SESSION 2
The Conceptual
Framework
National company law
National accounting standards
GAAP (e.g.
Local stock exchange requirements (HOSE, NYSE, LSE)
IFRSs)
Non-mandatory
International accounting standards (WTO, TPP)
sources
Statutory requirements in other countries (France, Soviet union, US)
Accruals basis
Accounting basis
Going concern
Underlying assumption
Nature
Relevance
Materiality
Fundamental
Complete
Faithful
Substance
Qualitative
Neutral
representation
over form
characteristics of
Free from error
useful financial
Comparability
information
Verifiability
Conceptual
Enhancing
Timeliness
framework
Understandability
Cost constraint
Pervasive and subjective constraint
Financial position
Probable economic benefit
Recognition
Profit or Loss
Measured with reliability
Historical cost
Elements of financial
Current cost (Replacement cost)
statements
Realisable value
Measurement
Fair value
Settlement value
Present value of future cash flows (value in use)
Links
Accounting regulations in Vietnam
http://ketoanthienung.org/tin-tuc/van-ban-phapluat-ke-toan-moi-nhat.htm
Vietnamese Accounting Standards
https://thuvienphapluat.vn/tintuc/vn/thoi-su-phapluat/chinh-sach-moi/7051/he-thong-26-chuan-mucke-toan-viet-nam
International Financial Reporting Standards
http://www.ifrs.org/issued-standards/list-ofstandards/
1 Conceptual framework and GAAP
A conceptual framework: a statement of generally
accepted theoretical principles which form the
frame of reference for financial reporting.
A conceptual framework will form the theoretical
basis for determining which events should be
accounted for, how they should be measured and
how they should be communicated to the user.
Users of accounting information consist of
investors, employees, lenders, suppliers and other
trade creditors, customers, government and their
agencies and the public.
Generally Accepted Accounting
Practice (GAAP)
GAAP signifies all the rules, from whatever source, which
govern accounting.
In individual countries this is seen primarily as a
combination of:
• National company law
• National accounting standards
• Local stock exchange requirements
Although those sources are the basis for the GAAP of
individual countries, the concept also includes the effects
of non-mandatory sources such as:
• International accounting standards
• Statutory requirements in other countries
Advantages
Lack of a conceptual framework producing
• contradictions and inconsistencies
Some standards may concentrate on profit or loss
whereas some may concentrate on the valuation of
net assets (statement of financial position).
• large number of highly detailed standards
• bolster standard setters against political pressure
http://cafef.vn/tai-chinh-ngan-hang/vamc-co-giupcac-ngan-hang-giam-no-xau-cai-thien-tinh-hinhtai-chinh-2014012112001239313.chn
Disadvantages
(a) Variety of users  different purpose
(b) It is not clear that a conceptual framework
makes the task of preparing and then
implementing standards any easier than
without a framework.
 The Conceptual Framework is not an IFRS and
so does not overrule any individual IFRS. In the
(rare) case of conflict between an IFRS and the
Conceptual Framework, the IFRS will prevail.
Accruals basis
The effects of transactions and other events are
recognised when they occur (and not as cash or
its equivalent is received or paid) and they are
recorded in the accounting records and reported
in the financial statements of the periods to
which they relate.
Going concern
Going concern is the underlying assumption in
preparing financial statements.
The entity is normally viewed as a going
concern, that is, as continuing in operation for
the foreseeable future. It is assumed that the
entity has neither the intention nor the
necessity of liquidation or of curtailing
materially the scale of its operations.
Qualitative characteristics of useful financial
information
The Conceptual Framework states that qualitative
characteristics are the attributes that make financial
information useful to users.
Chapter 3 of the Conceptual Framework distinguishes
between fundamental and enhancing qualitative
characteristics, for analysis purposes.
• Fundamental qualitative characteristics distinguish useful
financial reporting information from information that is not
useful or misleading.
• Enhancing qualitative characteristics distinguish more
useful information from less useful information.
The two fundamental qualitative characteristics are
relevance and faithful representation.
Relevance
Relevant information is capable of making a
difference in the decisions made by users.
The relevance of information is affected by its
nature and its materiality.
Materiality. Information is material if omitting it
or misstating it could influence decisions that
users make on the basis of financial information
about a specific reporting entity.
Faithful representation
Financial reports represent economic phenomena in
words and numbers. To be useful, financial information
must not only represent relevant phenomena but must
faithfully represent the phenomena that it purports to
represent.
To be a faithful representation information must be
complete, neutral and free from error.
• Substance over form
This is not a separate qualitative characteristic under the
Conceptual Framework. The IASB says that to do so would
be redundant because it is implied in faithful
representation. Faithful representation of a transaction is
only possible if it is accounted for according to its
substance and economic reality.
Enhancing qualitative characteristics
• Comparability  relevance
• Verifiability  faithfulness
• Timeliness  relevance
• Understandability  relevance
Classifying, characterising and presenting
information clearly and concisely makes it
understandable.
Comparability
Comparability is the qualitative characteristic
that enables users to identify and understand
similarities in, and differences among, items.
Information about a reporting entity is more
useful if it can be compared with similar
information about other entities and with
similar information about the same entity for
another period or date.
The cost constraint on useful financial
reporting
This is a pervasive constraint, not a qualitative
characteristic. When information is provided, its
benefits must exceed the costs of obtaining and
presenting it. This is a subjective area and there are
other difficulties: others, not the intended users,
may gain a benefit; also the cost may be paid by
someone other than the users. It is therefore
difficult to apply a cost-benefit analysis, but
preparers and users should be aware of the
constraint.
Asset. A resource controlled by an entity as a result
of past events and from which future economic
benefits are expected to flow to the entity.
Liability. 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 benefits.
Equity. The residual interest in the assets of the
entity after deducting all its liabilities.
Recognition of the elements of financial
statements
Items which meet the definition of assets or liabilities
may still not be recognised in financial statements
because they must also meet certain recognition criteria.
Recognition. The process of incorporating in the
statement of financial position or statement of profit or
loss and other comprehensive income an item that meets
the definition of an element and satisfies the following
criteria for recognition:
(a) It is probable that any future economic benefit
associated with the item will flow to or from the entity
(b) The item has a cost or value that can be measured
with reliability
Assets which cannot be recognised
The recognition criteria do not cover items which
many businesses may regard as assets.
A skilled workforce is an undoubted asset but
workers can leave at any time so there can be no
certainty about the probability of future economic
benefits.
A company may have come up with a new name for
its product which is greatly increasing sales but, as
it did not buy the name, the name does not have a
cost or value that can be reliably measured, so it is
not recognised.
Measurement of the elements of
financial statements
A number of different measurement bases are
used in financial statements. They include:
– Historical cost
– Current cost
– Realisable (settlement) value
– Present value of future cash flows
Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or
the fair value of the consideration given to acquire them at the time of their
acquisition. Liabilities are recorded at the amount of proceeds received in exchange
for the obligation, or in some circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be paid to satisfy the liability in the
normal course of business.
Current cost (replacement cost). Assets are carried at the amount of cash or cash
equivalents that would have to be paid if the same or an equivalent asset was
acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.
Fair value, which is defined by IFRS 13 as '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'.
• Realisable value. The amount of cash or cash equivalents that could currently be
obtained by selling an asset in an orderly disposal.
• Settlement value. The undiscounted amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities in the normal course of business.
Present value. A current estimate of the present discounted value of the future net
cash flows in the normal course of business
Example
A machine was purchased on 1 January 20X8 for $3m. That was its original cost. It has a
useful life of 10 years and under the historical cost convention it will be carried at original
cost less accumulated depreciation. So in the financial statements at 31 December 20X9
it will be carried at:
$3m – (0.3 x 2) = $2.4m (carrying value, net book value)
The replacement cost of the machine will be the cost of a new model less two year's
depreciation. The cost of a new machine may now be $3.5m. Assuming a ten-year life, the
replacement cost will therefore be $2.8m.
The current cost of the machine, which will probably also be its fair value, will be fairly
easy to ascertain if it is not too specialised. For instance, two year old machines like this
one may currently be changing hands for $2.5m, so that will be an appropriate fair value.
The net realisable value of the machine will be the amount that could be obtained from
selling it, less any costs involved in making the sale. If the machine had to be dismantled
and transported to the buyer's premises at a cost of $200,000, the NRV would be $2.3m.
The present value of the machine will be the discounted value of the future cash flows
that it is expected to generate. If the machine is expected to generate $500,000 per
annum for the remaining eight years of its life and if the company's cost of capital is 10%,
present value will be calculated as:
$500,000 x 5.335* = $2667,500
* Cumulative present of $1 per annum for eight years discounted at 10%