Framework for preparation and presentation of financial statements in accordance with IND AS
Purpose
• Sets out the concepts for preparation and presentation of financial statements in accordance with IND AS
• Assist in development of future Indian Accounting Standards and review the existing
• Assist in promoting harmonization of regulations, AS and procedures relating to presentation of IND AS
• Assist prepares of FS in applying IND AS
• Assist auditors in forming opinion
• Assist users in interpreting the information contained in FS
• Provide interested parties information about the approach in their formulation
Status
Framework do not override the specific IND AS
Scope
The framework deals with
• The objectives of FS
• Qualitative characteristics that determine the usefulness of information in FS
• Definition, recognition and measurement of elements of FS
• Concepts of Capital and Capital Maintenance
• The framework is concerned about the general purpose FS
• Complete set of FS includes
- Balance Sheet
- Statement of profit and loss
- Statement of cash flows
- Notes, other statements and explanatory material
• The framework applies to the FS of all commercial, industrial and business reporting entities
Users of FS
• Investors
• Employees
• Lenders
• Suppliers and other trade creditors
• Customers
• Governments and their agencies
• Public
The primary responsibility of preparation and presentation of FS lies with management of the entity
Objectives of FS
To provide information about the financial position, performance and cash flows of an entity
Underlying Assumptions
Accrual Basis
Effects of transactions and other events are recognized when they occur
Going Concern
Entity will continue operation for the foreseeable future
Qualitative Characteristics of FS
• Understandability – readily understandable
• Relevance – relevant to decision making
• Materiality – omission or misstatement could influence the economic decision
• Reliability – free from material error and bias
• Faithful representation – must represent the transactions faithfully
• Substance over form – transactions accounted and presented in their substance and economic reality and not merely their legal form
• Neutrality – information should be free from bias
• Prudence - Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.
• Completeness – information must be complete within the bounds of materiality and cost
• Comparability – compare FS on the basis of time and different entities
Constraints on relevant and reliable information
• Timeliness
• Balance between benefit and costs
• Balance between qualitative characteristics
• True and fair view
Elements of Financial Statements
• elements directly related to the measurement of financial position in the balance sheet are assets, liabilities and equity
• elements directly related to the measurement of performance in the statement of profit and loss are income and expenses
• The cash flow statement usually reflects elements of statement of profit and loss and changes in balance sheet elements
• presentation of these elements in the balance sheet and the statement of profit and loss involves a process of sub-classification
Financial Position
• An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity
• A liability is 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
• Equity is the residual interest in the assets of an entity after deducting all its liabilities
Performance
• Profit is frequently used as a measure of performance
• The elements directly related to the measurement of profit are income and expenses.
• 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 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
Recognition of elements of Financial Statements
• Recognition is the process of incorporating in the balance sheet or statement of profit and loss an item that meets the definition of an element and satisfies the criteria for recognition
• An item that meets the definition of an element should be recognized if:
- it is probable that any future economic benefit associated with the item will flow to or from the entity and
- the item has a cost or value that can be measured with reliability.
The probability of future economic benefit
The concept of probability is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity.
Recognition of Asset
An asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
Recognition of Liability
A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.
Recognition of Income
Income is recognized in the statement of profit and loss when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably.
Recognition of Expenses
Expenses are recognized in the statement of profit and loss when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.
Measurement of the elements of financial statements
• Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and statement of profit and loss.
• Different measurement bases
- Historical Cost
- Current Cost
- Realizable Value
- Present Value
- Fair Value
Concept of Capital and Capital Maintenance
A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.
The author is working as finance professional in automobile industry and can be reached at vcpote@rediffmail.com
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