Reporting entity • Chapter deals with GPFRs, including F/S • Concept used to identify when entity should prepare GPFRs • Characteristics of reporting entity: – raises resources from, or on behalf of, constituents, and/or uses resources to undertake activities for benefit of, or on behalf of, those constituents; and – service recipients/resource providers dependent on entity’s GPFRs for accountability or decision- 31 making purposes
Reporting entity • May have separate legal entity but not essential characteristic • Group reporting entity → 1 or more separate entities presenting GPFRs as if they are a single entity – not same as economic entity → economic entity only exists if one entity has control over another – boundary of group reporting determined using characteristics of reporting entity 32
What’s changed and how to apply proposed concepts? 33
Comparison Proposed CF Existing Framework Impact Uses terms such as “entity” Concept used to describe Establishing such a concept in the and “reporting entity” boundary of reporting CF is useful to the Board when: • provides characteristics of interchangeably without there is no legislative entity that should prepare defining them and requirement for entity to prepare defines “economic entity” but GPFRs. F/S; or • in the context of F/S only. in understanding if there is a reporting obligation. It also clarifies “group reporting entity” is not same as “economic entity”. 34
Chapter 5: Elements in financial statements 35
Elements • Chapter only deals with F/S and not GPFRs • Elements include: – assets – liabilities – revenue – expense – ownership contributions – ownership distributions 36
Assets “Resource presently controlled by entity as a result of past event” 37
Assets • Resource – item with SP or the ability to generate EB – does not need to have physical form • Presently controlled – ability to use resource (or direct others) to derive benefit of SP or EB – assess indicators of control : • legal ownership; • access to or the ability to limit access to resource; • means to ensure resources are used to achieve its objective; and 38 • enforceable rights to SP or EB
What’s changed and how to apply proposed concepts? 39
Comparison - Assets Proposed CF Existing Framework Impact A resource presently A resource controlled Proposed CF has more comprehensive guidance controlled by the by the entity as a result than that which is provided by the Framework, entity as a result of a of past events and from clarifies that: past event. which future economic • Service potential and ability to generate benefits or service economic benefits is embodied in the potential is expected to resource. flow to the entity. • Notion of “flow” of FEB or SP removed as a resource exists because of the benefits embodied in it rather than the flow of those benefits to an entity. • Service potential and ability to generate economic benefits arise from the resource, rights to use resource, or ability to direct use of resource by others. • Resource must be presently controlled and provides clearer indicators of control. • Sovereign powers give rise to assets → asset arises when power is exercised and there’s 40 right to receive resources
Liabilities “A present obligation of an entity for an outflow of resources that results from a past event” 41
Liabilities • Present obligation – legal obligation or non-legally binding obligation – little or no realistic alternative to avoid • Outflow of resources – For it to be settled, there must be outflow of resources from entity • Past event – past event or past tx is essential to determine whether an obligation is a present obligation 42
Liabilities • Binding obligations – legal or non-legally binding obligations – obligation must be with external party • not essential to know identity before time of settlement • Legal obligations – enforceable in law → no realistic alternative to avoid obligation – includes unconditionally enforceable claims 43
Liabilities • Non-legally binding obligations – not enforceable in law – entity has indicated to other parties that it will accept certain responsibilities (past practice); – as a result of such an indication, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities; and – entity has little or no realistic alternative to avoid settling the obligation arising from those responsibilities – examples: economic coercion, political necessity 44
What’s changed and how to apply proposed concepts? 45
Comparison - Liabilities Proposed CF Existing Framework Impact A present obligation A present obligation of Proposed CF has more comprehensive guidance of the entity for an the entity arising from than that which is provided by the Framework, outflow of resources past events, the clarifies that: that results from a settlement of which is • Obligations that are not enforceable in law give past event. expected to result in an rise to liabilities and distinguishes between outflow from the entity legal obligations and non-legally binding of resources obligations embodying economic → economic coercion and political necessity benefits or service may lead to a liability being recognised as a potential. result of non-legally binding obligations. • Obligation must be to an external party, otherwise it may not be considered a liability. 46
Net financial position • Not defined but description provided • Difference between assets and liabilities – can be positive or negative residual amount 47
What’s changed and how to apply proposed concepts? 48
Comparison – Net financial position Proposed CF Existing Framework Impact Net financial position Net asset defined as: Proposed CF does not define net assets but described as: provides a description of net financial position The residual interest of because: The difference the owners in the • For the IPSASB, net financial positions is between assets and assets of the entity described as difference between assets and liabilities recognised after deducting all its liabilities after adding other resources and in statement of liabilities. deducting other obligations recognised in the financial position. statement of financial position. Can be a positive or → IPSASB acknowledges existence of other negative residual resources and other obligations which do not amount. meet the definition of an element but may be recognised at a Standards-level to to achieve the objectives of financial reporting. • Since the Board decided to remove references to other resources and other obligations in CF, in the local context net financial position is the same as net assets defined in the existing 49 Framework except if other resources and other obligations are used
Revenue and expense Revenue “Increases in net financial position of the entity, other than increases arising from ownership contributions” Expense “Decreases in net financial position of the entity, other than decreases arising from ownership distributions ” 50
What’s changed and how to apply proposed concepts? 51
Comparison – Revenue and expenses Proposed CF Existing Framework Impact • Increases in the net The gross inflow of economic Consistent with proposed definitions financial position of the benefits or service potential to assets and liabilities, proposed entity, other than during the reporting period definitions of revenue and expenses increases arising from when those inflows result in an refer to the movements in the net ownership contributions. increase in net assets, other financial position rather than the “flow” of economic benefits or than increases relating to contributions from owners. service potential. • Revenue definition makes no Decreases in the net Decreases in economic reference to whether the increase in financial position of the benefits or service potential net financial position is “gross” or entity, other than during the reporting period in “net” as: decreases arising from the form of outflows or → the Board believes such a ownership distributions. consumption of assets or consideration should be made at incurrences of liabilities that a Standards-level; and result in decreases in net → gross or net approach will be assets, other than those appropriate in certain relating to distributions to circumstances. owners. 52
Ownership contributions “Inflows of resources to an entity, contributed by external parties in their capacity as owners, which establish or increase an interest in the net financial position of the entity” 53
Ownership distributions “Outflows of resources from an entity, distributed to external parties in their capacity as owners, which return or reduce an interest in the net financial position of the entity” 54
Ownership contributions and distributions • Important to distinguish inflows of resources from owners, and outflows of resources to owners in their capacity as from revenue and expenses – first identify who the owners are before making such a distinction 55
What’s changed and how to apply proposed concepts? 56
Comparison – Ownership contributions Proposed CF Existing Framework Impact • Inflows of resources to an Future economic benefits or service Proposed CF has more entity, contributed by potential that has been contributed to comprehensive guidance external parties in their the entity by parties external to the than that which is provided capacity as owners, which entity, other than those that result in by the Framework. establish or increase an liabilities of the entity, that establish a interest in the net financial financial interest in the net assets of position of the entity. the entity, which: (a) Conveys entitlement both to distributions of future economic benefits or service potential by the entity during its life, such distributions being at the discretion of the owners or their representatives, and to distributions of any excess of assets over liabilities in the event of the entity being wound up; and/or 57 (b) Can be sold, exchanged, transferred or redeemed.
Comparison – Ownership distributions Proposed CF Existing Framework Impact • Outflows of resources from the Distributions to owners are Proposed CF has more entity, distributed to external either: comprehensive guidance (a) decreases in the owners’ parties in their capacity as than that which is provided owners, which return or reduce residual interests resulting by the Framework. an interest in the net financial from transfers to owners in position of the entity. their capacity as owners; or (b) dividends or similar distributions paid to owners as a return on capital. 58
Chapter 6: Recognition in financial statements 59
Recognition • Chapter only deals with F/S and not GPFRs • It identifies the criteria for an element to be recognised in financial statements, as follows: – item needs to meet the definition of an element; and – item can be measured in a way that achieves the QCs 60
Recognition uncertainties • Recognition involves an assessment of uncertainty related to the existence and measurement of the element • Existence uncertainty – item does not satisfy all essential features in the definition of the element • Measurement uncertainty – measurement of item does not achieve QCs and constraints on information 61 – includes uncertainty about amount of SP/ EB
Recognition uncertainties • When the conditions that led to uncertainty change, recognition uncertainties need to be assessed at each reporting date 62
Disclosure and recognition • Failure to recognise items that meet the definition of an element and the recognition criteria is not rectified by the disclosure of accounting policies, notes or other explanatory detail. 63
Unit of account • Represents the group of rights and/or obligations to which recognition and measurement requirements apply – selected for REAL after considering how recognition and measurement will apply – may have a different unit of account for recognition and measurement 64
Derecognition • Use same criteria used at initial recognition when evaluating uncertainty about existence 65
What’s changed and how to apply proposed concepts? 66
Comparison – Recognition criteria Proposed CF Existing Framework Impact The recognition criteria An item that meets the Issues with existing recognition criteria: are: definition of an element • Misinterpreted to mean that there must be • an item satisfies the should be recognised if: a high expectation of an inflow or outflow • definition of an it is probable that any of future benefits to justify recognition. element; and future economic • As a result, items with a lower likelihood • can be measured in benefit or service were not recognised. a way that achieves potential associated the QC’s and takes Benefits of proposed recognition criteria with the item will flow account of to or from the entity; Proposed CF has more comprehensive constraints on and guidance than that which is provided by the • information included the item has a cost or Framework: in GPFRs. value that can be • Recognition not reliant on the probability measured reliably. of the flow of economic benefits or service potential. • Degree of uncertainty that amount of economic benefits or service potential will not flow to/from the entity included in the 67 measurement of the element.
Comparison – Recognition criteria Proposed CF Existing Framework Impact • Removal of probability of the flow in economic benefits or service potential results in more items being recognised. • Items with a low probability or remote likelihood of resulting in inflows or outflows are recognised. • Provide better information as recognised elements better meet the QCs of faithful representation, relevance and comparability. 68
Chapter 7: Measurement in financial statements 69
Measurement • Chapter only deals with F/S and not GPFRs • Identifies measurement concepts to be applied by – Board → selecting measurement bases for GRAP – preparers → selecting measurement bases for assets and liabilities if no requirement in GRAP • Establishes a measurement objective 70
Measurement objective “To select those measurement bases that most fairly reflect the cost of services , operational capacity and financial capacity of the entity in a manner that is useful in holding the entity to account, and for decision- making purposes” 71
Measurement bases Assets Liabilities Historical cost Current value Historical cost Current value measurement measurements measurement measurements Market value Cost of fulfillment Replacement cost Market value Historical cost Historical cost Net selling price Cost of release Value in use Assumption price 72
Selection of measurement basis • Objective of CF is not to provide a single measurement basis • CF identifies factors that should be considered in assessing which measurement basis should be used 73
Selection of measurement basis • Measurement bases are classified by whether they are: – entry vs exit values – observable or unobservable in a market – entity or non-entity specific 74
Attributes of measurement bases Entry and exit values Observable and unobservable Entity-specific and non-entity measures specific measures Entry values Observable in market Entity specific • • • Measure reflects entity’s Measure reflects cost of Measure is observable in purchase (assets) open, active and orderly position not a hypothetical market market • Measure reflects amount → i.e. measure is → i.e. entity’s own economic at which obligation is received or assumed understandable and opportunities and risks (liabilities) verifiable Non-entity specific Exit values Unobservable in market • Measure reflects general • • Measure reflects either Measure is less market opportunities and economic benefits from the understandable and verifiable risks immediate sale or amount than observable measures to be derived from use and subsequent sale (assets) • Measure reflects amount required to fulfil obligation 75 or to be released from obligation (liabilities)
Attributes of measurement bases - assets Observable or Entity or Non-entity Measurement Basis Entry or Exit Unobservable in a Market Specific Entity specific Historical cost Entry Generally observable Market value in open, active and Entry and exit Observable Non-entity specific orderly market Market value in Dependent on valuation Dependent on Exit inactive market technique valuation technique Replacement cost Entry Observable Entity specific Net selling price Exit Observable Entity specific 76 Value in use Exit Unobservable Entity specific
Attributes of measurement bases - liabilities Observable or Entity or Non-entity Measurement Basis Entry or Exit Unobservable in a Market Specific Entity specific Historical cost Entry Generally observable Cost of fulfillment Exit Unobservable Entity-specific Market value in open, active and Entry and exit Observable Non-entity specific orderly market Market value in Dependent on valuation Dependent on Exit inactive market technique valuation technique Cost of release Exit Observable Entity specific 77 Assumption price Entry Observable Entity specific
Assessing measurement bases • Each measurement base examined in the context of whether it (a) provides information about cost of services, operational capacity, and financial capacity; and (b) extent to which it provides information that meets the QCs. 78
Historical cost Definition Cost of services Operational capacity Financial capacity Consideration given Reflects amount of Exchange transaction Reflects value of assets to acquire or resources expended to Reflects amount of that may be used as develop an asset, acquire/develop assets resources available to collateral. which is the cash or consumed. provide services in cash equivalent or future Does not reflect the the value of the Cost of services is amount that could be other consideration reported based on past Non-exchange reinvested from sale of given, at the time of prices transaction asset. its acquisition or Transaction price → does not reflect development. does not reflect cost of assets information about when consumed operational capacity. Entry, generally during reporting observable, entity- period specific value • QCs: Faithful representation, verifiable, timeliness, understandable. • Relevance, comparability achieved to lesser extent as price changes not 79 reflected in historical cost.
Market value Definition Cost of services Operational capacity Financial capacity Amount for which an Revenue from services Useful if it reflects Reflects amount asset could be measured in current value of service receivable on sale of exchanged, or a terms; and consumption potential of asset asset (exit-based liability settled, of asset will also be (entry-based values) values) between reflected at current knowledgeable, terms. willing parties in an arm’s length transaction. Exit value e.g. assets held for trading Entry value e.g. specialised operational assets 80 • QCs: Faithful representation, relevance, verifiable, comparable and understandable (in open, active and orderly market)
Replacement cost Definition Cost of services Operational capacity Financial capacity The most economic Cost of consuming asset Provides information Does not provide cost required for the = sacrifice of service about the resources information about entity to replace the potential incurred by that available to provide amount receivable upon service potential of use. services in future sale of the asset. an asset (including periods. the amount that the Cost of services reported entity will receive in current terms, from its disposal at therefore consumption the end of its useful stated at value of asset life) at the reporting at the date consumed. date. Facilitates comparison Entry value and with taxes and revenue. entity-specific. QCs: Calculation can be complex, and may affect faithful representation. May also affect understandability, timeliness, verifiability, and comparability (as an entity specific value, although may be comparable where same services 81 provided).
Net selling price Definition Cost of services Operational capacity Financial capacity The amount that the Cannot quantify cost of Does not provide Provides information entity can obtain provision of services. information about about value of an asset from sale of the available service if it is to be sold. asset, after potential. deducting the costs of sale. Exit value and entity-specific. QCs: If measure is relevant, it achieves faithful representation, can be timely, verifiable, understandable as based on market information. 82
Value in use Definition Cost of services Operational capacity Financial capacity The present value to Limited applicability and complexity makes use in costing services, and the entity of the assessing operation and financial capacity irrelevant in most instances. asset’s remaining service potential or ability to generate economic benefits if it continues to be used, and of the net amount that the entity will receive from its disposal at the end of its useful life. Exit value and entity-specific. QCs: Complex basis, therefore reduces faithful representation, timeliness, comparability, understandability and verifiability. 83
Summary of assessment - assets Measurement Applicability and suitability Cost of Opera- Financial base services tional capacity capacity a a r Historical cost Straightforward to apply as transaction information is readily available. Useful for assets used in provision of services i.e. operational assets. a a a Market value Provides useful information as it fairly reflects value of asset to entity when markets are open, active and orderly. Entry- Entry- Exit- Exit-based values useful for assets held for based based based trading e.g. financial instruments Entry-based values useful for specialised operational assets. Cost of replacing an asset’s service potential a a r Replacement cost rather than determining cost of acquiring an identical asset. Calculation may be complex and require 84 subjective judgements.
Summary of assessment - assets Measurement Applicability and suitability Cost of Opera- Financial base services tional capacity capacity r r a Net selling Unlike market value, it does not require an price open, active and orderly market. Appropriate when most economic way of using the assets is to sell the asset. r r r Value in use Appropriate when it is less than replacement cost but greater than net selling price. Appropriate for assessment of impairments. Calculation can be complex and has limited applicability in the public sector as it is derived from expected cash flows and most assets held with objective to deliver services. 85
Measurement bases - liabilities Measurement base Definition Historical cost The consideration received to assume an obligation, which is the cash or cash equivalents, or the value of the other consideration received at the time the liability is incurred. Cost of fulfillment The costs that the entity will incur in fulfilling the obligations represented by the liability, assuming that it does so in the least costly manner. Market value The amount for which a liability could be settled between knowledgeable, willing parties in an arm’s length transaction. Cost of release The term used in the context of liabilities to refer to the same concept as “net selling price” in the context of assets. Cost of release refers to the amount of an immediate exit from the obligation. Assumption price The term used in the context of liabilities to refer to the same concept as replacement cost for assets. Just as replacement cost represents the amount that an entity would rationally pay to acquire an asset, so assumption price is the amount which the entity would rationally be willing 86 to accept in exchange for assuming an existing liability.
Summary of assessment - liabilities Measurement base Applicability and suitability Historical cost Advantages and drawbacks for liabilities are the same as those discussed under assets. Appropriate where liabilities will be settled at stated terms. Not applicable for liabilities arising from non-exchange transactions and those with variable amounts. Cost of fulfillment Appropriate only when it is higher than cost of release and assumption price. Market value Advantages and drawbacks for liabilities are the same as those discussed under assets. Appropriate when liability is subject to changes in a specified rate, price or index in an open, active and orderly market. Not appropriate where transfer of liabilities is restricted i.e. obligations from non-exchange transactions. 87
Summary of assessment - liabilities Measurement base Applicability and suitability Cost of release Advantages and drawbacks for liabilities are the same as those discussed under “net selling price” for assets. Appropriate when the most resource-efficient course is to seek immediate release from an obligation i.e. cost of fulfillment is higher than cost of release. Assumption price Advantages and drawbacks for liabilities are the same as those discussed under “ replacement cost” for assets. Not relevant for non-exchange transactions. Appropriate when it is higher than cost of fulfillment and cost of release. 88
What’s changed and how to apply proposed concepts? 89
Comparison Proposed CF Existing Framework Impact Selection based on whether it Selection of an appropriate CF provides comprehensive and provides information about measurement basis based on conceptually-based reasons as cost of services, operational the objective of financial to why certain measurement capacity, and financial statements and the QCs of bases would be appropriate. capacity; and extent to which it financial information, the nature Board agreed it is confusing to provides information that of assets or liabilities refer to fair value and market meets the QCs. concerned, and circumstances because and IFRS 13 definition involved. not suitable for p/sector. It is also Assets: not appropriate to define fair • historical cost Different measurement bases value differently from IASB. • market value are applied in varying Present value is not included as • replacement cost combinations, and include the it is not a measurement basis but • net selling price following: a technique used to estimate • • value in use historical cost measurements. • Liabilities: current replacement cost • • historical cost realisable (settlement) value • • cost of fulfillment present value • • market value market value 90 • • cost of release fair value • assumption price
Chapter 8: Presentation in GPFRs 91
Presentation • Chapter deals with GPFRs, including F/S • Presentation is defined as “ the selection , location and organisation of information in GPFRs” • Presentation aims to provide information that supports the objectives and meets the QCs of financial reporting 92
Information selection • Selection of information should reflect – what information is reported: (a) in F/S; and (b) in GPFRs outside the financial statements • Information is selected for display or disclosure in GPFRs – display: communicates key messages, concise, presented prominently – disclosure: provides the basis, disaggregation of displayed info 93
Information selection • Information selection decisions involve consideration of: - objectives of financial reporting; - QCs and constraints of info included in GPFRs; and - relevant economic or other phenomena about which information may be necessary 94
E.g. Information for display 95
E.g. Information for disclosure 96
Information location • Information location decisions focus on the allocation of – information between different reports; and – information within a report. • Impacts contribution to achievement of objectives of financial reporting and QCs • Can affect users’ interpretation of information as well as its comparability 97
Information location • Information location decisions involve consideration of: – nature of the information – jurisdiction-specific factors ie. legislative requirements – linkages between information 98
Information organisation • Information organisation addresses the arrangement, grouping and ordering of information, which includes decisions about: – how information is arranged within a GPFR; and – the overall structure of a GPFR. • Can affect the interpretation by users 99
Information organisation • Takes into account – important relationships between information and whether it is for display or disclosure • relationships include: enhancement, similarity and shared purpose – relationships may exist between information in different GPFRs, components within a GPFR, and parts of a single component. 100
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