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Accounting Standard Preparation and the Scope of Conceptual Framework, Study notes of Management Accounting

West Visayas State University (WVSU)Management Accounting

This document encompasses the process in making an accounting standard and the different parts or scope of conceptual framework.

Typology: Study notes

2024/2025

Available from 06/26/2025

monique-s76
monique-s76 🇵🇭

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STANDARD PREPARATION
1. Setting and planning the project agenda
For every five years, the IASB conducts an extensive consultation to define
or redefine international standard-setting priorities and develop its project work
plan. Topics can be added, if necessary, between agenda consultations such as
following post-implementation reviews of Standards; or the IFRS Interpretations
Committee may also request the IASB review an issue.
2. Development and obligation of discussion paper
The IASB's research programme involves the analysis of possible financial
reporting problems by collecting evidence on the nature and extent of the
perceived shortcoming and assessing potential ways to improve financial reporting
or to remedy a deficiency. Also includes how financial reporting is evolving, to
encourage international debate on financial reporting matters. Herein, a discussion
paper is made and seek public comment. This shall help the IASB in decide-making
as only those that are relevant enough will proceed to a proposal for a new or
modified standard.
3. Development and publication of exposure draft
Proposals for amendments or a new Accounting Standard are published in
an exposure draft for public consultation. To gather additional evidence, members
of the IASB and IFRS Foundation technical staff consult with a range of
stakeholders from all over the world, undertaking additional outreach activities
such as meetings, discussion forums, webcasts and podcasts and roundtable
meetings.
4. Development and publication of final accounting standard
After the publication of an exposure draft, the IASB analyzes constituent
feedback, alternatively, may re-expose proposals prior to finalization. Once
deliberations have been finalized, the IASB's technical staff will prepare the final
standard for balloting and voting on by the Board.
5. Post-standard publishing procedure
The IASB must conduct a post-implementation review of each new
standard, usually commence around 2.5-3 years after the effective date of the
pronouncement, to assess whether the Standard is achieving its objective and, if
not, whether any amendments should be considered. As a result of the post-
implementation review, the IASB may start a new research project.
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STANDARD PREPARATION

  1. Setting and planning the project agenda For every five years, the IASB conducts an extensive consultation to define or redefine international standard-setting priorities and develop its project work plan. Topics can be added, if necessary, between agenda consultations such as following post-implementation reviews of Standards; or the IFRS Interpretations Committee may also request the IASB review an issue.
  2. Development and obligation of discussion paper The IASB's research programme involves the analysis of possible financial reporting problems by collecting evidence on the nature and extent of the perceived shortcoming and assessing potential ways to improve financial reporting or to remedy a deficiency. Also includes how financial reporting is evolving, to encourage international debate on financial reporting matters. Herein, a discussion paper is made and seek public comment. This shall help the IASB in decide-making as only those that are relevant enough will proceed to a proposal for a new or modified standard.
  3. Development and publication of exposure draft Proposals for amendments or a new Accounting Standard are published in an exposure draft for public consultation. To gather additional evidence, members of the IASB and IFRS Foundation technical staff consult with a range of stakeholders from all over the world, undertaking additional outreach activities such as meetings, discussion forums, webcasts and podcasts and roundtable meetings.
  4. Development and publication of final accounting standard After the publication of an exposure draft, the IASB analyzes constituent feedback, alternatively, may re-expose proposals prior to finalization. Once deliberations have been finalized, the IASB's technical staff will prepare the final standard for balloting and voting on by the Board.
  5. Post-standard publishing procedure The IASB must conduct a post-implementation review of each new standard, usually commence around 2.5-3 years after the effective date of the pronouncement, to assess whether the Standard is achieving its objective and, if not, whether any amendments should be considered. As a result of the post- implementation review, the IASB may start a new research project.

SCOPE OF THE REVISED CONCEPTUAL FRAMEWORK

  1. The objective of financial reporting The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Decisions relate to: (a) the buying, selling or holding equity and debt instruments; (b) providing or settling loans and other forms of credit; or (c) exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. For decision-making, users assess: (a) the economic resources of the entity, claims against those resources, and prospects for future net cash inflows to the entity; and (b) management’s stewardship of the entity’s economic resources Specific types of information to help external users assess uncertainties  Financial Flexibility- it refers to the ability to use financial resources to adapt to change.  Liquidity and Solvency – Liquidity refers to the availability of cash in the near future after taking account all financial commitments over the period. While, solvency refers to the availability of cash over the longer term to meet financial commitments as they fall due.  Operating Capability – it refers to the ability of the entity to maintain a given physical level of operations.  Investing, Financing and Operating Activities – this information is used as basis for evaluating the ability of the entity to generate cash and cash equivalents and the needs to utilize those cash flows. Limitations of General Purpose Financial Reporting o Do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need such as general economic conditions and expectations, political events and political climate, and industry and company outlooks o Not designed to show the value of a reporting entity; but they provide information to estimate the value of the reporting entity. o May not meet the needs of primary users because of the differences and conflicting information needs and desires of such users; and
  1. Financial statements and the reporting entity Financial statements are the systematic and structured means of communicating financial information of the entity to its stakeholders in order to make informed decisions. A reporting entity is an entity that chooses or is required to prepare financial statements and is not necessarily a legal entity. Types of Financial Statements I. Consolidated Financial Statements Provide financial information of both parent and its subsidiaries as a single reporting entity. II. Unconsolidated Financial Statements Provide financial information of the parent only III. Combined Financial Statements Provide financial information of two or more entities that are not considered as parent and subsidiary. Complete Set of Financial Statements Statement of Financial Position (Balance Sheet) – shows resources of the company, the company’s obligations, and the net difference between assets and liabilities. Statement of Financial Performance (Income Statement) – shows the net assets generated through business operations, the net assets consumed, and the difference between income and expenses. Statement of Cash Flows – shows the amount of cash generated and consumed by the company through the operating, investing, and financing activities. Statement of Changes in Equity – summarizes the changes in each item of equity for a period of time. Notes to Financial Statements – contains supplemental information as well as information such as accounting estimates excluded in the financial statements. Perspective adopted in financial statements and going concern assumption Financial statements provide information about transactions and other events viewed from the perspective of the reporting entity as a whole and are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future.
  2. The elements of financial statements Assets – present economic resources controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Requisites:

a. Economic resource b. Management’s Control c. Resulting from past transactions Example: cash, accounts receivable, land Liabilities – are present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid. Requisites: a. Obligation b. Require transfer of economic benefits c. Specify the terms, parties and conditions of the transfer d. Resulting from past transactions Example: accounts payable, bonds payable, loans payable Equity – the residual interest in the assets of the entity after deducting all its liabilities. Example: common stock, preferred stock, retained earnings Income – increases in assets, or decrease in liabilities, that result in increase in equity. Encompasses both:  Revenue – inflows that arises in the course of ordinary business activities  Gains – inflows that may or may not arise in the course of ordinary business activities Example: sales, fees, disposal of non-current asset Expenses - decrease in assets, or increases in liabilities, that result in decrease in equity. Encompasses both:  Expenses – outflows that arises in the course of ordinary business activities  Losses – outflows that may or may not arise in the course of ordinary business activities Example: Utilities, miscellaneous, loss from fire or flood

a. Fair Value – 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 date. b.Value in use – present value of the cash flows that an entity expects to derive from the use of asset and from the ultimate disposal. c.Fulfilment Value – present value of cash that an entity expects to transfer in paying or settling a liability. d.Current Cost o Current cost of an asset is the cost of an equivalent asset at the measurement date comprising the consideration paid and transaction cost o Current cost of a liability is the consideration that would be received less any transaction cost at measurement date. Selecting a measurement basis In selecting a measurement basis for an asset or liability and for the related income and expense, it is necessary to consider the nature of the information that the measurement basis will produce. In most cases, no single factor will determine which measurement must be implemented. It all boils down on how appropriate and suitable it is for the entity.

  1. Presentation and Disclosure A reporting entity communicates information about its assets, liabilities, equity, income and expenses by presenting and disclosing information in its financial statements. Effective communication of information in financial statements requires: (a) focusing on presentation and disclosure objectives and principles rather than focusing on rules; (b) classifying information in a manner that groups similar items and separates dissimilar items; and (c) aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation. Classification Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for presentation and disclosure purposes. Such characteristics include—but are not limited to—the nature of the item, its role (or function) within the business activities conducted by the entity, and how it is measured.

Offsetting Offsetting occurs when an entity recognizes and measures both an asset and liability as separate units of account, but groups them into a single net amount in the statement of financial position Aggregation Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are included in the same classification.

  1. Concepts of Capital and Capital Maintenance Concepts of Capital  Financial Concept. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. It should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital.  Physical Concept. A physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day. The main concern of users is with the operating capability of the entity. Concepts of Capital Maintenance  Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.  Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.