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CONCEPTUAL FRAMEWORK
&
ELEMENTS IN THE FINANCIAL
STATEMENT
CONCEPTUAL FRAMEWORK
PRACTICE IN MALAYSIA
Framework is a guidance to standard
setting
MASB has to date issued the Proposal
Framework for the Preparation and
Presentation of Financial Statement
This proposed framework is similar to the
one issued by the IASC
CONCEPTUAL FRAMEWORK
PRACTICE IN MALAYSIA (cont)
FINANCIAL STATEMENT
purposes of financial
statement
provide information about the financial position,
performance and cash flows of an enterprise that is
useful to a wide range of users in making economic
decisions
to show the results of managements stewardship of the
resources entrusted to it.
FINANCIAL REPORTING
Process of communicating financial affairs
of an enterprise to interested parties
Qualitative Characteristics
of Financial Statements
understandability
relevance
reliability
comparability
Understandability
Understandability
(cont)
Relevance
Relevance (cont)
To have predictive value, information need not be in the
form of an explicit forecast
The ability to make predictions from financial statements
is enhanced, however, by the manner in which
information on past transactions and events is displayed.
For example, the predictive value of the income
statement is enhanced if unusual, abnormal and
infrequent items of income or expenses are separately
disclosed
Reliability
Comparabilty
Definition of Elements In
Financial Statements
Asset
A resource controlled by the enterprise as a result of
past events & from which future benefits are expected
to flow to the enterprise.
The eco. benefits embodies in asset have the
potential to contribute directly or indirectly to the flow
of cash & cash equivalents to the enterprise.
There are various ways the future economic benefits
may flow into enterprise such as:
Definition of Elements In
Financial Statements cont
Liability
Payment of cash
Transfer of other assets
Provision of services
Replacement of obligation with other obligations
Conversion of the obligation to equity.
Definition of Elements In
Financial Statements cont
Equity
The residual interest in the assets of the enterprise
after deducting all its liabilities.
For disclosure purposes, it may be sub-classified to
show funds contributed by s/holder, retained profits &
other reserves.
Definition of Elements In
Financial Statements cont
Income
Includes both revenue & gains.
Revenue arises in the course of ordinary activities of
enterprise (sales, fees, interest income & rental
income).
Gains not arises from ordinary activities of enterprise,
arising from disposal of non-current assets.
Some gains-unrealized (surplus on revaluation of FA).
Definition of Elements In
Financial Statements cont
Income give rise to increase in eco. benefits during
accounting the period.
These may be in form of
Inflows/enhancements of assets, or
Decrease in liabilities that result in increase in equity.
Definition of Elements In
Financial Statements cont
Expenses
Encompasses losses as well as those expenses that arise in the
course of the ordinary activities of the enterprise.
Expenses arise in course of ordinary activities (cost of sales,
wages and depreciation).
Usually take the form of 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 eco. benefits & as such they are
no different in nature from other expenses.
Recognition
An items is recognized if:
It is probable that any eco. benefit associated with
item will flow to & from the enterprise, &
The item has a cost or value that can be measured
with reliability.
Recognition cont
Recognition of Assets
Recognized when it is probable that future eco.
benefits will flow to the enterprise
The assets has a cost or value that can be measured
reliably.
Recognition of Liabilities
Recognized when it is probable that outflow of eco.
resources will settle present obligation
The amount will measured reliably.
Recognition cont
Recognition of Income
Recognized when increase in future eco. benefits
related to increase in the asset or decrease of liability
has arisen, &
The amount can be measured reliably.
Recognition of Expenses
Recognized when a decrease in future eco. benefits
related to a decrease in asset or increase of liability
has arisen, &
The amount can be measured reliably.
CONSTRAINTS ON
RELEVANT & RELIABLE
INFOMATION
Relevance
Info. which can influence the economic decision by user
is useful.
Thus, useful info. has to be relevant to the decision that
are being made.
Reliable
Info. which are free from errors, bias and represent
faithfully the event & transactions which have occurred is
reliable.
CONSTRAINTS ON
RELEVANT & RELIABLE
INFOMATION
INDUSTRY PRACTICE
ENTERPRISE WITNIN SAME INDUSTRY MAY
PRESENT THE INFO IN A SIMILAR MANNER.
CAPITAL MAINTENANCE
APPROACH
ALSO REFERRED AS THE CHANGE IN EQUITY
APPROACH.
MEASURES INCOME BY TAKING THE DIFFERENCE
BETWEEN THE NET ASSETS OR CAPITAL VALUES
BETWEEN TWO POINTS OF TIME.
CONCERNED WITH HOW AN ENTERPRISE DEFINES
THE CAPITAL THAT IT SEEKS TO MAINTAIN.
CAPITAL MAINTENANCE
APPROACH (cont)
CLASSIFIED BY 2 CONCEPTS :
FINANCIAL CAPITAL MAINTENANCE
PHYSICAL CAPITAL MAINTENANCE
Underlying Assumptions
Accruals
Transactions and events are recognized when
they occur and are recorded and reported in
the financial statements in the period to which
they relate irrespective of whether cash was
received or paid.
Revenue are accrued when earned
Realization
Expense are accrued when incurred Matching
Periodicity
Economic activities of an enterprise are divided into
time periods; usually yearly.
To determine profit
Divide entities life into periods
Income
What is income?
how much wealthier a person/entity has become in
given period; broad perspective
Max value they can consume during a week n still
expect to be as well off at the end of the week as they
were at the beginning; John Hicks
Increase in net worth, after removing additional
capital contribution/ withdrawal effects by owner from
initial capital investment; Barton
No definition in SAC 4, instead define revenue n
expense.
Income cont
Business income
The excess of the price ultimately paid by
individuals and other entities for the firms
output over the expense incurred by the firm.
The reward paid by the individuals to
business entities for their productivity, which
represent business income, and therefore it is
the rewardwhich acts as the motivating
force in a free market economy; Bedford
Matching Principle
Matching principle is critical importance in
historical cost accounting.
Provide guides in deciding:
Which costs to be expensed n matched
against revenue for the period
Which costs remain unexpired, recorded as
asset in balance sheet
Immediate recognition
When there is no possibilities of both 1st and 2nd
principle.