The Conceptual Framework of Accounting

Fundamental objective of accounting is to provide financial information

that readers can use to make appropriate decisions.

1. Internal users—those who own and/or work in the organization.

2. External users—those outside the organization, primarily existing or

potential investors, creditors and lenders.
The Accounting Standards Board (AcSB), which is the primary accounting
standard-setting body in Canada, has decided that Canadian
businesses must adhere to one of two sets of accounting standards
when recording and reporting financial information.

1. International Financial Reporting Standards (IFRS)

2. Accounting Standards for Private Enterprises (ASPE)

Fundamental Qualitative Characteristics

IFRS defines two fundamental qualitative characteristics that are required

to provide useful financial information.

1. Relevance : all the information that may affect a user’s decision must
be present in the financial statements.

2. Faithful representation : Information presented in the financial

statements should faithfully represent the transaction and events that
occur during a period.
Enhancing Qualitative Characteristics

The four enhancing qualitative characteristics are

1. Comparability: must be prepared in a similar way from year to year

2. Timeliness: information must be shared with users while it is still

able to influence decisions

3. Verifiability : all information must be proven (i.e. receipts etc)

4. Understandability: all information presented must be done so in a

clear and understandable way, assuming a basic knowledge of
accounting.
Underlying Assumptions

Concept of Economic Entity- business affairs separately of the company

must be separate from the owners

Going Concern Assumption- the business will continue to exist as an

entity in the future

Monetary Unit Assumption- accounting records must be expressed in

terms of money in a single currency such as Canadian dollars or euros.

Cost Constraint - ensures that the benefits of relevant and faithfully

represented financial information exceed the costs of providing that
information.
Elements of the Financial Statements

- Assets: Any item that is owned and controlled by a business and

expected to provide a future economic benefit,

- Liabilities: A debt or legal obligation that the business owes and must
pay with an outflow of resources.

- Equity: The owners’ investment in the business (i.e their claim on the
assets of a business)

- Revenues: Income earned by a business

- Expenses: A decrease in equity incurred through day to day operations

of the business
Financial statements under IFRS (ASPE)

One of the differences between ASPE and IFRS is the

presentation and names of financial statements.
1. Statement of Financial Position (Balance Sheet)
2. Statement of Comprehensive Income (Income Statement)
3. Statement of Changes in Equity (Statement of Owners’ Equity)
4. Statement of Cash Flows (Cash Flow Statement)
5. Notes summarizing significant accounting policies and other
explanatory information
Statement of Financial Position (Balance Sheet)

ASPE lists items in the following order:

• Assets: in sequence according to the level of liquidity
• Liabilities: in sequence according to the timing of payment (with
payments that are due sooner being listed first)

IFRS lists items in the following order:

• Assets: non-current or long-term assets are presented before the
current assets (the least liquid items are listed first)
• Liabilities: non-current or long-term liabilities are presented before the
current liabilities (payments due later are listed first)
Recognition of financial Information

Revenue Recognition: Revenue can only be recorded (recognized) when

goods are sold or when services are performed.

Expense Recognition: The expense recognition states that expenses

should be recognized in the same period as the revenues to which they
relate.
Revenue Recognition : Example

Ketch Construction signs a contract to build a condo building.

Building is scheduled to begin on June 1, 2016 and is estimated to take two
years to complete.
Ketch Construction charges $500 million for the project and expects to incur
$400 million in costs.
How much revenue should be recognized in 2016 ?