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Conceptual Framework of Financial Statements

Financial Accounting for Management

CHAPTER OBJECTIVES

Financial Accounting for Management

 Introduction Manifestation of complexities in modern day businesses Purpose of the Framework Assistance to: Preparers Auditors Users of Financial Statements Accounting Standards Board (ASB) Scope and Coverage Components of Financial Statements, objectives of financial statements, users and their information needs, Assumptions underlying the preparation of financial statements, qualitative characteristics, definitions, recognition and measurement of elements of FS, Concepts of capital.

Components of Financial Statements

Balance Sheet info about financial position Statement of Profit and Loss - performance Cash Flow Statement Cash Flows (CFs) Notes to Account and Accounting Policies integral part of above mentioned statements
Financial Accounting for Management

Research In Financial Reporting

Consider the case of Tata Motors Ltd. On what financial statements and reports can be presented in the annual report.
Case 1: Research in financial reporting Tata Motors Ltd.

Financial Accounting for Management

Financial Accounting for Management

Objective of Financial Statements Financial position

Economic resources useful in predicting the ability of the enterprise to generate cash and cash equivalents in future. Financial structure useful in predicting its present and future borrowing needs Liquidity (short-term) and solvency (long-term) useful in predicting the ability of an organization to meet its financial commitments in time Performance Profitability - predicting capacity of the enterprise to generate internal cash flows and in forming judgments about its effectiveness to employ additional resources generated. Cash flows info about CFs is useful in evaluating investing, financing and operating activities. Present and Potential Investors Employees and their Representative Groups Lenders Suppliers and other Trade Creditors Customers Governments and their Agencies Public Management Others
Financial Accounting for Management

Users and Their Information Needs

 Case 2 Reliance Industries Ltd. Annual Report 200506

Financial Accounting for Management

Financial Accounting for Management

Use of this information to various Stakeholders

The entire information is of common use to all the users since it informs them about the performance of the company. However some information is of specific use to different users Users Present and potential investors Employees Lenders Suppliers Specifically useful information S.No. 7,11,16, 17, 19, 20 S.No. 12, 13 14 S.No. 2, 3, 18 S.No. 21

Customers
Government Public Management

S.No. 22
S.No. 5, 15, 23, 24, 25 S.No. 5, 15, 23, 24, 25, 26 S.No. 1, 6, 10, 11
Financial Accounting for Management

 Assumptions Underlying Preparation of Financial Statements

Accrual basis the effects of transactions and other events are recognized when they occur, and not when cash or cash equivalents are received or paid. Going concern it is assumed that an enterprise will continue in operation for the foreseeable future. Consistency the accounting policies are followed consistently to achieve comparability over time

Qualitative Characteristics of Financial Statements

Understandability it is assumed that users have a reasonable knowledge of business, economic activities, and accounting. Relevance relevant to the decision making needs of the users Materiality info which influences the decision of users, size, nature is also seen
Financial Accounting for Management

 Illustration 1

Financial Accounting for Management

 Reliability free from material error and bias

Faithful representation which meet the recognition criteria Substance over form in accordance with their substance and economic reality Neutrality free from bias Prudence inclusion of degree of caution Completeness complete within the bounds of materialaity and cost Comparability ability to compare the Financial statements of an organisation Balance between Timeliness and Reliability Balance between Benefit and Cost Balance between Qualitative Characteristics

Constraints on qualitative characteristics

True and fair view

Financial Accounting for Management

 Definitions, Characteristics Recognition and Measurement of the Elements of Financial Statements Definitions and Characteristics
Financial position
Assets Liabilities Equity Income Revenue (ordinary course of business) & gains Expenses expenses (ordinary course of business) & Losses

Performance

Cash flows combines the elements of P&L and B/S

Recognition
Process of recognition Specific Issues

Financial Accounting for Management

 Measurement
Measurement bases
Historical cost Current cost (inflation accounting) Realisable value (Settlement value e.g. inventory) Present value (e.g. employees retirement benefit liability)

Concepts of Capital and Capital Maintenance Capital

Financial concept Physical concept Financial capital maintenance
Illustration 2

Capital maintenance and determination of profit

Physical capital maintenance

Financial Accounting for Management

 Case 3 Infosys Technologies Ltd. (Annual Report 200506)

Financial Accounting for Management

Presentation of share capital in Balance Sheet Illustration 5

Financial Accounting for Management