Financial Position

Users of financial statements seek information about the investing, financing and
operating activities that an enterprise has undertaken during the reporting period. This
information helps in assessing how well the enterprise is able to generate cash and
cash equivalents and how it uses those cash flows. [F.18]

The cash flow statement provides this kind of information. [F.19]

Notes and Supplementary Schedules

The financial statements also contain notes and supplementary schedules and other
information that (a) explains items in the balance sheet and income statement, (b)
discloses the risks and uncertainties affecting the enterprise, and (c) explains any
resources and obligations not recognised in the balance sheet. [F.21]

Underlying Assumptions

The Framework sets out the underlying assumptions of financial statements:

         Accrual Basis. The effects of transactions and other events are recognised
         when they occur, rather than when cash or its equivalent is received or paid,
         and they are reported in the financial statements of the periods to which they
         relate. [F.22]
         Going Concern. The financial statements presume that an enterprise will
         continue in operation indefinitely or, if that presumption is not valid, disclosure
         and a different basis of reporting are required. [F.23]

Qualitative Characteristics of Financial Statements

These characteristics are the attributes that make the information in financial
statements useful to investors, creditors, and others. The Framework identifies four
principal qualitative characteristics: [F.24]

         Understandability
         Relevance
         Reliability
         Comparability

Understandability

Information should be presented in a way that is readily understandable by users who
have a reasonable knowledge of business and economic activities and accounting and
who are willing to study the information diligently. [F.25]
Relevance

Information in financial statements is relevant when it influences the economic
decisions of users. It can do that both by (a) helping them evaluate past, present, or
future events relating to an enterprise and by (b) confirming or correcting past
evaluations they have made. [F.26-28]

Materiality is a component of relevance. Information is material if its omission or
misstatement could influence the economic decisions of users. [F.29]

Timeliness is another component of relevance. To be useful, information must be
provided to users within the time period in which it is most likely to bear on their
decisions. [F.43]

Reliability

Information in financial statements is reliable if it is free from material error and bias and
can be depended upon by users to represent events and transactions faithfully.
Information is not reliable when it is purposely designed to influence users' decisions in
a particular direction. [F.31-32]

There is sometimes a tradeoff between relevance and reliability - and judgement is
required to provide the appropriate balance. [F.45]

Reliability is affected by the use of estimates and by uncertainties associated with items
recognised and measured in financial statements. These uncertainties are dealt with, in
part, by disclosure and, in part, by exercising prudence in preparing financial
statements. Prudence is the inclusion of a degree of caution in the exercise of the
judgements needed in making the estimates required under conditions of uncertainty,
such that assets or income are not overstated and liabilities or expenses are not
understated. However, prudence can only be exercised within the context of the other
qualitative characteristics in the Framework, particularly relevance and the faithful
representation of transactions in financial statements. Prudence does not justify
deliberate overstatement of liabilities or expenses or deliberate understatement of
assets or income, because the financial statements would not be neutral and, therefore,
not have the quality of reliability. [F.36-37]

Comparability

Users must be able to compare the financial statements of an enterprise over time so
that they can identify trends in its financial position and performance. Users must also
be able to compare the financial statements of different enterprises. Disclosure of
accounting policies is essential for comparability. [F.39-42]

The Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics. These
broad classes are termed the elements of financial statements.

The elements directly related to financial position (balance sheet) are: [F.49]

         Assets
         Liabilities
         Equity

The elements directly related to performance (income statement) are: [F.70]

         Income
         Expenses

The cash flow statement reflects both income statement elements and changes in
balance sheet elements. [F.47]

Definitions of the elements relating to financial position

         Asset. An asset is a resource controlled by the enterprise as a result of past
         events and from which future economic benefits are expected to flow to the
         enterprise. [F.49(a)]
         Liability. A liability is a present obligation of the enterprise arising from past
         events, the settlement of which is expected to result in an outflow from the
         enterprise of resources embodying economic benefits. [F.49(b)]
         Equity. Equity is the residual interest in the assets of the enterprise after
         deducting all its liabilities. [F.49(c)]

Definitions of the elements relating to performance

         Income. Income is increases in economic benefits during the accounting
         period in the form of inflows or enhancements of assets or decreases of
         liabilities that result in increases in equity, other than those relating to
         contributions from equity participants. [F.70]
         Expense. Expenses are decreases in economic benefits during the
         accounting period in the form of outflows or depletions of assets or incurrences
         of liabilities that result in decreases in equity, other than those relating to
         distributions to equity participants. [F.70]

The definition of income encompasses both revenue and gains. Revenue arises in the
course of the ordinary activities of an enterprise and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent. Gains
represent other items that meet the definition of income and may, or may not, arise in
the course of the ordinary activities of an enterprise. Gains represent increases in
economic benefits and as such are no different in nature from revenue. Hence, they are
not regarded as constituting a separate element in the IASC Framework. [F.74]

The definition of expenses encompasses losses as well as those expenses that arise in
the course of the ordinary activities of the enterprise. Expenses that arise in the course
of the ordinary activities of the enterprise include, for example, cost of sales, wages and
depreciation. They usually take the form of an outflow or depletion of assets such as
cash and cash equivalents, inventory, property, plant and equipment. Losses represent
other items that meet the definition of expenses and may, or may not, arise in the
course of the ordinary activities of the enterprise. Losses represent decreases in
economic benefits and as such they are no different in nature from other expenses.
Hence, they are not regarded as a separate element in this Framework. [F.78]

Recognition of the Elements of Financial Statements

Recognition is the process of incorporating in the balance sheet or income statement an
item that meets the definition of an element and satisfies the following criteria for
recognition: [F.82-83]

         It is probable that any future economic benefit associated with the item will
         flow to or from the enterprise; and
         The item's cost or value can be measured with reliability.

Based on these general criteria:

         An asset is recognised in the balance sheet when it is probable that the future
         economic benefits will flow to the enterprise and the asset has a cost or value
         that can be measured reliably. [F.89]
         A liability is recognised in the balance sheet when it is probable that an
         outflow of resources embodying economic benefits will result from the
         settlement of a present obligation and the amount at which the settlement will
         take place can be measured reliably. [F.91]
         Income is recognised in the income statement when an increase in future
         economic benefits related to an increase in an asset or a decrease of a liability
         has arisen that can be measured reliably. This means, in effect, that
         recognition of income occurs simultaneously with the recognition of increases
         in assets or decreases in liabilities (for example, the net increase in assets
         arising on a sale of goods or services or the decrease in liabilities arising from
         the waiver of a debt payable). [F.92]
         Expenses are recognised when a decrease in future economic benefits
         related to a decrease in an asset or an increase of a liability has arisen that
         can be measured reliably. This means, in effect, that recognition of expenses
         occurs simultaneously with the recognition of an increase in liabilities or a
         decrease in assets (for example, the accrual of employee entitlements or the
         depreciation of equipment). [F.94]

Measurement of the Elements of Financial Statements

Measurement involves assigning monetary amounts at which the elements of the
financial statements are to be recognised and reported. [F.99]

The Framework acknowledges that a variety of measurement bases are used today to
different degrees and in varying combinations in financial statements, including: [F.100]

         Historical cost
         Current cost
         Net realisable (settlement) value
         Present value (discounted)

Historical cost is the measurement basis most commonly used today, but it is usually
combined with other measurement bases. The Framework does not include concepts or
principles for selecting which measurement basis should be used for particular
elements of financial statements or in particular circumstances. The qualitative
characteristics do provide some guidance, however. [F.101]

								
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