CH 1 – FRAMEWORKS

Financial Position

Economic Resource Claims

Asset Liability Equity

A present economic A present The residual

resource controlled by obligation of the interest in the

the entity as a result entity to transfer an net assets of the entity

of past events economic resource
as a result of past events
An economic resource is a “right that has the potential to produce economic benefits.”

à Economic benefits include :

● Cash flows, such as returns on investment sources

● Exchange of goods, such as by trading, selling goods, provision of services
● Reduction or avoidance of liabilities such as paying loans

à Obligation is a duty or responsibility that the entity has no practical ability to avoid:
● A present obligation exists as a result of past events if the entity has already
obtained economic benefits or taken an action, and as a consequence, the entity
will or may have to transfer an economic resource that it would not otherwise
have had to transfer.

Income Definition
Increase in assets or decrease in liabilities that result in increase in equity other than those relating to contribution
from holders of equity claims

Expenses Definition
Decrease in assets or increase in liabilities that result in decrease in equity other than those relating to distributions to
holders of equity claim

Presentation and disclosure

Income and expenses should be included in the statement of profit or loss unless relevance or faithful
representation would be enhanced by including a change in the current value of an asset or a liability in OCI.

Recognize income/expense in OCI if arises from current value measurement and enhances relevance of P/L
Items in OCI will be reclassified to P/L unless unable to determine timing or amount of the reclassification.
Qualitative characteristics of useful financial information

Fundamental qualitative characteristics :

1- Relevance ● Relevant information is capable of making a difference in decisions

made by users. It has predictive and confirmatory value.
● Consider materiality : information is material if omitting
or misstating itcould influence decisions of primary
users.

2- Faithful A faithful representation reflects economic substance rather than legal

Representation form and is :

a. Complete : all information necessary for understanding

b. Neutral : without bias, supported by exercise of prudence
c. Free from error : processes and description without error,
does not mean perfect

Faithful representation of information does not mean that that information must be accurate in all
respects. As the use of estimates are an essential part of the preparation of financial information and
this does not necessarily weaken the usefulness of the information. The Framework strikes a balance
between relevance and faithful representation in order to provide useful information to the users of
financial statements. “Prudence is introduced in support of the principle of neutrality for the purposes
of faithful representation. Prudence is understood here as the exercise of caution when making
judgements under conditions of uncertainty.”

Enhancing Qualitative Characteristics

● Comparability
● Verifiability Usefulness of information is enhanced if these
● Timeliness characteristics are maximized
● Understandability

1. Comparability : Comparability is the qualitative characteristic that enables users to

identify and undestand similarities in and differences among items.
2. Verifiability : Verifiability helps assure users that information faithfully represents
the economic phenomena it purports to represents.
3. Timeliness : It means having information available to decision makers on time to be
capable of influencing their decisions. Generally, the older information
is less useful.
4. Understandability : Classifying, characterising and presenting informatino clearly and
concisely makes it undestandable.
 OBJECTIVE OF FR
The Conceptual framework states that the purpose of FR is to provide information to current and
potential investors, lenders and other creditors that will enable them to make decisions about
providing economic resources to an entity.

COST CONTRAINT
A cost constraint applies in ensuing that the information is useful, in that the benefit of obtaining
the information should outweigh the cost of obtaining it.

RECOGNITION
The new Conceptual Framework states that assets and liabilities should be
recognized ifsuch recognition provides users of financial statements with:

(a) relevant information about the asset or the liability and about any income,
expenses orchanges in equity;
(b) a faithful representation of the asset or the liability and of any income, expenses or
changesin equity; and
(c) information which results in the benefits exceeding the cost of providing that information.
Recognition might not provide relevant information if there is uncertainty over the existence of
the element or if there is a low probability of an inflow or outflow of economic resources.
Recognition of an element might not provide a faithful representation if there is a very high
degree of measurement uncertainty.

DERECOGNITION
Derecognise an element if:
o Entity no longer controls asset, or
o Entity no longer has obligation for liability

SELECTING A MEASUREMENT BASE

The first of the measurement bases is historical cost. The accounting treatment of this is
unchanged, but the Framework explains that the carrying amount of non-financial items held
at historical cost should be adjusted over time to reflect the usage (in the form of depreciation
or amortization). Alternatively, the carrying amount can be adjusted to reflect that the
historical cost is no longer recoverable (impairment). Financial items held at historical cost
should reflect subsequent changes such as interest and payments, following the principle often
referred to as amortized cost.

The Framework also describes three measurements of current value: fair value, value in use (or
fulfilment value for liabilities) and current cost. Fair value continues to be defined as the price in an
orderly transaction between market participants. Value in use (or fulfilment value) is defined as the
present value of the cash flows that an entity expects to derive from the continuing use of an asset and
its ultimate disposal.
Current cost is different from fair value and value in use, as current cost is an entry value. This looks at
the value in which the entity would acquire the asset (or incur the liability) at current market prices,
whereas fair value and value in use are exit values, focusing on the values which will be gained from the
item.

Relevance is a key issue. The Framework says that historical cost may not provide relevant information
about assets held for a long period of time, and are certainly unlikely to provide relevant information
about derivatives. In both cases, it is likely that some variation of current value will be used to provide
more predictive information to users.

Conversely, the Framework suggests that fair value may not be relevant if items are held solely for use
or to collect contractual cash flows. Alongside this, the Framework specifically mentions items used in a
combination to generate cash flows by producing goods or services to customers. As these items are
unlikely to be able to be sold separately without penalising the activities, a cost-based measure is likely
to provide more relevant information, as the cost is compared to the margin made on sales

(14) IFRS 13 - FAIR VALUE MEASUREMENT

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderlytransaction between market participants at the measurement
date.

Active market or Principal market is a market with the greatest volume and level of
activity.

Fair value measurement assumes that the transaction to sell the asset or transfer the
liability takesplace in the principal market for the asset or liability or, in the absence
of a principal market, in themost advantageous market for the asset or liability.

The most advantageous market- a market where the entity is in a position to receive
the maximum amount on sale of the asset or pay the minimum amount to transfer a
liability after considering transaction and transport costs. While transaction and
transport costs are relevant to identify the market, they are not considered in
determining the fair value.
“Fair value is not adjusted for transaction costs.”

Valuation techniques:
I. Market approach: based on recent sales prices.
II. Income approach: based on financial forecasts.
III. Cost approach: based on replacement cost of the asset.

IFRS 13 classifies the inputs to valuation techniques used to measure fair value into three
(input) levels:
- Level 1: quoted prices, for identical assets in active markets Level 2: Quoted prices are
 not available but fair value is based on observable market data Level 3: Unobservable
inputs.
“Priority is given to Level 1 inputs.”

Examples of use of fair values in IFRS include:

- IAS 16 Property, Plant and Equipment allows revaluation through other

comprehensiveincome, provided it is carried out regularly.

- While IAS 40 Investment Property allows the option of measuring investment

properties atfair value with corresponding changes in profit or loss, and this
arguably reflects the business model of some property companies, many
companies still use historical cost.

- IAS 38 Intangible Assets permits the measurement of intangible assets at fair value
with corresponding changes in equity, but only if the assets can be measured reliably
through the existence of an active market for them.
- IFRS 9 Financial Instruments requires some financial assets and liabilities to be measured at
amortized cost and others at fair value. The measurement basis is largely determined by the
business model for that financial instrument. For financial instruments measured at fair value,
depending on the category and the circumstances, gains or losses are recognized either in profit
or loss or in other comprehensive income

OUTSIDE THE SCOPE OF IFRS 13

● Share-based payment transactions within the scope of IFRS 2 Share-based Payment
● Leasing transactions within the scope of IFRS 16 Leases

NON FINANCIAL ASSETS

These include PPE and intangible assets.

The FV of a NFA should be based on its highest and best use.

HBU is the use that a market participant would adopt in order to maximize its value.

Factors to consider in determining HBU:

1) Physically possible (2) Legally permitted (3) Financially viable

Rules in business combination:

IFRS 3 sets out general principles for arriving at the fair values of a subsidiary's assets
and liabilities onlyif they satisfy the following criteria:

I. In the case of an asset other than an intangible asset, it is probable that any
associated future economic benefits will flow to the acquirer, and its fair value can be
measured reliably. Vice versa forliabilities

II. In the case of an intangible asset or a contingent liability, its fair value can be measured reliably.
III. The acquiree's identifiable assets and liabilities might include assets and liabilities
not previouslyrecognised in the acquiree's financial statements An acquirer
should not recognise liabilities for future losses or other costs expected to be
incurred as a result of the business combination.

IV. The acquiree may have intangible assets which can only be recognised separately
from goodwill ifthey are identifiable. They must be able to be capable of being
separated from the entity.

V. The acquirer should measure the cost of a business combination as the total of the
fair values at thedate of acquisition

VI. If part of the consideration is payable at a later date, this deferred consideration is
discounted topresent value at the date of exchange.

VII.In case of equity instruments as cost of investment, the published price at the
date of exchangenormally provides the best evidence of the instrument's fair
value.

VIII.Costs attributable to the combination, for example professional fees and

administrative costs, shouldnot be included: they are recognised as an expense when
incurred.

IX. If an asset or liability has been recognised at fair value at acquisition, it must be
recorded in thesubsidiary‘s statement of financial position at fair value
consequently also

X. Some fair value adjustments are made on depreciable assets such as buildings, the
assets with fairvalue adjustment must be depreciated at its fair value so there will be
an adjustment, which flowsthrough to profit or loss for this additional depreciation.
Disclosures :
- Information about the hierarchy level into which fair value measurements fall
- Transfers between levels 1 and 2
- Methods and inputs to the fair value measurements and changes in valuation techniques, and
- Additional disclosures for level 3 measurements that include a reconciliation of opening and
closing balances, and quantitative information about unobservable inputs and assumptions
used.