Course : ACCT8002 – Corporate Reporting

Period : September 2017

Financial Accounting Theories

Professional and Ethical Duties
of Accountants
Session 01

Dewi Fitriasari, Ph.D., CSRA, CMA.

Session learning objectives:
Financial Accounting Theories:
•Explain the valuation models adopted by standard setters
•Discuss the use of an accounting framework in underpinning th
e production of accounting standards
•Identify the relationship between accounting theory and practic
e
Professional and Ethical Duties of Accountants:
•Discuss the ethical and professional issues in advising on corpor
ate reporting.
•Discuss the relevance and importance of ethical and profession
al issues in complying with accounting standards.
 Conceptual Framework:
Why do we need it?

• A conceptual framework is a set of theoretical

principles and concepts that underlie the
preparation and presentation of financial
statements.
• If no conceptual framework existed, then it is
more likely that accounting standards would be
produced on a haphazard basis as particular
issues and circumstances arose.
• These accounting standards might be
inconsistent with one another, or perhaps even
contradictory.
 The purpose of conceptual
framework
• Assist in the development of future accounting
standards and in the review of existing standards.
• Provide a basis for reducing the number of
alternative accounting treatments permitted by
international standards.
• Assist national standard setters in developing
national standards.
• Assists preparers of financial statements in
applying international standards and dealing with
issues not covered by international standards.
 The purpose of conceptual
framework
• Assist auditors in forming an opinion whether
financial statements conform to international
standards.
• Assist users of financial statements in
interpreting the information contained in
financial statements complying with
international standards.
• Provide information about the IASB’s
approach to setting international standards.
 The objective of financial
reporting

The objective of financial reporting is to

provide information about the reporting
entity that is useful to existing and
potential investors, lenders and other
creditors in making decisions about
providing resources to the entity.
 Underlying assumptions
The framework identifies one underlying
assumption governing the preparation of financial
statements which is:
•Going Concern
The Going Concern basis assumes that the entity
has neither the need nor the intention to liquidate
or curtail materially the scale of its operations.
In previous versions of the Framework, accruals was
also regarded as a fundamental assumption.
Although it is still referred to within the Framework,
it is no longer an underlying assumption.
 Useful financial information:
The qualitative
characteristics
The
framework identifies two fundamental qualitative
characteristics of useful financial information:
1. Relevance:
•Information considered as relevant when it makes a
difference on the decision making made by the users
of the information
•It must have predictive value or confirmatory value
•supported by materiality considerations in which the
omission or misstatement of the information can
influence the decisions made by the users of the
information
 Useful financial information:
The qualitative
characteristics
2. Faithful representation:
•Information to be regarded as faithfully
represented when:
•It is complete
•It is neutral, and
•It is free from error
 Four enhancing qualitative
characteristics of useful
financial information
1. Comparability:
•Information can be compared with similar
information about other entities or even the
same entity over periods of time. To do so, there
must be:
•Consistency of methodology, approach or prese
ntation helps to achieve comparability
of financial information.
•Permitting different accounting treatments for
similar items is likely to reduce comparability.
 Four enhancing qualitative
characteristics of useful
financial information
2. Verifiability
•Verifiability means that different,
knowledgeable and independent observers
could reach consensus, although not necessarily
complete agreement, that a particular
presentation of an item.
•Or items is faithful representation.
•Verifiability of financial information provides
assurance to users regarding its credibility and
reliability.
 Four enhancing qualitative
characteristics of useful
financial information
3. Timeliness:
•Information should be made available to users
within a timescale which is likely to influence
their decisions.
4. Understandability:
•Understandability is enhanced if information is
classified, characterised and presented clearly &
concisely.
 The cost constraint

• The costs incurred in reporting financial information a

re justified by the benefits that the information brings
to its users.
 The elements of financial
statements
• An asset is 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.

• A liability is 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
 The elements of financial
statements

• Equity is the residual interest in an entity’s

assets after deducting all its liabilities.
• Income is the increase in economic benefits
during the accounting period.
• Expenses are decreases in economic benefits
during the accounting period.
 Recognition of the elements
in financial statements
An item should be recognised in the
financial statements if:
• it meets one of the definitions of an element
• it is probable that any future economic benefit

associated with the item will flow to or from

the entity
• the item can be measured at a monetary
amount (cost or value) with
sufficient reliability
 The recognition of assets and
liabilities falls into three stages

• Initial recognition (e.g. the purchase of a non­

current asset)
• Subsequent re-measurement (e.g. revaluation
of the above asset)
• de-recognition (e.g. sale of the asset)
 Measurements of the
elements
The Framework identifies four possible measurement
bases:
1. Historical cost
2. Current cost
3. Realisable value
4. Present value
 Fair value measurement
(IFRS 13)
The fair value of an asset or a liability may be
required to be measured in a variety of circumstances
as follows:
•Fair value upon initial recognition arises when a
reporting standard requires fair value to be measured
upon initial recognition.
•For example, IFRS 3 Business Combinations
(Revised) requires that the separable net assets of the
acquired entity are measured at fair value to
determine goodwill at acquisition.
 Fair value measurement
(IFRS 13)

• Fair value on a recurring basis arises when

a reporting standard requires fair value to
be measured on an ongoing basis.
• Example of this include IAS 40 Investment
Property, or IFRS 9 Financial Instruments
which require some financial assets and
liabilities to be measured at fair value at
each reporting date.
 Fair value measurement
(IFRS 13)
• Fair value on a nonrecurring basis arises
when a reporting standard requires fair
value to be measured at fair value only
in certain specified circumstances.
• For example, IFRS 5 requires that assets
classified as held for sale are measured
at fair value less costs to sell.
 The basis of fair value
measurement
1.
The asset or liability to be measured may be an
individual asset (e.g. plot of land) or liability, or a
group of assets and liabilities (e.g. a cash
generating unit or business), depending upon
exactly what is required to be measured.
 The basis of fair value
measurement
2.
The measurement should reflect the price at
which an orderly transaction between
willing market participants would take place
under current market conditions. It should not b
ea
distress transaction.
 The basis of fair value
measurement
3.
The value of the asset of liability should take
into account the assumptions of market
participants, who will generally want to
maximise their own best interests.
The valuation must therefore reflect the
characteristics of the asset or liability (age,
condition, location and restrictions on use or
sale) that are relevant to market participants.
 The basis of fair value
measurement
4.
The entity must determine the market in which
an orderly transaction would take place
This will normally be the principal
market, which is the market in which the
transaction would normally take place.
In the absence of a principal market, the most
advantageous market should be used.
 The basis of fair value
measurement
5.
Fair value is not adjusted for transaction
costs because these are specific to the
transaction and not a characteristic of the asset
or liability
 Fair value hierarchy

• Level 1
Inputs comprise quoted prices (‘observable’) in
active markets for identical assets and liabilities
at the measurement date.

• Level 2
Inputs are observable inputs, other than those
included within Level 1 above, which are
observable directly or indirectly.
 Fair value hierarchy

• Level 3
Inputs are unobservable inputs for an asset or
liability, based upon the best information
available, including information that may be
reasonably available relating to market
participants.
END OF SESSION 1