Analysis of IFRS Conceptual Framework and Financial Statement Measures

This report provides a comprehensive analysis of the International Financial Reporting Standards (IFRS), focusing on its conceptual framework and the various measurement methods used in financial statements. The introduction highlights the importance of financial reporting in providing crucial information about a company's liquidity and other aspects, adhering to IFRS guidelines. The report delves into the IFRS conceptual framework, emphasizing its role in guiding the preparation of financial statements for external users, and explores the qualitative characteristics of useful financial information, including objectivity, relevance, and comparability. The report then discusses different measurement bases, such as historical cost, current cost, net realizable value, and present value, outlining the advantages and limitations of each method. It emphasizes the importance of these measures in presenting a fair value of assets and liabilities and assisting investors in making informed decisions. The report concludes by reiterating the significance of IFRS in ensuring ethical business conduct and enabling informed decision-making for investors.

International Financial
Reporting Standard
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
a) IFRS conceptual framework for Financial Reporting .............................................................3
b) Discussing the measures of financial statements.....................................................................5
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
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INTRODUCTION
Financial reporting is the most important task which assists corporation to ensure proper
reporting of all financial information. It assists corporation to deliver important information
related to liquidity and other related aspect of the business so as to meet expectation of different
parties in an effectual manner. Present report is based on International Financial Reporting
Standard and its key purpose. Further, different measures of financial statements such as
historical cost, fair value and net realizable value as well as present value of future cash flow are
explained. In addition to this, limitation of each measure has been explained in detail so as to
assess the effectiveness of reporting standard.
a) IFRS conceptual framework for Financial Reporting
International Financial Reporting standard is the most important aspect which state the
rules and regulations for preparing financial statement for public limited corporation. According
to guidelines provided by IFRS, companies need to prepare all necessary statements which
reflects details related to profit, cost and liquidity as well as equity or investment etc. It facilitates
to describe the basic concepts wit regard to preparation as well as present of financial statements
fort meeting expectation of external users (Hail, Leuz and Wysocki, 2010). This proves to be
effective to resolve accounting issues faced by companies and ensure ethical conduct of business.
The revised Framework reflects that generally purpose of financial reporting is limited to users
like existing or potential investors, creditors and lenders. This also focuses upon qualitative
characteristics to useful financial information. In this manner, fundamental qualitative and
enhancement of qualitative characteristics are explained with respect to verifiability,
understandability and comparability. However, basic focus or purpose of IFRS is on the
following aspects- Objective of financial reporting-It is the most important aspect under which reporting is
done for potential and existing investors who generally use the financial information for
taking decision related to selling, buying and holding equity or debt instrument
(Armstrong and et. al., 2010). Here, IFRS may not provide all the related information to
uses for making economic decision. At this juncture, users can refer other sources for
pertinent information. Furthermore, IFRS does not consider regulatory as primary users
and in turn general purpose financial report does not direct to them and other parties.
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 Qualitative characteristics of useful information-Under this, reporting shed light on
predictive value and confirmatory value or both through which difference can be made in
decision of users. Here, focus is laid on faithful representation of financial information of
the business. It reflects connection of financial report to reliability whereby financial
report present the economic phenomena (Shanklin, Hunter and Ehlen, 2011). Owing to
this, reliable information depicts that financial statements are neutral, free from error and
should be complete report. It can be critically evaluated that financial information might
to always be reliable and free from error. However, four stated aspects such as timeliness,
understandability and comparability as well as verifiability are considered for taking
effective decision for investors (DeFond and et. al., 2011). For example, comparative
aspect make it possible for user to assess difference between item and compare
performance of one entity with other. On the other hand, all the financial information is
presented on time and reached to users so as to take decision. In addition to this, concept
of understandability is ensured under which all financial statements are presented clearly
and concisely.
 Concepts of capital and capital maintenance- It is another concept of conceptual
framework of International Financial Reporting Standard which shows that link between
profit and capital employed. It aids to measure to rate of return or profit generated by the
corporation. At this juncture, inflows of assets addition to maintain capital is considered
as profit as well as return on capital (Cotter, 2012). In this manner, profitability is
calculated from income after deducting the expenses. However, in case expenditure are
higher than residual amount then ratio of loss come to zero. On the other hand, concept of
profit in case of physical assets is considered only when physical productive capacity of
the entity at the end of financial year exceeds the physical productive capacity the
beginning of the the period. Therefore, major difference between two concepts is of
treatment of price change effect of assets and liabilies.
In this manner, some of the cases are identified by board which create conflict between
conceptual framework and IFRS. However, the critical issue give importance to requirement of
IFRS over conceptual framework (Kieso, Weygandt and Warfield, 2010). It is showing that
above conceptual framework plays vital role in meeting expectations of users and enables them
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to take right decision. It determine long run success of the business with increased rate of return
as ethical conduct is ensured.
b) Discussing the measures of financial statements
Measurement is the process adopted by business to set the amount of elements of
financial statement. This is generally applied for balance sheet where different types of assets
and capital of the business are presented (Measurement Bases for Financial Accounting, 2006).
In this regard, different measures of financial statements are included such as historical, current
cost/ fair value and present value of future cash flow or net realizable value. These are explained
as follows-
Historical cost
Generally assets are recorded on cash equivalents or the fair value. This value indicates
the price of asset paid at the time of its acquisition. Furthermore, liabilities are recorded on the
basis of amount of proceeds derived in exchange of obligation. It shows liabilities can be paid in
normal course of business (Bohušová, 2014). It is traditional valuation method under which price
of assets is calculated on past basis. It can be critically evaluated that contemporary business
environment should be flexible and transparent. However, focus is laid on recording of assets
and liabilities on its actual value. In this regard, adjustment related to inflation and other related
aspects are ignored.
For example, in case historical cost is adopted then value of assets shown in balance sheet
would actual purchase cost. This is very simple cost under which more conventional methods are
adopted. However, information remain free from any kind of biased view. Apart from this,
adoption of historical cost does not support business for manipulation of the due to evidence in
the form of receipts and invoices (Pounder and CFM, 2010). Despite of several good aspects,
there are disadvantages of this concept. For example, historical cost just reflects the price of
assets but not the actual value. Owing to this, cost purchased in current time might be costly in
future because of impact on inflation. Furthermore, any intangible assets of the business are
reporting in the financial statements and mere outdated and old interest rate information is shown
in the financial statements.
Current cost
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It is another measure of financial statements under which currently acquired assets are
required to be paid. However, they should be carried at the amount of cash or cash equivalents.
Here, operating capability of business is maintaining by focusing capital maintenance approach.
However, adjustment are based on market to market but generally assets are measured on the
basis of replacement cost (Kythreotis, 2014). This method is considered as comparatively more
relevant as up-to-date information with provided by taking into account financial market.
Further, inflationary adjustment are also taken into account (Measurement in financial reporting,
2016). Not only this, current cost accounting proves to be effective for investors to easily review
the and determine the risk level of assets and liability. Therefore, market price is considered for
determining the value of assets.
It can be critically evaluated that cost accounting method proves to be unreliable and
issue is faced in making financial decision. Furthermore, volatile price is considered because
lack of market price of assets forced management to estimate the volatile which is generally
considered inappropriate. Owing to this, appreciation cannot be measured as information are
irrelevant and less reliable.
Realisable value
This is another type of costing method under which seller estimate the price or value of
assets after deduction of cost of selling or disposing of an assets. This method enables company
to present the fair value of assets in financial statements through which inventors can easily take
decision related to investment. This aspect enable business to present its fair value and meet
expectations of all related parties. Owing to this, firm can also include the net realizable value of
assets into accounts receivables (Bank, 2016). It shows that Financial Accounting Standard
Board set guidelines for management of inventory and other related assets which can be
converted into cash in relatively less time span. Moreover, companies use this method for
presenting the right information among investors, Under this, management assign right value of
inventory.
It can be critically evaluated that realizable value is calculated on the basis of high
information. However, assumption are also made and then accordingly expected outcome is set.
Though, assumption and other related aspect might not be true all the time. In this regard,
presented information might be illusory of investors or other related parties of the business. This
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method does not show the perfect comparison but close estimation is provided. I this manner,
realizable cost method is less appropriate for the business but still present the appropriate detail
related to value of particular machinery or assets (Henry and Holzmann, 2011).
Present value
This is another effective method to allocate the value of assets under financial statement.
It enables management of the business to consider future value of cash flow. Under this,
investment appraisal technique are applied and then accordingly value of future money in present
content is determined. It aids to meet the organization objectives by assessing the effectiveness
of acquisition of single assets. This aspect make it possible to ensure optimum utilization of
limited resources for business (Christensen and et. al., 2015). Owing to this, present value is the
most effective aspect to determine the price of assets showing the financial statement of
business. In this regard, different assets such as stocks, options, business enterprises and
intangible assets are included. All of these stated assets need valuation for different purpose such
as capital budgeting, merger, investment analysis and financial reporting as well as for tax
liability. However, management of the business must have information related to different
aspects such as timing, amount of future cash flow, economic conditions and interest rates. Apart
from this, at some point of time some assumption are also made related to decreased neutrality.
In addition to this, clear information are presented related to all assets of business where
reliability of the information is not damaged in any context.
The major issues faced under present value is related to risk adjustment because
management need to assure about inclusion of market risk and uncertainties associated with the
same. Otherwise, valuation of assets will not be right. Furthermore, fair value measurement is
also considered by focusing upon market based assumption, future cash flows and uncertainties
as well as demanded risk premium (Kieso, Weygandt and Warfield, 2010). Though, present
value method is helpful to assess the financial performance of the business in an effectual
manner because it assists corporation incorporate exact value of the assets. This in turn business
can plan for its expansion and development because actual performance is know. It can be
critically evaluated that market assumption are also focused which might create issues in growth
and development of the business at some point of time.
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CONCLUSION
The aforementioned report concludes that there are different aspect the present the
financial information under the financial statement in order to meet expectations of potential
investor. It assist corporation to meet expectation of external users who are making their
investment decision. It can be also be said that appropriate measures of elements of financial
statement is used by the business through which it becomes easy to ensure ethical conduct of
business. However, conceptual framework International Financial reporting standard is applied
to resolve potential issues which are being faced by investor. However, any case of conflict in
IFRS and framework, requirement of IFRS are considered.
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REFERENCES
Journals and books
Armstrong, C.S. and et. al., 2010. Market reaction to the adoption of IFRS in Europe. The
accounting review. 85(1). pp.31-61.
Bohušová, H., 2014. General aaproach to the IFRS and US GAAP convergence. Acta
Universitatis Agriculturae et Silviculturae Mendelianae Brunensis. 59(4). pp.27-36.
Bruce Pounder, C.M.A. and CFM, D.A., 2010. A common framework for accounting
standards. Strategic Finance. 92(5). p.20.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What
determines accounting quality changes around IFRS adoption?. European Accounting
Review. 24(1). pp.31-61.
Cotter, D., 2012. Advanced financial reporting: A complete guide to IFRS. Financial
Times/Prentice Hall.
DeFond, M. and et. al., 2011. The impact of mandatory IFRS adoption on foreign mutual fund
ownership: The role of comparability.Journal of Accounting and Economics. 51(3). pp.240-
258.
Hail, L., Leuz, C. and Wysocki, P., 2010. Global accounting convergence and the potential
adoption of IFRS by the US (Part I): Conceptual underpinnings and economic
analysis. Accounting Horizons. 24(3). pp.355-394.
Henry, E. and Holzmann, O.J., 2011. Conceptual framework revisions: Say goodbye to
“Reliability” and “Stewardship”. Journal of Corporate Accounting & Finance. 22(3).
pp.91-94.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS
edition (Vol. 2). John Wiley & Sons.
Kythreotis, A., 2014. Measurement Of Financial Reporting Quality Based On Ifrs Conceptual
Framework’S Fundamental Qualitative Characteristics.European Journal of Accounting,
Finance & Business. 2(3). pp.4-29.
Shanklin, S.B., Hunter, D.R. and Ehlen, C.R., 2011. A retrospective view of the IFRS'conceptual
path and treatment of fair value measurements in financial reporting. Journal of Business &
Economics Research. 9(3). p.23.
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Online
Bank, E., 2016. The Net Realizable Value Method of Accounting. [Pdf]. Available
through:<http://smallbusiness.chron.com/net-realizable-value-method-accounting-
65552.html>. [Accessed on 14th November 2016].
Measurement Bases for Financial Accounting. 2006. [Pdf]. Available
through:<http://www.ifrs.org/Current-Projects/IASB-Projects/Measurement-Objectives/
Discussion-Paper-and-Comment-Letters/Documents/
MeasurementBasesforFinancialAccountingDPshort.pdf>. [Accessed on 14th November
2016].
Measurement in financial reporting. 2016. [Pdf]. Available
through:<http://www.icaew.com/en/technical/financial-reporting/information-for-better-
markets/ifbm-reports/measurement-in-financial-reporting>. [Accessed on 14th November
2016].
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