THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201 Principles

1. Nadeeshani Dissanayake B.Sc. Accounting (Sp), First Class, ACA, ACMA, CPA (Aust) THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKAPOSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201Principles of Financial and Cost AccountinG

2. Conceptual Framework for the Preparation and Presentation of Financial Statements

3. At the end of this session the students should be able to: • Understand the need for conceptual framework for financial reporting • Understand the objective of financial reporting • Understand the fundamental assumptions in FR • Describe the qualitative characteristics of financial information • Define the elements of financial statements • Understand the components of financial statements Learning Outcomes

4. “A conceptual framework is a coherent system of inter-related objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, limits of financial accounting and financial statements.” (FASB Definition) What is a conceptual framework?

5. Objectives of the Framework • To assist in the development of A/Ss and review of existing standards. • To assist in promoting harmonization of regulation, Accounting Standards and procedures relating to Financial Reporting • To assist preparers of Financial Statements in applying accounting standards • To assist auditors in forming an opinion • To solve new practical accounting problems quickly. • To increase financial statements users’ understanding and confidence in financial reporting. • To enhance, comparability among companies’ Financial Statements.

6. The objectives of financial statements Underlying assumptions  Qualitative characteristics of F/Ss The elements of F/Ss  The definition and recognition of the elements of F/Ss Measurement of the elements of the F/Ss Concepts of capital and capital maintenance The matters dealt within the Framework

7. “ Provide financial information about the reporting entity that is useful to existing and potential investors and other creditors in making decisions about providing resources to the entity”. Financial statements prepared for this purpose meet the common needs of most userswho don’t have the right to demand information and who have a reasonable knowledge of business and economic activities Financial statements also show the results of the stewardship of management or the accountability of management. The Objective of Financial Reporting

8. Financial reports and users

9. Underlying Assumptions Accrual Basis – In order to meet the objectives, financial statements are prepared on the accrual basis of accounting. What is accrual basis of accounting? What is cash basis? Effects of transactions and other events are recognised when they occur ( not when cash or cash equivalents received or paid)

10. Underlying Assumptions Going Concern – The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

11. Primary Qualitative Characteristics of Accounting Information • Relevance : Capable of making a difference in users’ decision Information should have the predictive value (predictive role), Feedback value (Confirmatory role). • Faithfully represent /Reliability: Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, • neutral and free from error. • Completeness • Neutrality (unbiased) • Free from errors Qualitative Characteristics

12. Enhancing Qualitative Characteristics • Comparability: information should be presented in a manner that can be compared with the historical information of the same organization, information of the other competitive organizations, information with the industry average figures. • Verifiability knowledgeable and independent observers could reach consensus • Materiality Informationis material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. • Understandability: information should be presented in a manner that can be easily understood by an average man who is having a general idea about business • Timeliness Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. Qualitative Characteristics

13. Elements of Financial Statements There are five elements in the Financial Statements. • Assets • Liabilities • Equity • Income • Expenses

14. ELEMENTS OF FINANCIAL STATEMENTS • ASSETS. • A resource controlled by the entity as a result of past events and from which futureeconomic benefits are expected to flow to the entity. • Main features • Controlled by the enterprise • Past Events • Future economic benefits Group Work : A Printing Machine, Office Building, employees, elephant, Cash, stationery – pens/clips/pins, teak trees, bees

15. LIABILITIES. 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. Main features • Present obligations • Transfer economic benefits • Past Transactions or Events ELEMENTS OF FINANCIAL STATEMENTS Group Work - annual reports

16. Elements of Financial Statements INCOME. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. EXPENSES. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Group Work - annual reports

17. EQUITY. The residual interest in the assets of the enterprise after deducting all its liabilities. ELEMENTS OF FINANCIAL STATEMENTS Group Work - annual reports Basic Accounting equation and double entry system

18. Statement of Financial Position • Income Statement • Statement of Comprehensive Income (including other Comprehensive Income) • Statement of Changes in Equity • Statement of Cash flows • Notes Components of Financial Statements Group Work - annual reports

19. Statement of Financial Position Continued……….

20. Statement of Financial Position Continued……….

21. Statement of Financial Position

22. Statement of Comprehensive Income Continued……….

23. Statement of Comprehensive Income Continued……….

24. Statement of comprehansive income

25. Statement of Changes in Equity …..