CONCEPTUAL FRAMEWORK AND GAAP
TOPIC LIST
• The conceptual framework
• Introduction to conceptual framework and
GAAP in financial reporting
• The regulatory framework
• The standard setting process
• Role of IASB, SIC and IFRIC
• The due process
GENERALLY ACCEPTABLE ACCOUNTING
STANDARDS (GAAP)
•GAAP means all rules, guidelines, and directives
from whatever source which govern the
recognition, measurement and disclosure of
accounting transactions for the purpose of the
preparation of financial statements.
•The conceptual framework which was developed
by International Accounting Standards Board
(IASB).
Generally Accepted Accounting Practice
(GAAP)
GAAP signifies all the rules, from whatever
source, which govern accounting.
In individual countries this is seen primarily as
a combination of:
• National company law
• National accounting standards
• Local stock exchange requirements
Non-mandatory sources
The concept also includes the effects
of non-mandatory sources such as:
• International accounting standards
• Statutory requirements in other
countries
Sources of GAAP
• Company law
• The Institute of Chartered Accountants of
Malawi
• Malawi Accountants Board
• Malawi Stock exchange
• International accounting standards Board
CONCEPTUAL FRAMEWORK
• The conceptual framework is a statement of
generally accepted theoretical principles
which form the frame of reference for
financial reporting.
IASB,IFRIC,SIC
• International Accounting Standards Board
(IASB)
• IFRIC Interpretations are developed by the
IFRS Interpretations Committee (previously
the International Financial Reporting
Interpretations Committee, IFRIC) and are
issued after approval by the International
Accounting Standards Board (IASB).
• Standard Interpretations Committee (SIC)
The IASB's role
Under the IFRS Foundation Constitution, the IASB
has complete responsibility for all technical matters
of the IFRS Foundation including:
• Full discretion in developing and pursuing its
technical agenda, subject to certain consultation
requirements with the Trustees and the public
• the preparation and issuing of IFRSs (other than
Interpretations) and exposure drafts, following the
due process stipulated in the Constitution
• the approval and issuing of Interpretations developed by
the IFRS Interpretations Committee.
Role IFRIC
• Interpret the application of IFRSs
• Provide timely guidance on financial reporting issues not specifically
addressed in IFRSs, in the context of the IASB’s Framework
• Undertake other tasks at the request of the IASB in carrying out its work
above
• Have regard to the IASB‘s objective of working actively with national
standard-setters to bring about convergence of national accounting
standards and IFRSs to high quality solutions.
• Publish after clearance by the IASB draft Interpretations for public
comment and consider comments made within a reasonable period
before finalising an Interpretation report to the IASB.
• Obtain the approval of nine of its members for final Interpretations if
there are fewer than sixteen members, or by ten of its members if there
are sixteen members.
Purpose of the framework
• For consistency of presentation of financial
statements
• Avoid political intervention in the preparation
of financial statement.
Objectives
(a) to assist IASB in the development of future International Financial Reporting
Standards (IFRS) and review of the exiting IFRSs
(b) to assist IASB in promoting harmonization of regulations, accounting
standards and procedures relating to the presentation of financial
statements by providing a basis for reducing the number of alternative
accounting treatments permitted by IFRSs.
(c) to assist national standard setting bodies in developing their national
standards.
(d) to assist prepares of financial statements in applying IFRSs and in dealing
with topics that have yet to form the subject of an IFRS
(e) to assist auditors in forming an audit opinion on whether financial
statements comply with IFRSs;
(f) to assist users of financial statements in interpreting the information
contained in financial statements prepared in compliance with IFRSs and
(g) to provide those who are interested in the work of the IASB with
information about its approach to the formulation of IFRSs.
Danger of not having a conceptual
framework
• standards tend to be produced in a haphazard
and fire-fighting approach.
• producing contradictions and inconsistencies
in basic concepts,
• highly detailed standards produced by the
Financial Accounting Standards Board (FASB)
has created a financial reporting environment
governed by specific rules rather than general
principles.
Advantages
• The situation is avoided whereby standards are
developed on a patchwork basis, standardised
accounting practice
• policies deriving from a conceptual framework will
be less open to criticism that the standard-setter
buckled to external pressure.
• Some standards may concentrate on profit or loss
whereas some may concentrate on the valuation of
net assets (statement of financial position).
Disadvantages
• Financial statements are intended for a variety of
users, and it is not certain that a single conceptual
framework can be devised which will suit all users.
• Given the diversity of user requirements, there may
be a need for a variety of accounting standards, each
produced for a different purpose (and with different
concepts as a basis).
• It is not clear that a conceptual framework makes
the task of preparing and then implementing
standards any easier than without a framework.
The new chapters of the Conceptual Framework;
1. The objectives of financial information
2. The reporting entity
3. The qualitative characteristics of useful
financial information
4. The definition, recognition and measurement
of elements from which financial statements
are constructed.
5. The concept of capital and capital maintenance.
(A) Objectives of financial statements
• The objectives of financial statements is to
provide information about the financial
position, performance and changes in financial
position of an entity that is useful to a wide
range of users in making economic decisions.
• These users include lenders, investors,
customers, suppliers, employees, Government
and other stakeholders.
The general purpose financial statements
• Financial performance is shown by the statement of
Profit or loss and other comprehensive income.
• Profitability is used to assess the potential changes in
economic resources the entity is controlling.
• Changes in financial position are given by the
statement of financial position.
• This information is more useful to the lenders as it
shows the financial stability of an entity
• Details of cash generated during the year and how it
has been utilized is presented through the statement
of cash flows.
B. Reporting entity
• Business is supposed to be treated
as a separate legal entity from its
owner as such business transactions
should be recognized separately
from the private transactions of the
owner.
C. Qualitative characteristics of useful financial information
• There are two fundamental
qualitative characteristics of financial
information which must always be
checked on if the financial
information is to be meaningful to the
intended users and these are
relevance and faithful presentation.
(a) Relevance
• The financial information provided should
capable of affecting the decision made by
users.
Materiality
• Relevant information is affected by its nature
and materiality. Information is material if its
omission or misstatement could influence the
economic decisions of users taken on the basis
of financial statements.
(b) Faithful presentation
• The second aspect is faithful presentation.
• The relevance of financial information can be
recognized if such information has been
presented in a form which clearly reflects the
purpose for which it has been prepared.
• Information must present faithfully the
transaction which it is supposed to present.
Enhancing qualitative characteristics
• Apart from the fundamental
characteristics listed above, IASB
recognized that for financial
information to be very useful, there
other characters which are
complementary to the two and makes
financial information even more
meaningful.
Comparability
• Financial information should be presented in a
format which can easily be comparable
between two different entities but also within
the same entity over a number of years.
• Consistent application of accounting policies
enhance comparison within the same entity
over a number of years while usage of agreed
format enhances comparison of results for two
different entities.
Timeliness
• Financial information should be presented in
good time if the decision made there from is
to be useful to the users. Decisions made out
of stale information tend to result in wrong
conclusions from the financial information and
is misleading.
Understandability
• Financial information is usually considered as
complex as such must be presented in a simplified
manner in recognition of the intended users.
• Care must be taken when considering simplifying
the financial information as some information
may lose the meaning while trying to ensure
simplicity.
• The relevance of financial information will
strongly be measured by the way users
understand the information provided.
(D) The definition, recognition and
measurement of elements from which
financial statements are constructed.
The following are regarded as elements of financial
statements;
• Assets,
• Liabilities,
• Equity,
• Revenues and
• Expenses
Assets
• A resource controlled by an entity from past event from which future
economic benefits are going to flow to the enterprise.
The definition emphasizes three main issues for an item to be an asset:
i. There should be a past event or transaction for an asset to be called an asset
ii. There should be control and not ownership. For example, if there is a
finance lease, the lessee will recognize the asset in the financial position
much as the item does not belong to him while the lessor will not
recognize the same asset in his books much as he is the owner of the asset.
iii. There should be future economic benefit for an asset to be an asset. i.e. an
asset of an enterprise may have been rendered not useful at all because of
technological advancement of the item being used now. Much as the item
was bought by the entity, it is now useless as the will not use it in their
production process.
Liability
• This is a present obligation of the entity arising
from past event, the settlement of which is
expected to result in an outflow from the entity of
resources embodying economic benefits.
• Obligation may be legal or constructive. It does not
matter as long as an entity has a present
obligation, then it has to recognize the liability.
• Also note that the definition emphasizes past
events or transaction, current obligation and
future outflows.
Equity
• This is the residual interests in the assets of the
entity after deducting all its liabilities.
• This is derived from the accounting equation
which says; A-L=C. Equity represents
ownership interest in the business.
Income and Expense
Income
• This is the increases in the economic benefits during the
accounting period in the form of inflows or enhancements of
assets or decreases of the liabilities that result in increases in
equity, other than those relating to equity participants.
• The recognition in income occurs simultaneously with the
recognition of increase in asset or decrease in liability.
Expense
• These are reduction in economic activities during the accounting
period in the form of outflows or depletion other than the
reduction because of payments to equity participants.
• The recognition in expenses occurs simultaneously with the
recognition of increase in liability or decrease in asset.
Recognition of Elements in the financial statements
• Recognition is the process of including as item in the
financial statements.
• There is need for an element of financial statement
satisfy two criteria for it to be recognized.
i. It is probable that there will be the future flow of
economic benefits to or from a firm.
ii. The item has a cost or value that can be measured reliably.
• Probable future economic benefits refers to the
probability of it happening is more than not happening.
In other words, the probability of happening is more
than 50%.
Measurement of elements in the financial statements
• Measurement is the determination of value to be included in the
financial statements.
• Usually, these are included at the following bases:
i. Historical Cost model. Assets and liabilities are measured at the
amount which an item was purchased at. The advantage of this
cost is that the amount can be verified.
ii. Current cost. Assets are carried at amounts of cash and cash
equivalents that would have to be paid if the same or equivalent
asset was acquired now.
iii. Realizable (settlement) Value. The amount of cash that can be
currently realized if an asset was sold
iv. Present value: a current estimate of the (present discounted)
value of future net cash flows.
(E) Capital maintenance
• A business should maintain the amount of
capital invested and the retained profit is
measured by the value of which capital is
increased during the period.
• For a business to survive it has to ensure that
its capital levels are maintained.
• The measurement of capital can either be in
terms of operating (Physical) capacity or
financial capacity.
(i) Financial maintenance
• This is the most common measure of capital. In
essence capital is measured as the monetary
value of capital at the beginning of the year
against the value at the end of financial year.
• Example if the business had a capital of
K3,000,000 at the beginning of the year and at
the end of the year capital is now at
K3,500,000 then it is said that capital has been
maintained.
(ii) Operating (Physical) maintenance
• This is where capital is measured in terms of
the physical units of core business activities.
• The aim of this measurement is to ensure that
the business is able to maintain its operating
capacity especially in times of high inflation.
(ii) Operating (Physical) maintenance
• Looking at example above on financial capital maintenance.
If the business trade in various merchandize whereby the
price at the beginning of the year was K400 and at the end of
the year is now trading at K500 Operating capital at close of
the year ( K3,500,00 /500) 7,000 units
• Operating capital at the beginning of the year
( K3,000,000 / 400) 7,500 units
• Please note that for financial capital maintenance, the
business is seen to have maintained its capital while at the
same time using operating capital maintenance it shows that
the business was able to have 7,500 units at the beginning of
the year but this has been significantly reduced to 7,000
units.
OTHER LOCAL GAAP IN MALAWI
• For Accountants in Malawi, there are other
General Acceptable Accounting Practice
(GAAP) which are supposed to be taken into
account when preparing financial statements.
(A) Companies Act
• Companies Act is an important framework in the
preparation of financial statements.
• Companies Act 2013 among other issue specifies;
- How a company can be formed and the requirements for
each form of business
- The preparation of financial statements and dates for
filing such financial statements.
- The requirement for auditing financial statements
- The issues on corporate governance – roles of
shareholders and directors
Companies Act
Specific provisions in the new Act relating to Accounting are
found from Section 180.
- Every company shall maintain accounting records which
shows a true and fair view –S 180
- Every company shall at the end of financial year file an
annual return with the registrar of companies – S181
- The directors of every company shall, at a date not later than
eighteen months after the incorporation of the company and
subsequently once at least in every calendar year at intervals
of not more than fifteen months, cause to be prepared and
sent to every member of the company and to every holder of
debentures of the company a copy – S 182.
Companies Act
- Every company shall produce a Profit or Loss account and
the Statement of Financial Position at the end of an
accounting period – S183 & S184.
- Section 185 requires a company which has subsidiaries to
prepare group accounts, combining the results of the
subsidiary with those of the parent company.
- Requirement to produce directors report which must
accompany the financial statements – S 189
- Requirement to have the financial statements of a
company audited – S 1910 Appointment and remuneration
of the Auditors – S 191
B. Malawi Stock Exchange
Business entities which are listed on the stock exchange
are subjected to extra review by the stock exchange
rules.
• Firstly, before a company is listed, there are specific
financial information which is supposed to be produced
to assist potential investors in deciding whether to
invest in the business or not.
• Any listed company is required to prepare and publish
mid-year results as opposed to only produce financial
statements at the end of financial as is the case with
other form of business.
C. Institute of Chartered Accountants in Malawi (ICAM)
• ICAM is an accountancy profession body of Malawi responsible
for overseeing accountancy professional in Malawi.
The role of ICAM include;
(1) To promote the development of accountants in Malawi
(2) to supervise accounting profession to the best interest of
the public
(3) to promote the highest order of professional ethics and
business conduct of, and enhance the quality of service
offered by Chartered Accountants or Diplomat Accountants
(4) to protect the public interest by ensuring that members of
the institute observe the highest standards of professional and
ethical standards
ICAM
(5) to ensure the professional independence of accountants
6) to determine the eligibility criteria to become the member of the Institute
(7) to arrange for the assessment of candidates seeking certification as members
(8) to promote, maintain and increase the knowledge, skill and competence of
members of the institute and students
(9) to ensure that members of the institute obtain necessary technical and ethical
guidance that enables them to meet the needs of the community in areas in
which they have special knowledge and expertise
(10) to maintain and monitor high quality practical training at all levels of the
profession
(11) to maintain the legitimate professional rights of the members of the institute
(12) to advance the theory and practice of accountancy in all aspects.
(13) to promote high quality accounting, auditing and financial reporting
standards and practices
(14) to develop professional qualification for accountants and auditors in Malawi.
(D) Malawi Accountancy Board
MAB is an accountancy regulatory board of Malawi and
the responsibilities include;
(1) To promote high quality reporting of financial and non-
financial information by entities.
(2) To promote the highest professional standards among
auditors and accountants.
(3) To improve the integrity, competence and transparency
of professional activities in accounting and auditing.
(4) To adopt and ensure compliance with and the
enforcement of applicable local and international
accounting and auditing standards.
MAB
(5) To protect the interests of the general public and
investors.
(6) To encourage effective collaboration with other
regulators.
(7) To consider and determine applications for registration
as chartered accountants and diplomat accountants.
(8) To maintain the Register of chartered accountants and
diplomat accountants.
(9) To advise training institutions and the Institute of
Chartered Accountants in Malawi (ICAM) in matters
pertaining to examinations and training of accountants.
