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MASBs PROPOSED

CONCEPTUAL FRAMEWORK
&
ELEMENTS IN THE FINANCIAL
STATEMENT

Why developing country need


conceptual framework?
To suit the particular need of Malaysian
economy in developing standards
To incorporate culture, political (ideology) and
religion
Issue arise that has significant impact to
Malaysia but not an agenda to IASC
The resolution of issue by IASC may have
potential adverse effect on the national
development

Why developing country need


conceptual framework? (cont)
Several legislation bodies in Malaysia e.g. Bank
Negara guideline etc, have an impact on
accounting standard
Impact on some issue are different it must be
considered in standard setting process
Selective treatment of developing countries on
issue due to different regional or country
characteristic

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)

The Framework deals with the following:


Definition of financial statements
Purposes of financial statements
Qualitative characteristic of financial information
Identification, definition and recognition of the
elements of the financial statement
- Concepts of capital and capital maintenance
- Basis for the measurement of the elements of
financial statement

FINANCIAL STATEMENT

a structured financial representation of the financial position and


the transactions undertaken by an enterprise

a complete set of financial statements comprises:


a) a balance sheet;
b) an income statement;
c) a statement of changes in equity showing either:
i) all changes in equity; or
ii) changes in equity other than those arising from
transactions with equity holders acting in their capacity as
equity holders;

d) a cash flow statement


e) notes, comprising a summary of significant
accounting policies and other explanatory notes

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

purposes of financial reporting


are to provide :

information that is useful in investment


and credit decisions
information that is useful in assessing
cash flow prospects
information about enterprise resources,
claims to those resources, and changes
in them

Qualitative Characteristics
of Financial Statements
understandability
relevance
reliability
comparability

Understandability

Decision makers vary widely in the types of decisions


they make, the methods of decision-making they employ,
the information they already possess or can obtain from
other sources, and their ability to process the information

As such, for information to be useful there must be a


connection (linkage) between these users and the
decisions they make

This linkage is served by the communication of


appropriate information in understandable form.

Understandability
(cont)

This link, understandability, is the quality of information


that permits reasonably informed users to perceive its
significance

For this purpose, users are assumed to have a


reasonable knowledge of business and economic
activities and accounting and a willingness to study the
information with reasonable diligence

However, information about complex matters that should


be included in the financial statements because of its
relevance to the economic decision-making needs of
users should not be excluded merely on the grounds
that it may be too difficult for certain users to understand

Relevance

To be useful, information must be relevant to the decisionmaking needs of users

To be relevant, accounting information must be capable of


making a difference in a decision, by either providing
information not provided elsewhere, reinforcing information
provided elsewhere, or even correcting such other information
contained elsewhere

Information has the quality of relevance when it influences the


economic decisions of users by helping them evaluate past,
present or future events (predictive value) or confirming, or
correcting, their past evaluations (feedback value)

Information about financial position and past performance is


frequently used as the basis for predicting future financial
position and performance

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

Accounting information is reliable to the extent that users can


depend on it to represent the economic conditions or events that
it purports to represent.

Reliability is the quality of information that gives assurance that it


is reasonably free of error and bias and can be depended upon
by users to represent faithfully that which it either purports to
represent or could reasonably be expected to represent.

Information may be relevant but so unreliable in nature or


representation that its recognition may be potentially misleading.

To be reliable, accounting information must possess six key


characteristics: verifiability, faithful representation, substance
over form, neutrality, prudence, and completeness.

Comparabilty

Information that has been measured and reported in a similar


manner for different enterprises is considered comparable.

Comparability enables users to identify the real similarities and


differences in economic phenomena because these differences
and similarities have not been obscured by the use of noncomparable methods of accounting.

Resource allocation decisions involve evaluation of alternatives,


and a valid evaluation can be made only if comparable
information is available.
Additionally, users must be able to compare the financial
statements of an enterprise through time in order to identify
trends in its financial position and performance.

Hence, the measurement and display of the financial effect of like


transactions and other events must be carried out in a consistent
way throughout an enterprise and over time for that enterprise
and in a consistent way for different enterprises.

The Elements of Financial


Statements
FS portray the financial effects of transactions by
grouping them into broad classes according to their
economic characteristics.
Elements directly related to measurement of financial
position in BS are:
Assets
Liabilities
Equity

Elements directly related to measurement of


performance in IS are:
Income
Expenses

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:

Used in the production of goods/services


Exchanged for the other assets
Used to settle liabilities
Distributed to owners of the enterprise

Definition of Elements In
Financial Statements cont

Liability

Is the 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
eco. benefits.
The essential element is that-there is a present
obligation. The obligation may be settled by:

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

HOWEVER, SOMETIME THERE MIGHT BE MORE


OF RELEVANT THAN RELIABLITY OR VICEVERSA.
RELEVANT VS RELIABLE
WHICH ONE IS SUPERIOR???????

RELEVANCE VS. RELIABLE


THIS 2 ELEMENTS MUST BE BALANCE
BETWEEN EACH OTHER.
CONSIDERATION AFFECT THE BALANCE
BETWEEN RELEVANT AND RELIABLE.
TIMELINESS
BALANCE BETWEEN BENEFIT AND COST
INDUSTRY PRACTICE
BALANCE BETWEEN QUALITATIVE
CHARACTERISTICS
TRUE AND FAIR VIEW

RELEVANCE VS. RELIABLE


(cont)
TIMELINESS
DELAY IN REPORTING INFO MAY LOSE IT
RELEVANCE BUT IT IS RELIABLE BECAUSE IT
TAKEN INTO ACCOUNT ALL ASPECTS OF A
TRANSACTION OR EVENTS.
CONVERSELY, PROVIDE INFORMATION ON A
TIMELY BASIS MAY EXCLUDE THE ASPECTS OF A
TRANSACTION OR EVENTS , THUS IMPAIRED
RELIABILITY.

RELEVANCE VS. RELIABLE


(cont)
BALANCE BETWEEN BENEFIT AND COST
INFO NOT COST FREE & BENEFIT MUST
OUTWEIGHT COST.

INDUSTRY PRACTICE
ENTERPRISE WITNIN SAME INDUSTRY MAY
PRESENT THE INFO IN A SIMILAR MANNER.

RELEVANCE VS. RELIABLE


(cont)
BALANCE BETWEEN QUALITATIVE
CHARACTERISTICS
A BALANCING, OR TRADE-OFF, BETWEEN
QUALITATIVE CHARACTERISTICS IS OFTEN
NECESSARY.
THE AIM IS TO ACHIEVE AN APPROPRIATE
BALANCE AMONG CHARACTERISTICS IN ORDER
TO FULFILL THE PURPOSE OF FINANCIAL
STATEMENTS.

RELEVANCE VS. RELIABLE


(cont)
TRUE AND FAIR VIEW
WHEN THE QUALITATIVE CHARACTERISTICS AND
GAAP ARE FAITHFULLY APPLIED.
THE FINANCIAL STATEMENTS IS ASSUMED TO
PRESENT THE TRUE AND FAIR VIEW OF THE
PERFORMANCE AND POSITION OF AN
ENTERPRISE.

CONCEPTS OF CAPITAL AND


CAPITAL MAINTENANCE
CONCEPTS OF CAPITAL:
THE NET ASSET OF AN ENTERPRISE.
AMOUNT OF MONEY CONTRIBUTED BY THE
OWNERS PLUS THE INCREASE IN THE NET ASSET
WHICH REMAIN IN THE ENTERPRISE.

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

FINANCIAL CAPITAL MAINTENANCE


PROFIT IS EARNED ONLY IF THE FINANCIAL AMOUNT
OF THE NET ASSETS AT THE END OF THE PERIOD
EXCEEDS THE FINANCIAL AMOUNT OF NET ASSETS
AT THE BEGINNING OF THE PERIOD, AFTER
EXCLUDING ANY DISTRIBUTIONS TO, AND
CONTRIBUTIONS FROM, OWNERS DURING THE
PERIOD.
MEASURED IN EITHER NOMINAL MONETARY UNITS
OR UNITS OF CONSTANT PURCHASING POWER.

PHYSICAL CAPITAL MAINTENANCE


PROFIT IS EARNED ONLY IF THE PHYSICAL
PRODUCTIVE CAPACITY (OR OPERATING
CAPABILITY) OF THE ENTERPRISE (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.
ADJUSTMENT ARE MADE TO THE NET ASSET FOR
ALL PRICE CHANGE.

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

Underlying Assumptions Cont


Going Concern
Fin sttmnt are prepared on the assumption that the
enterprise will continue to be in operation for the
foreseeable future.
Historical cost application

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

3 principles; cause n effect, systematic n


rational allocation, immediate recognition.

Matching Principle cont


Cause n effect
Decide the used up services n goods that have aided
in the revenue creation for that period, trough
reasonable observation.
Example; sales commissions, cost of goods sold.

Systematic n rational allocation


Allocating cost over time

Immediate recognition
When there is no possibilities of both 1st and 2nd
principle.

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