Conceptual and Regulatory Framework

CONCEPTUAL AND REGULATORY
FRAMEWORK
EXPLAIN WHY A REGULATORY FRAMEWORK IS NEEDED

A regulatory framework for the preparation of financial statements is necessary for a number of
reasons which are as follows:
 To ensure that the needs of the users of financial statements are met with at least a basic
minimum of information.
 To ensure that all the information provided in the relevant economic arena is both
comparable and consistent. Given the growth in multinational companies and global
investment this arena is an increasing international one.
 To increase users' confidence in the financial reporting process.
 To regulate the behavior of companies and directors towards their investors
DISTINGUISH BETWEEN PRINCIPLES-BASED ACCOUNTING AND

RULES-BASED ACCOUNTING
Principles-Based Accounting vs. Rules-Based Accounting
Principles-based Accounting
In accounting, a principles-based on approach is the most popular accounting method globally

because it is usually better to adjust accounting principles to a company’s transactions, rather
than adjusting a company’s operations to accounting rules. The international financial reporting
standards (IFRS) system – the most common international accounting standard – is a principles-
based approach, which states that a company’s financial statements must be understandable,
readable, comparable and relevant to current financial transactions.
Rules-based Accounting
By contrast, rules-based accounting involves a list of detailed rules that companies and their
accountants must follow when preparing financial statements. The major example of rule-based
accounting is the Generally Accepted Accounting Principles (GAAP), which is a system broadly
used in the U.S. Rules-based accounting involves – as the name implies – that users follow a list
of strict and specific rules that accountants must apply when creating financial statements and
other financial documents.
The Framework splits qualitative characteristics into two categories:
(i) Fundamental qualitative characteristics
 Relevance
 Faithful representation
(ii) Enhancing qualitative characteristics
 Comparability
 Verifiability
 Timeliness
 Understandability
5 Elements of the financial statements
Assets
Assets are:
• resources controlled by the entity
• as a result of past events
• from which future economic benefits are expected to flow to the entity.
Liabilities
Liabilities are:
• an entity’s present obligations
• to transfer economic benefits
• as a result of past transactions or events.
Equity interest
Equity interest is the residual amount found by deducting all liabilities of
the entity from all of the entity’s assets.
Income
Income is:
• an increase in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases in liabilities
• transactions that result in increases in equity, other than those relating to

contributions from equity participants.
• This definition follows a statement of financial position approach rather

that the more traditional profit or loss approach to recognising income.
Expenses
Expenses are:
• decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities
• transactions that result in decreases in equity, other than those relating
Q1
(1) Under the current structure of regulatory bodies, which of the

bodies listed below acts as the overall supervisory body?
A IFRS Interpretations Committee
B International Accounting Standards Board
C IFRS Advisory Council
D IFRS Foundation
Answer:
D
(2) Which of the bodies listed below is responsible for reviewing

International Accounting Standards and issuing guidance on
their application?

D IFRS Foundation
Answer:
B
(3) Which of the bodies listed below is responsible for issuing

International Financial Reporting Standards?
D IFRS Foundation
Answer:
B
(4) Which of the bodies listed below is responsible for the

approval of Draft Interpretations?
D IFRS Foundation
Answer:
A
(5) Which of the following best describes the role of the IFRS
Advisory Council?
A To prepare interpretations of International Accounting
Standards
B To provide the IASB with the views of its’ members on standard
setting projects
C To promote the use of International Accounting Standards
amongst its members
D To select the members of the IASB
Answer:
B
Q2 The International Accounting Standards Board's (IASB's) The

Conceptual Framework for Financial Reporting identifies four principals
qualitative characteristics of financial information.
Required:
Identify and explain EACH of the TWO fundamentals qualitative
characteristics of financial information listed in the IASB's Framework.
Answer:
The two principal qualitative characteristics are:
Relevance – Information is relevant when it influences the economic

decisions of users by helping them evaluate past, present or future
events or confirming or correcting their past evaluations.
The relevance of information can be affected by its nature and
materiality. Some items may be relevant to users simply because of their
nature whereas some items may only become relevant once they are
material. Hence, materiality is a threshold quality of information rather
than a primary characteristic.
According to the Framework, information is material if its omission or

misstatement could influence the decisions of users.
Faithful representation – If information is to represent faithfully the

transactions and other events that it purports to represent, they must be
accounted for and presented in accordance with their substance and
economic reality and not merely their legal form.
To be a faithful representation of financial performance and position, the
following characteristics should be evident:
Completeness
To be understandable information must contain all the necessary
descriptions and explanations.
Neutrality
Information must be neutral, i.e. free from bias. Financial statements are
not neutral if, by the selection or presentation of information, they
influence the making of a decision or judgement in order to achieve a
predetermined result or outcome.
Free from error

Information must be free from error within the bounds of materiality. A
material error or an omission can cause the financial statements to be
false or misleading and thus unreliable and deficient in terms of their
relevance.
Free from error does not mean perfectly accurate in all respects. For
example, where an estimate has been used the amount must be
described clearly and accurately as being an estimate.
Q3. The Conceptual Framework for Financial Reporting has a number of

purposes, including:
• Assisting the Board in the development of future IFRSs and in its

review of existing IFRSs
• Assisting the Board in promoting harmonization of regulations,

accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number of
alternative treatments permitted by IFRSs
• Assisting preparers of financial statements in applying IFRSs and in

dealing with topics that are yet to be covered in an IFRS.
Required:
Discuss how a conceptual Framework could help IASB achieve these
objectives.
Answer:
A conceptual Framework provides guidance on the broad principles of

financial reporting. It highlights how items should be recorded, on how
they should be measured and presented. The setting of broad principles
could assist in the development of accounting standards, ensuring that
the principles are followed consistently as standards and rules are
developed.
A conceptual Framework can provide guidance on how similar items are
treated. By providing definitions and criteria that can be used in deciding
the recognition and measurement of items, conceptual Frameworks can
act as a point of reference for those setting standards, those preparing
and those using financial information.
The existence of a conceptual Framework can remove the need to
address the underlying issues over and over again. Where underlying
principles have been established and the accounting standards are
based on these principles, there is no need to deal with them fully in
each of the standards. This will save the standard setters
time in
developing standards and will again ensure consistent treatment of
items.
Where a technical issue is raised but is not specifically addressed in an

accounting standard, a conceptual Framework can help provide
guidance on how such items should be treated. Where a short-term
technical solution is provided by the standard setters,
the existence of a
conceptual Framework will ensure that the treatment is consistent with
the broad set of agreed principles
Q4 The Conceptual Framework for Financial Reporting was first published

in 1989 and updated in 2012.
Required:
Explain the purposes of the Framework.
Answer:
According to the Framework, its purposes are to:

• Assist the Board in the development of future IFRSs and in its review
of existing IFRSs
• Assist the Board in promoting harmonization of regulations,

accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number of
alternative treatments permitted by IFRSs
• Assist national standard setting

bodies in developing national
standards
• Assist preparers of financial statements in applying IFRSs and in

dealing with topics that have yet to be covered in an IFRS.
• Assist auditors in forming an opinion as to whether financial
statements conform with IFRSs.
• Assist users of financial statements that are prepared using IFRSs
• Provide information about how the IASB has formulated its

approach to the development of IFRSs.
Q5
(1) Under the Framework for the Preparation and Presentation of
Financial Statements, which of the following is the ‘threshold
quality’ of useful information?
A Relevance
B Reliability
C Materiality
D Understandability
Answer:
C
(2) According to the Framework for the Preparation and

Presentation of Financial Statements, which of the following
are the underlying assumptions of a set of financial
statements?
A Going Concern and Prudence
B Going Concern and Accruals
C Accruals and Prudence
D Prudence and Comparability
Answer:
B
(3) Which of the following best defines information that is

relevant to the users of financial information?
A Information that is free from material error, bias and is a faithful
representation
B Information that has been prudently prepared
C Information that is comparable from one period to the next
D Information that influences the decisions of users
Answer
D
(4) Which of the following criteria need to be satisfied in order for

an item to be recognised in the financial statements?
(i) It meets the definition of an element of the financial statements
(ii) It is probable that future economic benefits will flow to or from
the enterprise
(iii) It is certain that future economic benefits will flow to or from the
enterprise
(iv) The item has a cost or value
(v) The item has a cost or value that can be reliably measured
A i, ii and v
B i, iii and v
C i, ii and iv
D i, iii and iv
Answer
A
(5) Which of the following measurement bases should be used

by enterprises according to the Framework for the
Preparation and Presentation of Financial Statements?
A Historical cost
B Current cost
C Present value
D Any of the above
Answer:
D
(6) The IASB’s Framework identifies qualitative characteristics.

(i) Relevance
(ii) Comparability
(iii) Verifiability
(iv) Understandability
(v) Faithfull representation
Which of the above are not listed as an enhancing

characteristic?
A (i), (iv) and (v)
B (ii), (iii) and (iv)
C (ii) and (iii)
D (i) and (v)
Answer:
D
(7) The Conceptual Framework for Financial Reporting provides

definitions of the elements of financial statement. One of the
elements defined by the framework is ‘expenses.
In no more than 35 words, give the IASB Framework’s
definition of expenses.
Answer:
Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets that
result in decreases in equity, other than those relating to
distributions to equity participants.
(8) The International Accounting Standards Board’s (IASB) Conceptual

Framework for Financial Reporting sets out two fundamentals
qualitative characteristics of financial information, relevance and
faithful representation.
Which characteristics would you expect information to
possess if it is to have faithful representation?
Answer: Completeness, neutrality and free from error.
(9) According to the International Accounting Standards Board’s

Framework for the Preparation and Presentation of Financial
Statements, what is the objective of financial statements?
Answer:
The objective of financial statements is to provide information about
the financial position, performance, and changes in that position, of
an entity that is useful to a wide range of users in making economic
decisions.
(10) The Conceptual Framework for Financial Reporting lists the

qualitative characteristics of financial statements.
(i) Comparability
(ii) Verifiability
(iii) Timeliness
(iv) Understandability
(v) Relevance
(vi) Faithful representation
Which TWO of the above are NOT included in the enhancing

qualitative characteristics listed by the Framework?
A (i) and (vii)

B (ii) and (v)
C (iv) and (v)
D (v) and (vi)
Answer:
D

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CONCEPTUAL AND REGULATORY

EXPLAIN WHY A REGULATORY FRAMEWORK IS NEEDED

DISTINGUISH BETWEEN PRINCIPLES-BASED ACCOUNTING AND

In accounting, a principles-based on approach is the most popular accounting method globally

5 Elements of the financial statements

• transactions that result in increases in equity, other than those relating to

• This definition follows a statement of financial position approach rather

(1) Under the current structure of regulatory bodies, which of the

(2) Which of the bodies listed below is responsible for reviewing

A IFRS Interpretations Committee

(3) Which of the bodies listed below is responsible for issuing

(4) Which of the bodies listed below is responsible for the

Q2 The International Accounting Standards Board's (IASB's) The

The two principal qualitative characteristics are:

Relevance – Information is relevant when it influences the economic

According to the Framework, information is material if its omission or

Faithful representation – If information is to represent faithfully the

Free from error

Q3. The Conceptual Framework for Financial Reporting has a number of

• Assisting the Board in the development of future IFRSs and in its

• Assisting the Board in promoting harmonization of regulations,

• Assisting preparers of financial statements in applying IFRSs and in

A conceptual Framework provides guidance on the broad principles of

Where a technical issue is raised but is not specifically addressed in an

Q4 The Conceptual Framework for Financial Reporting was first published

According to the Framework, its purposes are to:

• Assist the Board in promoting harmonization of regulations,

• Assist national standard setting

• Assist preparers of financial statements in applying IFRSs and in

• Assist users of financial statements that are prepared using IFRSs

• Provide information about how the IASB has formulated its

(2) According to the Framework for the Preparation and

(3) Which of the following best defines information that is

(4) Which of the following criteria need to be satisfied in order for

(5) Which of the following measurement bases should be used

(6) The IASB’s Framework identifies qualitative characteristics.

Which of the above are not listed as an enhancing

(7) The Conceptual Framework for Financial Reporting provides

(8) The International Accounting Standards Board’s (IASB) Conceptual

Answer: Completeness, neutrality and free from error.

(9) According to the International Accounting Standards Board’s

(10) The Conceptual Framework for Financial Reporting lists the

Which TWO of the above are NOT included in the enhancing

A (i) and (vii)

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