CHAPTER 2:
Conceptual
Accounting
Framework
© Ediciones Pirámide
BEYOND FIGURES: Introduction to Financial Accounting
CAMACHO-MIÑANO, M.M.; AKPINAR, M.; RIVERO-
MENÉNDEZ, M.J.; URQUIA.GRANDE, E. and ESKOLA,
A. (2012).
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Financial accounting 1.Chapter 2, Apuntes de Contabilidad Financiera
Asignatura: Contabilidad Financiera, Profesor: maria del mar camacho, Carrera: Administración y Dirección de Empresas, Universidad: UCM
Tipo: Apuntes
2013/2014
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CHAPTER 2:
Conceptual
Accounting
Framework
BEYOND FIGURES: Introduction to Financial Accounting^ © Ediciones Pirámide
CAMACHO-MIÑANO, M.M.; AKPINAR, M.; RIVERO- MENÉNDEZ, M.J.; URQUIA.GRANDE, E. and ESKOLA, A. (2012).
MOTIVATION OF THE CHAPTER 2
© Ediciones PirámideBEYOND FIGURES: Introduction to Financial Accounting
ANGRY BIRDS DEVELOPER SET FOR STOCK MARKET LAUNCH
Have you ever played this game? Do you know this company? Do you think this company should launch into the Stock Market? What accounting standards do you think this company is using? What accounting standards should this company apply if it wants to quote in the Stock Market?
Index
2.1. Accounting framework
2.2. The conceptual accounting framework: purpose and status
2.3. Accounting framework in Europe
2.4. Spanish accounting conceptual framework
2.5. Finnish accounting conceptual framework
BEYOND FIGURES: Introduction to Financial Accounting^ © Ediciones Pirámide
2.1. Accounting framework
- The conceptual framework is the “why, who, what and how” of the financial and accounting reporting.
- The conceptual framework describes the nature, function and boundaries within which financial accounting and reporting operate.
- The objective of the conceptual framework is to provide information about the company’s financial position, performance and changes in the financial position useful for the economic decision making.
- It is like rules of “accounting game” in the same sense as rules in any sports or play.
- The aim of the conceptual framework is to get the true and fair view of financial information in order to make decisions. The conceptual framework will influence: asset definition, leasing, sale and lease back, sale and purchase agreement, implicit interest, financial instruments classifications, consolidation…
BEYOND FIGURES: Introduction to Financial Accounting^ © Ediciones Pirámide
2.3. Accounting framework in Europe
© Ediciones Pirámide
OBJECTIVE
QUALITATIVECHARACTERISTICS
ENHANCEQUALITATIVE CHARACTERISTICS
CONSTRAINTS
ASSUMPTIONS
ELEMENTS
groups for their economic decision making^ Provide useful information to various user
Assets (^) Liabilities Equity Revenue Income- Expenses
Balance among qualitative characteristics^ Benefits versus^ costs
Accrual Accounting^ Concern^ Going
Understandability
representation^ Faithful^ Relevance
Verifiability Timeliness Comparability
2.4. Spanish Accounting framework
The Spanish accounting standards are collected in the Plan General Contable- (PGC-2007 or Spanish GAAP) following the IAS philosophy. Its structure is the following: 1.- FINANCIAL STATEMENTS. TRUE AND FAIR VIEW
2.- INFORMATION REQUIREMENTS TO INCLUDE IN FINANCIAL STATEMENTS
3.- ACCOUNTING PRINCIPLES
4.- ELEMENTS OF FINANCIAL STATEMENTS
5.- REGISTRATION CRITERIA OR ACCOUNTING RECOGNITION OF FINANCIAL STATEMENTS ELEMENTS
6.- VALUATION CRITERIA
© Ediciones Pirámide
BALANCE SHEET
CHANGES IN EQUITY
INCOME STATEMENT
STATEMENT OF CASH FLOWS
EXPLANATORY NOTES
ASSETS LIABILITIES EQUITY REVENUES^ EXPENSES
Fuente: Rodriguez y otros (2005, 35)
FINANCIAL SITUATION INCOME
F
F
S
S
E L
10
PART 2. INFORMATION REQUIREMENTS FOR FINANCIAL STATEMENTS
RELEVANT: useful to make decisions. “ The Financial Statements should show all the RISKS the company is facing”
RELIABILITY: without mistakes and biases.
“… the company should include in its financial statements all the data that can determine a decision making, without omission or misstatement…”
COMPARABILITY: over time and between companies.
(look in www.iasb.org the IASB taxonomy for XBRL)
INTEGRITY, CONSISTENCY AND CLARITY: full information, consistency
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- The assumption that ordinarily an entity persists indefinitely. This principle implies that a company will use its existing resources to fulfill its general business needs
Going Concern
EXAMPLE: When a company is under liquidation (to close down), then, it does not have to apply this requirement of going concern. It has to apply liquidation cost, not market price.
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- The Spanish Accounting regulation establishes the accrual basis principle for the company's application. This way the companies have to recognize the impact of transactions in the financial statements for the period when revenues and expenses occur.
Accrual basis
EXAMPLE: The telephone expenses of one month (December 2009) should be registered in the 2009 exercise although they will be paid on January
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- Profits should be registered in the year in which they have been obtained.
- Losses must be registered when they are expected.
Prudence / Faithfulness
EXAMPLE: A company has a land that cost 100,000 €. a) If its market value is now 120,000 € it cannot register a profit until it has been obtained, that is until the company has sold the land. b) If its market value is 90,000 €, the company must register the likely loss.
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- The company cannot offset assets with liabilities in
the Balance Sheet or expenses and revenues in the
Income Statement.
Offsetting
EXAMPLE: In order not to omit information, if company “A” is entitled to collect invoices, and has liabilities towards company “B”, they must appear as separate elements in the Balance Sheet.
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PART 4 FINANCIAL STATEMENTS ELEMENTS
ASSETS: Goods, rights, economic resources LIABILITIES: Obligations to pay NET EQUITY: difference between assets and liabilities. Owners’ wealth
REVENUES: increases in Equity EXPENSES: decreases in Equity
WEALTH FINANCIAL Situation
WEALTH ECONOMIC Situation
‡ partner's stock
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Financial Statements Elements
- ASSETS: economic resources owned by the company expected to help to generate future cash to the company
- LIABILITIES: economic obligations
- EQUITY: owner's claim on the organization
ASSETS = LIABILITIES + EQUITY
ACCOUNTING BASIC EQUATION
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