A Conceptual Framework

1. A Conceptual Framework Lectured by Dr. Siriluck Sutthachai Accounting Department Faculty of Management Science Khon Kaen University Khon Kaen, Thailand

2. A Conceptual Framework What is a conceptual framework for?

3. Components of a Conceptual Framework • Objectives of financial statements • Users of financial statements • Qualitative characteristics • Elements of financial statements • Recognition and measurement • A concept of capital maintenance

4. Qualitative Characteristics • Understandability • Relevance (ความเกี่ยวข้องกับการตัดสินใจ): the ability of the information to influence the manager’s decisions by changing or confirming their expectations about the results or consequences of actions or events. • Materiality (ความมีนัยสำคัญ): a state of relative importance.

5. Qualitative Characteristics • Reliability (ความเชื่อถือได้): the quality which permits users of data to depend on it with confidence as representative of what it proposes to present. • Representational faithfulness (ความเป็นตัวแทนอันเที่ยงธรรม) • Substance over form (เนื้อหาสำคัญกว่ารูปแบบ) • Neutrality (ความเป็นกลาง) • Conservatism (ความระมัดระวัง) • Completeness (ความครบถ้วน)

6. Qualitative Characteristics • Comparability (including consistency) (ความสม่ำเสมอและเปรียบเทียบกันได้): the use of the same method over time by a given firm.

7. Pervasive Constraints • Timeliness (ทันเวลา): the information must be available to a decision maker before it loses its capacity to influence decisions. • Benefits and Costs (ความสมดุลระหว่างประโยชน์ที่ได้รับและต้นทุนที่เสียไป): Financial accounting information will be sought if the benefit to be derived from the information exceeds its cost.

8. Pervasive Constraints • Balance of qualitative characteristics (ความสมดุลของลักษณะเชิงคุณภาพ)

9. Conceptual Framework Issues • Which view of earnings are identified? • The asset/liability view: • The revenue/expense view • The nonarticulated view • View of earnings determines definitions of elements of financial statements.

10. Definitions of Elements of Financial Statements • A definition of ‘assets’? • A definition of ‘liabilities’? • A definition of ‘earnings’? • A definition of ‘equity’? • A definition of ‘revenue’? • A definition of ‘expenses’?

11. Recognition and Measurement The recognition criteria include: • Definition: the item meets the definition of an element of financial statements. • Measurability: it has a relevant attribute measurable with sufficient reliability. • Relevance: The information about it is capable of making a difference in user decision. • Reliability: The information is representational, faithful, verifiable, and neutral.

12. Recognition and Measurement Two criteria for recognition • It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and • The item has a cost or value that can be measured with reliability.

13. Recognition and Measurement There are four different attributes of assets and liabilities presented in the discussion memorandum, namely: • historical cost (ราคาทุนเดิม); • current cost (ราคาทุนปัจจุบัน)(replacement cost or market cost); • net realizable value (มูลค่าที่คาดว่าจะได้รับ); and • present (or discounted) value of future cash flows (มูลค่าปัจจุบัน).

14. Concepts of Capital Maintenance • The concepts of ‘Capital’: • Financial Capital (ทุนทางการเงิน) • Physical Capital (ทุนทางกายภาพ) • Both concepts use measurements in terms of: • Units of money (หน่วยเงินตามอำนาจซื้อเดิม) • Units of the same general purchasing power (หน่วยเงินตามอำนาจซื้อคงที่)

15. Capital Financial Capital Physical Capital Units of Money Units of GPP Units of Money Units of GPP Concepts of Capital Maintenance

16. Concepts of Capital Maintenance Four concepts of capital maintenance: • Money maintenance: financial capital measured in units of money • General-purchasing-power money maintenance: financial capital measured in units of the same general purchasing power • Productive-capacity maintenance: physical capital measured in units of money • General purchasing-power, productive-capacity maintenance: physical capital measured in units of the same purchasing power.

17. Capital Maintenance and Income • The concept of capital maintenance implies that income is recognised after capital has been maintained or costs have been recovered. • Return on capital (income) is distinguished from return of capital (cost recovery).

18. Capital Maintenance and Income Example: A given firm has • $1,000 in net assets at the beginning • $2,000 in net assets at the end of a given period • $1,500 in net assets are required to maintain the firm’s actual physical productive capacity • the GPP level increased ten percent during the period. According to each of the concepts of capital maintenance, How much would the firm’s income be presented?

19. Capital Maintenance and Assets and Liabilities • Under the money-maintenance concept, conventional accounting, which relies on historical cost for the valuation of assets and liabilities, is mainly applied, as income is equal to the change in net assets adjusted for capital transactions expresses in terms of dollars. • GPP money-maintenance concept requires assets and liabilities be adjusted according to the GPP level.

20. Capital Maintenance and Assets and Liabilities • Productive-capacity maintenance is the concept of capital maintenance used in current-value accounting that discloses assets and liabilities in the financial statements at their current values. • GPP productive-capacity maintenance is the concept of capital maintenance used in general price-level-adjusted, current-value accounting.