CA Intermediate · Advanced Accounting

Framework for Preparation and Presentation of Financial Statements: formula sheet

Full chapter guide

Key formulas

Objective of general purpose financial statements: Information on financial position + performance + cash flows → useful for economic decisions by a wide range of users; Add stewardship: they also show the results of management's accountability for resources.
Status rule: Framework is not an Accounting Standard; if Framework conflicts with a standard, the standard prevails; Write this line in any question on status. This is the ICAI Framework for AS; Ind AS entities follow the separate Ind AS Conceptual Framework.
Main users: Investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies, the public; Seven groups. Learn them as a list.
Information needs in short: Investors: risk, return, dividend capacity | Employees: stability, pay, retirement benefits | Lenders: repayment of loans and interest | Suppliers: payment when due | Customers: continuance of the entity, especially when they have a long-term involvement with it or depend on it | Government: resource allocation, tax and regulation | Public: trends and recent developments; Match each user to one need in answers.
Scope of the Framework: Objective, assumption, qualitative characteristics, elements, recognition, measurement, presentation and disclosure, capital maintenance; Use this list when asked what the Framework covers.
Fundamental characteristics: Relevance + Faithful representation; Both are needed. Information lacking either is not useful.
Enhancing characteristics: Comparability + Verifiability + Timeliness + Understandability; They improve useful information. They cannot make irrelevant or unfaithful information useful.
Components of relevance: Relevance = Predictive value and/or Confirmatory value (with materiality as an aspect); Information needs only one of the two values to be relevant.
Components of faithful representation: Faithful representation = Complete + Neutral + Free from error; Free from error does not mean perfectly accurate.
Cost constraint: Benefits of reporting should justify the cost of providing the information; This is a judgement, not a numeric test. It is a pervasive constraint on reporting, not a characteristic of the information itself.
Going concern assumption: Entity continues for the foreseeable future → no intention or need to liquidate or curtail operations materially; If it does not hold, statements use another basis and that basis must be disclosed.
Accrual basis: Recognise income when earned and expenses when incurred, irrespective of cash receipt or payment; Income earned but not received is an asset (accrued income); expense incurred but not paid is a liability.
Reporting entity: Entity that is required, or chooses, to prepare financial statements; It may be one entity, a portion of an entity, or more than one entity. It need not be a legal entity.
Consolidated statements: Statements of parent and its subsidiaries presented as those of a single economic unit; Unconsolidated statements are those of the entity alone, without its subsidiaries.
Cash-to-accrual conversion for an expense: Expense for the year = Cash paid + Closing outstanding − Opening outstanding − Closing prepaid + Opening prepaid; Use this to move from cash figures to the accrual-based expense. Closing prepaid reduces the current-year expense; opening prepaid increases it.
Accounting equation: Assets − Liabilities = Equity; Equity is a residual figure. It is not measured independently.
Asset definition (three tests): Resource + Control + Past event, with expected future economic benefits; Ownership in law is not required. Control is what matters.
Liability definition (three tests): Present obligation + Past event + Expected outflow of resources; Future intentions or commitments not yet triggered by a past event are not liabilities.
Income: Income = Revenue + Gains; Contributions from equity participants (share capital) are not income.
Expenses: Expenses = Expenses of ordinary activities + Losses; Distributions to owners (dividends, drawings) are not expenses.
Recognition criteria: Recognise if: (1) future economic benefit is probable AND (2) cost or value is reliably measurable; Both conditions must be met. Failing either means no recognition.
Profit: Profit = Income − Expenses; Profit is the change in equity other than owner transactions.
Historical cost (asset): Cost at acquisition = price paid + transaction costs; later carrying amount = cost − depreciation/amortisation − impairment; Updated for consumption, impairment and, for financial items, accrued interest.
Fair value: Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; Market-based, exit price, not entity-specific.
Value in use: Present value of expected future cash flows from using the asset and from its ultimate disposal; Entity-specific. The liability counterpart is fulfilment value.
Fulfilment value: Present value of the cash or other resources the entity expects to transfer to settle the liability; Entity-specific, includes the entity's own expected costs of settling.
Current cost: Asset: cost of an equivalent asset now (price + transaction costs). Liability: consideration receivable now for an equivalent liability, less transaction costs; Entry-type value, not an exit price.
Factors in selecting a basis: Relevance (contribution to future cash flows, characteristics of the item) + Faithful representation (measurement uncertainty, mismatches) + Cost constraint; Use these as headings in any 'how do you choose' answer.
Profit under financial capital maintenance (nominal money): Profit = Closing net assets − Opening net assets + Distributions to owners − Contributions from owners; Closing net assets is closing equity. Adjust for owner transactions first, then compare.
Profit under financial capital maintenance (constant purchasing power): Profit = (Closing net assets + Distributions to owners − Contributions from owners) − Opening net assets × (1 + general price index rise); Opening capital is restated by the general price level change. Only the excess is profit.
Profit under physical capital maintenance: Profit = (Closing net assets + Distributions to owners − Contributions from owners) − Opening operating capability measured at current cost at year end; The rise in current cost of the assets needed to keep capacity goes to a capital maintenance adjustment in equity.
Capital maintenance adjustment: Capital maintenance adjustment = Current cost of keeping capacity − Opening cost of that capacity; It is the revaluation of the opening capacity at current cost. It equals the difference between nominal financial-capital profit and physical-capital profit only when opening capital is wholly in the assets whose cost rose, as in the worked example below.
Classification: Classify = sort by shared characteristics (nature or function); Do not mix dissimilar items in one group.
Aggregation: Aggregate = add items with shared characteristics, without hiding material items; Offsetting assets against liabilities, or income against expenses, is generally not appropriate unless a standard requires or permits it.

Quick revision

The Framework supports the standards; it is the concept base, not a standard that gives treatment rules for specific items. It is not an Accounting Standard, and if the Framework and an Accounting Standard conflict, the Accounting Standard prevails.
This page follows the ICAI Framework for Preparation and Presentation of Financial Statements. Use its definitions, not the wording of the IASB 2018 Conceptual Framework.
Objective: to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.
The four principal qualitative characteristics are understandability, relevance, reliability and comparability.
Relevance includes materiality. Reliability includes faithful representation, substance over form, neutrality, prudence and completeness.
Constraints on relevant and reliable information: timeliness, balance between benefit and cost, and balance between qualitative characteristics.
The Framework gives two underlying assumptions: accrual basis (the effects of transactions are recognised when they occur, not when cash is received or paid) and going concern (the enterprise is assumed to continue in operation for the foreseeable future).
Asset: a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow.
Liability: a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
Equity is the residual interest in assets after deducting all liabilities.
Income: an increase 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: a decrease 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.
Measurement bases in the ICAI Framework: historical cost, current cost, realisable (settlement) value and present value.
Under the concepts of capital and capital maintenance, capital can be seen in a financial or a physical sense, and profit is earned only after the chosen capital is maintained.

Common mistakes

Calling the Framework an Accounting Standard Fix: Remember it is a conceptual guide. Write that it is not a standard and the standard prevails in a conflict.
Saying the Framework overrides a standard when they differ Fix: The standard always prevails. The Framework only guides where no standard applies.
Listing comparability or timeliness as fundamental characteristics. Fix: Fix the tiers: only relevance and faithful representation are fundamental. The other four enhance.
Treating faithful representation as the same as accuracy. Fix: Say it means no errors or omissions in the process, and that estimates are clearly described. It also needs completeness and neutrality.
Treating going concern and accrual basis as the same thing. Fix: Going concern is about the entity's continuation. Accrual is about the timing of recognition. Write one line for each when you compare them.
Saying going concern means the entity will exist forever. Fix: The assumption is for the foreseeable future, and only when there is no intention or need to liquidate or curtail operations materially.
Treating legal ownership as necessary for an asset. Fix: Apply the control test. Assets under finance lease can qualify without legal title.
Recognising a liability for a future planned expense. Fix: Ask whether a past event created a present obligation. If not, there is no liability.
Treating fair value and current cost as the same Fix: Fair value is the exit price (selling or transferring). Current cost is the entry price (buying an equivalent asset, with transaction costs).
Calling value in use a market measure Fix: Value in use is entity-specific. It reflects the cash flows this entity expects, not market participants' views.

Exam tips

Learn the seven users and one need each. This is the most common written question from this topic.
Always write the status line: not an Accounting Standard, and the standard prevails in a conflict.
In MCQs, check for the phrase general purpose and for any claim that the Framework overrides a standard.
Use short numbered points in written answers. Step marks come from each distinct point, not from length.
Link this topic to qualitative characteristics and elements. Questions on scope often ask you to list what the Framework covers.
Know which Framework is asked about: the ICAI Framework applies to AS entities, while Ind AS entities follow the Ind AS Conceptual Framework.
Always state the two-tier structure first. It shows the examiner you know the framework.
For distinguish questions, write a two-column style in bullets: meaning, sub-parts, question it answers, example.