The Conceptual Framework for Financial Reporting is not an accounting standard but a foundational document that establishes the principles underlying Indian Accounting Standards (IndAS). It provides guidance for developing accounting policies when no specific standard exists and ensures consistency across all 39 IndAS. The framework sets boundaries for IndAS development and is converged with the IFRS Conceptual Framework (2018). Financial statements consist of five components: Balance Sheet (financial position), Profit and Loss Statement (financial performance), Statement of Changes in Equity (shareholder funds), Cash Flow Statement (liquidity), and Notes to Accounts (qualitative and quantitative disclosures). The five elements of financial statements are Asset, Liability, Equity, Income, and Expense. Any item in financial statements must be evaluated through four pillars: Recognition, Measurement, Presentation, and Disclosure. The framework ensures that financial information is useful to primary users (investors, lenders, and creditors) by providing information about economic resources, claims, and changes in these resources.
Final Paper 1: FR | Topic: Conceptual Framework for Financial Reporting...| Session 1 | 23 July 2026
Added:you all on the second class of live virtual classes organized by board of studies of ICAI. Friends, my name is CA Dr. Alo Gerk and I am the today's faculty on this topic. Friends, this conceptual framework for financial reporting is it a standard? Answer is big no. It is not a standard. It is something on which standards are based.
So friends, this conceptual framework for financial reporting relationship with the Indian accounting standard is just like a relationship or alphabet to the apple. Right? For example, when a child born and when a child started learning, studying. So the parents does not tell him only apple. Parents used to tell them a for apple means alphabet comes before the words, right? Apple, boy, ball, cat, dog. So A to Jed, A, B, C, D, E, F, G, H, A to Zed is the alphabet. and through the alphabet the words are formed. Right? So likewise conceptual framework for financial reporting sets the boundaries on which Indian accounting standards are based.
So it's a framework right it's a fundamental principles which are used for development and drafting of Indian accounting standards. Right? So it comes before Indian accounting standard. Okay friends. So friends before getting into this conceptual framework for financial reporting largely it's a theoretical concept okay I theoretical I mean to say this chapter is a theoretical chapter okay so you may find a question of three to four marks from this chapter so talking about this chapter friends conceptual framework of financial reporting it's a small chapter right it has around 8 to nine units 8 to nine chapters I'll take you through but before getting into this session let's let's discuss some quick questions friends how many Indian accounting standards are there how many Indian accounting standards are there are 39 Indian accounting standards there are 39 Indian accounting standards notified as on date right 39 INDAS and when indas were notified indas were notified on 16th February 2015 okay so friends we have 39 Indian accounting standard which are developed Right? Using the framework of conceptual framework for financial reporting. My dear friends, what are the component of the financial statement? What are the component of the financial statement? Because when you read conceptual framework for financial reporting, few component will be touched right in this chapter in this conceptual framework for financial reporting. So my question to all of you is how many component of the financial statement and what are the component of the financial statement. Friends component of the financial statement is balance sheet which provides you which provides you what? Which provides you statement of financial position. A statement of profit and loss which provides you financial performance. A statement of changes in equity which provides you shareholder performance. Shareholder funds performance. Okay. Then your statement of cash flows which provides liquidity performance and notes to accounts which provides the qualitative and quantitative information. So friends our component of the financial statements are balance sheet. Okay. Then P&L then statement of changes in equity.
Right? Then it is cash flow statement and then it is nodes to accounts. Nodes to accounts. Okay.
Right. So, balance sheet provides financial position. P&L provides financial performance. A statement of changes in equity provides shareholder funds performance. Cash flow statement provides uh liquidity performance. And notes to accounts provide qualitative and quantitative disclosure. Okay. My dear friends, talking further, how many element of the financial statement and what are the element of the financial statement? So like there are total five component right there are total five component. So how many element of financial statements are there? How many element of financial statement and what are the element of the financial statement? Element of financial statements.
In this in this framework you will also read the element of the financial statement. The meaning of the element of the financial statement.
Say there are five element of the financial statement asset, liability, equity, three from the balance sheet and two from the P&L income and expenditure.
Right? So how many element of financial statement are there? Asset liability, equity, right? Income, income and expenditure, income and expenditure or expenses, right? These are the punch of the financial statement. These are the punch of the commerce world. So you discuss, you name, you think about any item commercially, it will get fitted into these five element of the financial statement. Asset, liability, equity, income and expenses. Right? So these are the element of the financial statement.
My dear friends, friends, talking further, talking further, what are the four pillars of any accounting standard? What are the four pillars? So an item, an item in the financial statement has to be weighed through what four pillars, right? For example, there is a fixed asset. There is a building which was purchased. So what are the four key items relating to that building? First, how that building is going to be recognized. How that building is going to be recognized in the books of accounts, right? At what value it is going to be measured because if an item does not have any value, it will not be able to cap getting captured in the balance sheet, P&L statement of changes in equity or cash flow statement. Right?
So first of all recognition, then measurement, then where this building is going to be presented. For example, as a property, plant and equipment as a first line item on the face of the balance sheet. Then what are the sort of disclosures which are required in respect to this building? For example, gross block, accumulated depreciation, net block, okay, impairment.
If there is a revaluation reevaluation related disclosures okay so these disclosures will be captured in the notes to accounts presentation is happening in the in the balance sheet P&L cash flow soci it could be soi as well right and my dear friends the recognition means how it is going to be recognized whether it has to be expensed off in the P&L or it is going to be recognized as a property plant and equipment or investment property right and at what value cost revaluation ation, fair value, uh replacement value.
Okay. So value in use. So these are the various values. Okay. So my dear friends, there are the four there are the four key pillars of accounting standard or or any item that is recognition recognition. Okay. R recognition R. Then measurement measurement recognition measurement m presentation presentation P and disclosure and disclosure. Okay. D recognition, measurement, presentation and disclosure. RMPD recognition, measurement, presentation and disclosure. Right? So, so far now we have understood we have 39 Indian accounting standards. There are five component of the financial statement under IND balance sheet, profit and loss statement of changes in equity, cash flow statement and notes to accounts.
There are four uh there are five element of the financial statement asset liability, equity, income and expenditure and there are the four key items for any item in the financial statement. Recognition, measurement, presentation, disclosure. My dear friends, you will read these concept in the today's conceptual framework. Okay, is that clear? Great. Great my friends.
Great my dear friends. Absolutely fantabulous. Okay.
So friends, talking about this conceptual framework for financial reporting. My dear friends, this conceptual framework for financial reporting sets as a boundary sets as a boundary for for development of India as right for development of Indas, for revision of Indas, for providing guidance in Indas. So this this conceptual framework sets as a boundary for development of INDA as sir like Indian accounting standard are notified by ministry of corporate affairs wide notification dated 16th February 2015 whether this framework is also notified by ministry of corporate affairs. My dear friends this framework per se is not notified by ministry of corporate affairs directly but indirectly it is notified. Let me tell you how. Friends, this conceptual framework for financial reporting is issued by ICAI and there is a reference of this conceptual framework in Indian accounting standard 8. There is a reference which is given right when I will teach you in DS8, I will tell you how to develop an accounting policies in absence of any specific standard. Okay.
So, how to develop an accounting policy on an item where the standard is not there? For example, Bitcoin. Now, somebody is asking how to do the accounting of Bitcoin. Okay. So the point is my dear friends the point is under IND AS8 the standard which talks about accounting policies it gives a guidance that how the accounting policy is going to be finalized for an item where index is silent. It says that the framework needs to be referred or the help of the framework needs to be taken for development of the accounting policy for such item. And what is that framework?
That framework is a conceptual framework for financial reporting. So this framework is referred in IND S8 and IND S8 is notified by Ministry of Corporate Affairs. So my dear friends indirectly it is notified directly it is not notified. If you will find if you will search any notification where ministry has uh you know notified this conceptual framework probably you will not get that notification. Okay. Right. So friends as we all know our Indian accounting standard our Indian accounting standard index are the converged version index are the converged version converged version of what IFRS right so IND are the Indian standard right and IFRS are the global standard ifs are the global standard my dear friends okay So NDS are the Indian standard and IFRS are the global standard. Okay.
So what we did we we developed our Indas taking IFRS as a base and then we did some changes very few changes which are nomcclated as carve out carve in and removal of option. We discussed in the first class, right? Carve out means where where under IND we have taken a treatment different to what has been taken in the IFRS. To cut a long story short, we have taken a different treatment in Indas in comparison to IFRS.
Carving, what is meant by carving?
Carving means inserting or putting additional guidance. inserting or putting additional guidance in India's literature which is not there in IFRS removal of option as the name suggest removing the option in IFRS two or more options are given but we have curtailed those option and we said only this one thing will be applicable right so the difference between INDS and IFRS have been categorized into three parts which is carve out carbon removal of option my dear Friends, like in IFRS, right? For development of IFRS, there was there was a conceptual framework for financial reporting. There was a conceptual framework framework for financial reporting under IFRS which was issued in 2018. Which was issued in 2018. And this conceptual framework for financial reporting talks about development of IFRS standard providing a guidance in IFRS standard.
So like from IFRS we converged in. So likewise from conceptual framework for financial reporting under IFRS we developed we developed conceptual framework conceptual framework for financial reporting under INDAS in 2020 in 2020. Right? So we converged from conceptual framework for financial reporting under IFRS to conceptual framework for financial reporting under Indas. Right? So one thing is very clear so far this conceptual framework for financial reporting as the name suggest conceptual concept conceptual framework for financial reporting is not an Indian accounting standard. It provides a guidance for development of Indian accounting standard. It sets the boundaries for development of Indian accounting standard. Right. It helps in finalization of the accounting policies when the standard is silent. It provides uniformity and consistency of the various accounting standard. Okay, let's move on my dear friends.
What is the agenda for this conceptual framework for financial reporting?
Friends, in in the first case in the unit one, we will cover the introduction of conceptual framework and the status which we have already covered also.
Right? So then in the second unit we will cover objective of general purpose financial reporting GPFR general purpose financial reporting. Then the third chapter is qualitative characteristics.
We will cover the fundamental qualitative characteristics and we will cover the enhancing qualitative characteristics. Right? So then we'll cover financial statement. What is meant by financial statement? Now you guys know financial statement means balance sheet P&L cash flow statement of changes in equity and notes to accounts and reporting entity. Who is the reporting entity who reports who who publishes the financial statement? Standalone financial statement consolidated financial statement. Then we will cover element of the financial statement. Are you aware about the element of the financial statement? Yes sir. Asset, liability, equity, income and expenses.
Then we'll talk about recognition and re recognition with the help of the example. Then we will cover measurement.
Right? So historical cost, current cost, fair value, value in use, replacement cost. So various type of replacement, various type of measurement. Then we'll talk about presentation and disclosure.
Have we discussed recognition, measurement, presentation, disclosure?
Okay. Then we'll talk about capital and capital maintenance. Capital and capital maintenance. Okay. For example, for example, last for example, your salary in the last year was 10 lakh rupee. This year your salary become 11 lakh rupee.
10% increase is there.
Right? So if I talk about the in in form your salary has been increased by 10% from 10 lakh it become 11 lakh now right it increased by 10%. But tell me one thing let's say if inflation is 12%. If inflation is 12% right last year you were earning 10 lakh rupee and now you are earning 11 lakh rupee while the inflation is 12%.
So in spite of having an increment of 10% will you be able to maintain your capital? Will you be able to maintain your capital?
Yeah, of course. No. So for maintaining my capital right for meeting my for meeting my expenses on the on the current purchasing power right on the current current you know current inflation index I need at least 11 lakh 20,000 rupees but I have 11 lakh it means my capital is getting deteriorated right then friends we'll talk about the key messaging and we'll talk we'll discuss 10 multiplechoice question to check your knowledge Okay, let's move on.
Let's move on. My dear friends, friends, talking about the introduction, right?
What is this framework all about? What is this framework? We discussed my dear friends, the conceptual framework under INDS is not a standard, right? And does not override any indas or any requirement in any indas. So first of all it is very clear to all of you this conceptual framework is a guiding principle. It provides a guiding principle. It provides a format. It provides a layout. Okay. It is not a standard. It is not an indas. Right? And it does not override any indas or any requirement in Indas. It does not override also. Right? It is issued by ICAI Institute of Chartered Accountant of India and it is converged with IFRS conceptual framework which was published in 2018 issued by international accounting standard board. Right? In case of departure ICI explained the reason in the appendix to the relevant IND right my dear friends you remember I told you in the first class what is the structure of the standard in the standard first of all there is a main standard. Main standard means standard. Then there is a alphabetical appendix. In alphabetical appendix there are interpretations. Then there is a numerical appendix. Roman numerical appendix. Appendix I. Appendix double I.
Right? What is this Roman numerical appendex? It provides the difference between INDs and IFRS. Okay.
So friends in 1989 so international accounting standard committee long back issued the framework for for the presentation of the financial statement for framework for the preparation and presentation of financial statement and ICI was also using that framework for the preparation and presentation of financial statement. In 2018, International Accounting Standard Board had revised this framework for preparation and presentation of financial statement to conceptual framework for financial reporting under IFRS. Likewise, in 2020, Institute of Chartered Accountants of India also converged IFRS conceptual framework to India's conceptual framework. Right? In 2020, what is the what was the purpose? Now, we all are aware the purpose. The purpose is to is to assist Institute of Chartered Accountant of India in formulation of India based on the consistent concepts.
based on the consistent concepts. Okay friends, there are five brothers. There are five brothers.
Whether all the five brothers will be same, same I mean to say same in their thinking, same in their thought process, whether all were same. Answer is no. But if five brothers have taken a birth in the Brahman community for example and their father their father is the devotey of the of the Lord Shiva for example right. So these five brothers since birth they have seen their father to to worshiping Shiva Lord Shiva. Right? Means they their father is very religious, very devotey, right? Uh a pure vegetarian person. So likewise these five brothers will also follow the religion the the con the the religion the custom of the house right and probably these five brothers will be right they will be vegetarian they will be kind of you know they will be kind of god-fearing person right they will be kind of devoting and worshiing person so the point is this father this father is giving the directions to the five sons okay so this Conceptual framework is just like a father to the Indian accounting standards. Right? It assist ICAI in formulation of Indian accounting standard based on the consistent concepts. Let me take an example of consistent concepts. My dear friends, whether the financial statement has to be prepared on a cash basis or acral basis. What is the general feature of the financial statement? Cash basis or acral basis? Acral basis. Acrual basis means transactions are going to be recorded when it will be incurred not on the basis when the cash is received.
Okay. Acrual basis means transaction is going to be recorded when it is incurred. All right. So friends now if I talk about 39 Indian accounting standards all these 39 indas touches the different concepts. Okay. For example revenue recognition. Let's talk about revenue recognition. INDS 1115 right. So INDAS 1115 says that revenue has to be recognized to the extent the probability of collection is certain. The probability of collection is certain. Okay. For example, a company has sold goods to a customer for 1 lak rupee. The company is expecting that it will be able to collect 80,000 rupees only. Right? So whether revenue will be recognized for 1 lakh rupee or 80,000 rupees. Revenue has to be recognized to the extent the probability of collection is certain. So revenue has to be recognized for 80,000 rupees right at the time of the sale. So subsequently of course when the degree of certaintity will go higher for example after 2 months or after 1 month. Now the com entity is certain that it will be able to recover 90,000 rupees. Then 10,000 revenue has to be recognized at that point of time. So my dear friends, what is this concept? This concept is a cash concept or this concept is a acrual concept. This concept is a acrual concept. You are not saying revenue has to be recognized on the collection basis. You are not saying that. You are saying revenue has to be recognized to the extent probability of collection is certain.
Okay. So means you are not waiting for the collection. You are not waiting for the cash to be in. You are waiting for the certaintity. Okay. Second example.
Second example in the acturial. Right.
Indas 19 employee benefit standard says that the provision for graduity or long-term employee benefits like leave in cashment has to be measured on the basis of projected unit credit method right means means every year you have to measure you have to recognize your provision for graduity doesn't matter whether employee will leave or not I mean to say the graduity has to be payable only at the termination or attrition of the employee, right? It will be only payable at the exit of the employee. Graduity will never be paid Graduity will never be paid during the continuation of the tenure of the employee. No, never. Graduity will only be paid only be paid after after exit of the employee. Right? So, Indas 115 is a revenue standard which talks about the acroal concept. Ind 19 employee benefit standard it also talking about taking a provision when employees providing a service it is also taking about acrewing the provision. Now Indas 37 provisions contingent liability and contingent asset. Ind says that provision has to be measured on the basis of best estimate means you're not waiting for the outflow. You are creating a provision right now. Right?
So my dear friends, if you see every standard, every standard for the purpose of recognition and measurement, wherever recognition and measurement is there, the standard is talking about the acrual concept. The standard is not talking about the cash concept. Right? So the general feature of the financial statement is it has to be prepared on acral basis. How the financial statement has to be prepared?
Financial statement has to be prepared using Indian accounting standard. So, so see you have to prepare a financial statement. Okay. On acral basis, acrual basis you have to prepare financial statement using indas, right? And there are 39 indas on different different topic. So when you are using indas, it means these indas should be on acrual basis, right? So from where from where these indas are coming from where these indas are coming conceptual framework and this conceptual framework has given a fundamental concept of acrual basis and all the standards are drafted on a acrual basis in terms of recognition and measurement. Okay. Consistent preparation.
These framework also assist preparers management to develop consistent accounting policy when no indas applies or where a choice is allowed. My dear friends, have we discussed this? Right?
When no indas is there, then this framework helps the management to finalize an accounting policy or wherever there is a choice there is a option right. This framework also helps that you have to you have to use that accounting policy where it provides the relevant and the faithful representation of the information. Right?
interpretation of indas. It assists all the parties like preparers which is management, auditors, users, regulators to understand and interpret the standards. So my dear friends, the conceptual framework helps in the setting of the standards. It also helps in the consistent preparation, right?
Consistent preparation means when there is accounting policy choice how it is going to be used when there is no indas on any item how the accounting policy has to be finalized or developed right and it also assist it also provides guidance on the interpretations of indas okay now let's come to the second chapter of objective of general purpose financial reporting right sir how you have unitized these units it is on the basis of your board of studies material Okay.
So what is the objective of general purpose financial reporting? First of all, financial reporting means publishing and finalizing the financial statement. Financial statement means balance sheet, P&L, cash flow, statement of changes in equity and notes to accounts. Sir, what is this objective of general purpose financial reporting?
GPFR financial reporting we understood.
What is meant by general purpose? For example, Mr. MKkesh Shamani asked his CFO that please give me a balance sheet where you have to show trade receivable as the first line item. Okay.
And top five trade receivables in the first line item. Then the in the second line item other trade receivable. Then third line item should be property plant and equipment only relating to Jamagar refinary plant. And the in the fourth line item the other property plant and equipment Mr. Mr. MKkesh Amani is providing some guidance to the CFO. So friends, whether CFO will prepare such balance sheet to for Mr. MKkesh Amani, answer is yes, he will prepare. But he will not say that it is general purpose financial statement. He will not say that it is general purpose financial reporting. It is a customized special purpose MIS related balance sheet. Okay.
Only for the purpose of the consumption of Mr. Amani.
Now myself, Karan, Monica, right? Sam Midhavi, we all are the shareholders. We all are the shareholders of Reliance Industries Limited.
Can we ask such balance sheet from the CFO of uh Reliance Industries Limited or whether the CFO will provide such balance sheet which he has provided to Mr. Amani? Answer is big no. Right? So general purpose financial reporting is something which is which has been prepared as per the applicable law framework and the Indian accounting standards. Okay. So which is which is helpful for the regulators, creditors, lenders, shareholders, analysts, okay, bankers, employees, customers which can be used by the public at a large. For example, annual report. So for the listed companies the financial statement in the annual report is public information once it is getting published. For unlisted companies you can also get the financial statement in the XCBRL format by paying some fee 118 rupee or 108 rupee to the MCA. Okay. So what is the objective of the general purpose financial reporting? The objective is to provide the financial information about the reporting entity which is useful to the existing and the potential investors.
So the current investors which has invested in the company and potential investor also right today I want to invest in the shares of Reliance Industries. I am not a shareholder of Reliance. I want to invest in the shares of Reliance. Guys, see what sort of guidance I will use for taking a decision whether I should invest or I should not invest. The first primary document is financial statement. Right?
Financial reporting. Financial statement. So the objective of the general purpose financial reporting is to provide the useful financial information of a reporting entity which is benefited to the existing investors, potential investors, lenders which is bankers or financial institution who are providing the debt to the company. Okay.
Lenders and other creditors in making decisions relating to providing resources to the entity. So friends, how the entity will get the blood? When I say blood, blood means resources.
Resources means funds. How the company from which sources the company will get the funds. So the company will get the funds from two sources. Number one, equity, number two, debt, right? Equity.
Equity and debt. So the investors invest money in the company, right? Number two, the banker, the financial institution or the service provider who is providing the goods and service on credit basis.
Right? So lenders and creditors provide debt or or the goods and services on a credit basis. Right? So these investors, lenders and creditors provides the resources to the entity. Okay? So whether these investors, lenders and creditors have to provide the resources to the entity, of course they need some information, useful information in taking a decision whether I should provide or I should not provide. For example, you have applied a personal loan.
Tell me for for giving a personal loan to you what sort of document bank will require? Bank will require your salary slip. Bank will require your income tax return. Right? So these are the useful information. Bank will require your civil score whether you have defaulted in the past or not. Bank will require your your ID proof, address proof. So bank will need all the useful relevant information to decide whether bank will provide a resource to you or or not in the form of a loan. Right? Those decision involve what could be those decisions buying, selling or holding equity and debt instrument. So using those financial statement on a quarterly basis or a yearly basis these investors will decide whether I should buy more. I mean to say whether I should invest more in this company or I should exit from this company or I should keep the equity and debt instrument in this company. The banker will decide lender will decide whether I should provide or I should settle loans and other forms of credit.
Right? So exercising rights to vote on or influence management actions. The investors, the shareholders will decide whether I need to exercise my right to vote or influence the management actions, right?
What is the correlation between the general purpose financial reporting and the users's decision making? Financial information, right? About economic resources, claims and changes.
So when you look at the financial statement, it provides you the the details. It provides you the details of asset, liabilities and equities. It provides you information about the economic resources. It provides you the the details about the claims. Claims means equity, share capital and the liabilities, right? Claims means liabilities. Okay. Okay. And the changes it also provides you through the through your statement of changes in equity and through your uh statement of profit and loss. It also provides you the changes in the performance. Okay. Assessment of amount, timing and uncertaintity of future net cash flows. Right?
So these general purpose financial reporting also provides the details of provisions. Right? So provisions are not actual amount. Provisions are the liability of uncertain timing or amount.
So when you look at the accounting policy on the provision in the notes to accounts it we says that the provisions has to be measured on the best estimate basis. Okay. So then the notes provide you contingent liability also. So these kind of you know items provide the users of the financial statement the lender regulator banker investor okay and the creditor in assessing the amount timing and uncertaintity of future net cash flows expectation of returns dividends principal interest price gains etc etc and the decision of investors lenders and other creditors. So, so these things are based on these aspects. For example, the company has lot of contingent liability. Then the lender will expect in the future the profits may go down.
Why? Because there could be some item which may be confirmed which may be converted from contingent liability to confirmed liability. Right? So the lender will uh the lender will the investor will assess whether it will be a risky business to invest or it will be a a fair priced business to invest.
Right? So these these items provide and helps in the decision making of the user of the financial statement. Right?
What are the limitations of the general purpose financial statement? My dear friends, general purpose financial reports do not and cannot provide all the information needed by the users.
Users must also consider general economic condition, political event, industry outlook. Okay. For example, a company a company is a a company is uh I would say die hard supporter of Congress in a state. I'm just taking an example.
So a company is a diehard supporter of Congress party in a particular state.
So the company is uh is making a huge profit. the Congress party is is in power in that state and the company's flourishing and doing great right. So the elections will come in one year and in that state it seems like that the Congress will go and BJP will come for example.
So the company is not a supporter of BJP because one of this company is led by one of the MLA who is a Congress MLA for example.
So when BJP will come or some other party will come probably probably this company will face lot of hurdles and problems in getting awarded the infra projects right or running their business smoothly.
Yes.
Okay. So the point is but these kind of events right these kind of events whether if the election will happen the party will change what will be the impact on the business these kind of events situations are not described in the financial statement. So financial statement does not provide you all the information general economic condition geopolitical risk industry out outlook political events. So these are not part of the general purpose financial statement. So while few bit of it will is the part of MDNA management discussion and analysis section of the annual report okay not the financial statement. So general purpose financial statement are not designed to show the value of reporting entity. They help users estimate that value. Okay. Startup right.
So now the baijus by you know about right? What what is their fate and uh what happened with baijus? So I still remember you know couple of years back. So Baiju has a valuation of $2 billion, $3 billion, XYZ billion dollar. So even the loss making unicorn startup they have a valuation like anything. So what you will look at in the balance sheet in the financial statement, you will look at the financial position, the current position. You will not get the value of the reporting entity, right? So there could be a situation where entity is making a loss but the entity has a valuation of let's say $10 billion, $5 billion, $2 billion. Right. Right. So the point is the financial statement does not provide these sort of information. These are not primarily directed at other parties, right?
Regulators, general public other than investor, lender and other creditors. So friends, who are the primary users? So general purpose financial statement the primary users the primary users users of general purpose financial statement is investor who is existing and potential lenders right and the creditors these are the primary these are the primary user of the general purpose financial statement other than these three like customer employees regulators right others are the secondary user of the financial statement. Right? Largely financial statement are used by the investors, lenders, creditors. Okay?
Yes. Now moving further. Moving further.
Sorry. Moving further my dear friends.
What information is provided by the general purpose financial statement?
Financial position and financial performance. Financial position means asset, liabilities and equity. Assets provides the economic resources. What is an asset? Asset is a resource controlled by the entity resulting from the past events. Right? So your financial statement provides the financial position which provides the economic resources which is nothing assets and the claims which is liability plus equity. Who will claim?
Either the lender will claim lender and creditor. Whatever liability is there it has to be bifurcated into two parts.
either lender or creditor. Sir, employee, it could be employee also. My dear friends, if there is a outstanding payable to employee, if there is a salary outstanding payable to employee, where it will come into the balance sheet? Trade payable or somewhere else?
It is trade payable. Right? So on the liability side, either it is debt or it is or it is creditor outstanding amount for goods and services, right? So then equity investor who has who has given their money they also expect the returns and the returns on the capital and return of the capital right. So your financial position provides economic resources and the claims. It helps assess liquidity, solvency, need for additional financing and management is stewardship. Right? So my dear friends this financial position provides this financial provides the clue the guiding principle to the investors and the lenders about the liquidity position of the company about the solveny of the company debt equity ratio debt service coverage ratio interest service coverage ratio profitability ratio for example right and whether the company need additional financing or not. For example, if you look at the financial statement of Vodafone Idea Limited, every every investor is saying, everybody is saying Vodafone Idea Limited is in the need of additional financing and even they themselves say our fate is depending on the on the additional financing, right? Change in resources and claims. What is change in resources and claims? Change in resources and claims talks about your statement of profit and loss. Talks about statement of changes in equity and statement of cash flows. Right?
financial performance. It provides financial performance right which is on the acrual basis which comes from P&L your cash flow statement statement of cash flow which provides you what is the cash generation from the operating activity what is the cash generation from the investing activity what is the cash generation from the financing activity okay then my dear friends it also provides a non-performance changes right for example issue of debt equity right so while if there is a there is the buyback of capital there is a there is a issue of right there is a right issue right there is a right issue means issuance of capital so payment of dividend so these will not come to your uh your uh P&L but this will come to your statement of changes in equity okay so acral accounting reflect effects even if cash occurs in a different period right so this talks about acral accounting as I told you acral accounting means accounting when the transaction is incurred not when the cash will be received Okay. So my dear friends, we talked about the introduction of the conceptual framework. We talked about the meaning of general purpose financial reporting, right? Who are the primary user of the financial statement? Lender, investor, lender and creditor, right?
How the financial statements are helping these investor, lender and creditors, right? By giving them financial position about the economic resources and claims which is asset, liability and equity.
And by providing the changes in resources and claims through the financial performance which is P&L through the cash flow performance which is through cash flow and the non-performance changes which is through statement of changes in equity and no accounts as well.
Third third unit is very very very very important qualitative characteristics.
My dear friends qualitative characteristics means what makes financial information useful?
The auditors are writing the financial statement of XYZ Limited are presenting true and fair view as it has been prepared using Indian accounting standard as notified under section 133 of companies act 2013.
How come? How come using an Indian accounting standard makes presenting the financial statement true and fair? So how come the financial statement reflecting true and fair view just by using the Indian accounting standards? just by using the Indian accounting standards.
My dear friends, because the guiding principle is coming from conceptual framework and conceptual framework provides what could be the quality what could be the qualitative characteristics of the financial statement. Qualitative characteristics of the financial statement. Right? Just a minute.
Means means what makes financial statements useful. Right? What makes financial information useful? So it talks about two kind of qualitative characteristics. FE fundamental qualitative characteristics.
Fundamental qualitative characteristics and enhancing qualitative characteristics. Right? Fundamental basic and enhancing qualitative characteristics.
So both are required for information to be useful. Fundamental there are two kind of fundamental qualitative characteristics relevance and faithful representation.
The financial information the financial information the financial information in the financial statement has to be a relevant information and it has to be represented faithfully. It has to be represented faithfully. Now how will you say that a financial information is a relevant financial information? So financial information has to be considered as a relevant financial information when it is based on the concept of materiality.
Right? Tell me one thing. Reliance Industries limited. Let's talk about the company. Last year the consolidated turnover of this company was 11 lakh 76,000 crores. In the first quarter of this year they crossed a turnover of three lakh cr.
Are you getting me? Three lakh cr. So if I talk about the number three lakh cr.
So how it will be look like? Three lakh k.
This is the number of the turnover of alliance. Okay. In the quarter one my dear friends, last year they have the top line consolidated turnover of 11 lakh 76,000 cr and the bottom line of 95,000 cr. Profit of 95,000 cr. Tell me a small item of 50 lakh 1 cr whether it will make any difference to the primary user of the financial statement. Let's say Reliance has invested 50 lakh rupee on an ad advertisement and the accountant has forgot to record that advertisement expenses.
Will it make any difference?
Will it make any difference my dear friends?
It will not make any difference in the share price in the earning per share in the decision-m capacity of the user of the financial statement. They are rounding of their numbers in Kores. They have a huge top line, huge bottom line, the level of expenses are huge even. So they are the conglomerate and since they are the conglomerate, right? Even their small business has a value of 40,000 cr 50,000 cr right so the point is the point is if the concept of relevance will not be there I mean to say if you will not apply the concept of materiality probably your notes to accounts will be 500 pages right so normally our financial statement are maximum if it's a it is a big company one of the largest company the financial statement are of a size of 80 90 pages right but but tell me a situation if you will not apply the concept of materiality and you will start recording every expense as a separate line item probably your financial statement will comprise 200 300 pages if you start explaining every item and what happens if you start explaining every item sir so as a student as a small kids you will be thinking sir don't you think that will be a good disclosure. So everything is going to be disclosed.
Tell me one thing. You have to pass CA final exam, right? And you have to clear a financial reporting paper. In your financial reporting paper only INDS is there. If ICI will cover if ICI will include entire US gap, entire IFRS, entire ind accounting standard right in your FR syllabus will you able to concentrate and focus only on indas? Of course no of course no right. So friends that's how if every small information will become the part of the financial statement the relevant information and the critical information may be missed while reading and analyzing the financial statement. That is why the framework says that for making for framework says that the fundamental characteristics the fundamental qualitative characteristics of the financial information is it has to be relevant for becoming a relevant it has to be material it has to be material financial information material amount has to be there and it provides predictive value as well as confirmatory value it provides predictive value as well Confirmatory value. What is meant by predictive value and confirmatory value? Predictive value means you know your financial information.
Financial statement does not provide any forecast budget. It provides the actual information. It provides balance sheet as 31st March 2026. It provides the information of the past. Right? So statement of profit and loss for the year ended not for the year ending year ended 31st March 2026. Okay, it provides the actual information but using those information right current year, comparative year, right? The investors, lenders, creditors, they are able to predict the future outcomes, right? They are they are able to predict the future outcomes. For example, normally if you have heard if you if you read or if you listen any business news, you must have heard the analysts are forecasting a earning of 10% over the top line. They are budgeting and forecasting a increase of 7% uh growth of 7% in the top line over the last year performance over the last year turnover. Okay. So basically your financial statements are in such a manner that it all it provides a predictive value so that user will use those information user will you know user will predict predict the future outcomes. Okay. What is a confirmatory value? So confirmatory value means confirms or changes previous evaluation.
For example on the basis of predictive value of the last year. So last year the company has published the financial statement of 31st March 2025. Right? There was a growth of 10%. And using all the information, the user believes the primary user, the investor, lender and trader believes this year also the company will have a minimum growth of 10%. Okay.
So when the financial statement came on 31st March 2026 whatever they predicted whether the actual coincides with the predictions largely substantially then they will say that it confirms the actual outcome confirms our expectation or we need to revise our expectation for example their expectation was 10%. But when the result was published when the result was published so the turnover was in the growth was only 5% due to the geopolitical factors.
So now they are revising their expectation. They are thinking that this America and Iran war is not stopping. So nowadays the war is like a you know Mario game. It never stop. It is like a subway surf. It never stop. Okay. So lot of modules are there like this Russia Ukraine. Okay. So, America, Iran. So, these kind of wars are keep on going going and going, right? So, now the now on the basis of the actual outcome on the confirmatory values, now the investor and analyst are revising their expectation. Okay? So, basically the information will be considered as relevant, right? When it will be able to provide predictive value and confirmatory value, it will be able to provide both. Predictive value means the the user will be able to predict the future outcomes. Confirmatory value means the user will be able to compare what they have predicted in the past whether the actual outcome coincide with the past or not. For example, they expected a profit of 500 cr for this year. When the actual outcome came the profit was 490 cr means largely aligned.
But if the profit is 300 cr it means their expectation has not met. So they will revise their expectation. Example, revenue information for the current year can be used as a basis for predicting revenue in the future year. It is a predictive value. It can also be compared with revenue prediction made in the past years. For the current year, right? The comparison helps the user correct and improve the earlier prediction process. It gives a confirmatory value. Okay. What is materiality? information will be considered as material if the omission, misstatement or obscuring can impact the decision-m capacity of the user of the financial statement. Okay, for example, contingent liability while it is not a confirmed liability but there was a huge demand order came for the company came to the company right so there was a contingent liability of 500 crores okay so the company has not disclosed the contingent liability because the company believes that this is not an actual liability we are fighting in the court of the law so the company has not done any assessment and the company has not disclosed the contingent liability. My dear friends, tell me one thing. If the company would have disclosed the contingent liability, whether it will not impact the decision-m capacity of the user of the financial statement? It will. It will even when the valuers will do the valuation of the contingent liability uh sorry valuation of the entity or the business, they also factor some part of the contingent liability as their main liability. Okay. So information will be considered as material if the omission, misstatement or obscuring can impact the decision-m capacity of the primary user of the financial statement. Right? And materiality is largely entity specific right for example for Reliance 1 K is not material but for us 1 cr is a huge amount. Okay. So ICI cannot specify a uniform quantitative threshold for metality not nor predetermine what could be material in a particular situation.
My dear friends, the guidance of metality is a subjective guidance. It is not a objective guidance. Okay? No any threshold is given. The metality is a entity specific materality. Okay. Right.
So judgment is required for each entity based on the nature and magnitude of the item. Right? So friends first of all the first fundamental characteristics was relevance and the information will be relevant if it is material and it provides predictive value and confirmatory value and and the another fundamental characteristics is the information has to be represented faithfully. The information has to be represented faithfully means means right faithful representative means so the faithful representation will be achieved by by ensuring that the substance over form has to be ensured complete information should be complete information should be neutral and free from any error information should be neutral and free from any error let's discuss this to be useful financial information must faithfully represent the substance of the substance of the situation. If substance and legal form differ providing only the legal form would not be faithful. Let me take an example my dear friends.
In S 116 when you read Ind16 okay so lease is standard few of you might be know might be knowing in our accounting standard when there is a operating lease AS19 it says that you need to record your rental expense and credit your bank right you need to record your rental expenses but in case of Ind16 leases technically speaking if you would have taken a loan and you would have purchased a house, you would have sown house as a asset and loan as a liability. And what you are getting? You are getting a right to use that house.
If you have taken a house for 3 years lease for a lease period of 3 years, don't you think you have also entered into committed obligation for 3 years and what you are getting? You are getting a right to use of that house. So going by the substance you are getting some right and for which you are paying. So my dear friends Indas 116 when you read this standard it says that all the leases all the leases has to be measured on the basis of present value of the future lease rentals. So you have to discount all the future lease rentals.
Whatever value will come you have to recognize right of huge asset and you have to credit lease liability. So index 1116 is a classical example which is based on the substance over form. So going by the form it is a leases but going by the substance right it is going by the form it is rent going by the substance you are paying for using you are paying for getting a right of use of the asset. Okay. RO second second preference share capital in India either a preference share capital could be convertible preference share capital or could be redeemable preference share capital.
You will find lot of private limited companies what they are doing they are issuing a redeemable preferential capital or redeemable preference share capital. Okay they are issuing.
So friends in our accounting standard we were showing this redeemable preference share capital as a capital. Is it a capital? What is a capital? In capital you have always a residual interest. But this preference share capital has to be prioritized before the equity share capital. Right?
So going by the form the word is preference share capital but going by the substance it is like a borrowing. So in Indian accounting standard as for India s 109 and 32 this has to be classified as a debt not the capital.
Indas 115 another classical example of substance over form guys lot of example I have taken Indas 116 substance over form Indas 109 32 109 115 another example of substance over form for example you have said you are a automotive company you sold a car and you are also providing threeear free service a free service for 3 years you took 10 lakh rupee from sale of the car from the customer. Friends, this 10 lakh rupee is only for the sale of the car or this 10 lakh rupee is for the two performance obligation. One, sale of the car. Second, providing free service for 3 years. Don't you think when you provide service to the to this customer, you also incur cost, right? So in S115 says that whatever money you have received from the customer, whatever consideration you have received from the customer that consideration has to be allocated to the various performance obligation.
So going by the substance while you receive the entire 10 lakh rupee but you have not delivered the entire performance obligation you have only delivered car please record the revenue relating to the car and keep the liability for the portion of the services you are going to provide for next 3 years and whenever you complete the services or the time will elapse what you have to do you have to recognize revenue and you have to debit liability and recognize revenue for that portion. So first the faithful representation will be achieved to apply substance over the form. Second the information has to be complete right means it includes all information necessary for the user to understand the phenomenon including description and explanation.
Friends, the company the company has a property, plant and equipment.
Okay, last year the company has a property, plant and equipment of 1 cr rupees and in the face of the balance sheet only PP will come and what is this PP?
Is it a gross block or net block? This property, plant and equipment is net block which is gross block minus accumulated depreciation. It is the net block. Okay, it is the net block.
Friends, friends, last year it was 1 cr rupee. This year it become 1.25 cr rupes or let's say let's say 2 cr rupes from 1 cr it become 2 cr rupes. So on the face of the balance sheet on the face of the balance sheet this is the last year this is the current year the PPE was 1 cr in the last year current year it become 2 cr.
Looking at the face of the balance sheet, what is the thought which come into your mind? Sir, this company has doubled the property, plant and equipment. This company is doing expansion.
This company has acquired capex. This company has purchased capital asset, fixed asset.
But you know what this company has done?
This company has done the revaluation.
This company has applied the revaluation model. And this company has revalued the fixed assets and due to revaluation the amount has been more than doubled. So even after depreciation right and after revaluation the amount got doubled. So tell me if the company will just provide on the face of the balance sheet this kind of figures and the company will only provide the gross block egg and the net block and the company will not provide all the necessary information relating to the revaluation. Will the information will be considered as a complete? Will the user of the financial statement will be able to take the proper decision? Answer is no. Okay. So complete depiction has to be there. Complete depiction. For example, a complete depiction of a group of asset include nature of the asset. When you look at the PPE schedule, you will find office equipment, land, building, furniture and fixtures, aircrafts.
Okay. Plant and machinery. Okay.
Numerical amount, gross block amount, accumulated depreciation, net block amount and what the numerical also need explanation of significant facts. For example, for borrowing you are providing what is mortgage always you are depreciating other parties. What does it mean? It means you are not neutral. Right? It means you are not neutral. You are biased towards one party. Okay. So guys, likewise information should be neutral.
Information should not be with any biased, right? For example, you have opted a reevaluation model.
Okay. And what you said? You said this revaluation model is the best model and hence the company has applied the revaluation model for revaluing the finances revaluing the property plan and equipment. Your information has to be neutral. It has to be fact-based.
Fact-based means you can say that the company has elected to me elected to opt for reevaluation model because because there is a huge increase in the prices in comparison to the historical cost and company wants to reflect the current market situation in its financial position because now the company become big and bigger. So you have to you have to justify you have to give the relevant facts and the basis so that the information will be neutral and the user of the financial statement can analyze and interpret the financial statement or the information using their own wisdom.
Right? It has to be neutral without bias in selection or presentation supported by prudence. Right? Caution under uncertaintity. asset or income not overstated, liabilities or expenses not understated and vice versa. Okay. So your assets and income should not be overstated, liabilities and expenses should not be understated. If there is any uncertaintity, you have to provide the the proper explanation. Okay. So in your presentation, so for example, you should not use bold or the large phones for the large items. Okay? So it has to be consistent and neutral and of course the information has to be free from error right there should not be any error in the qualitative information as well as quantitative information. No error in description or in the process used free from error perfectly accurate reasonable estimates are acceptable right. So while if there is for example provision for gratuitity provision for warranty provision for asset retirement obligation. So the numbers are never accurate number but these are the best estimate. Whenever there is a provision you have to use the best estimate right.
Free from error via estimate. Use of reasonable estimate is essential. For example useful life of PPE. Net realizable value of inventory. Fair value of unlisted investment. Expected credit loss. So these are what these are the estimates. Right? So best estimate is required. Best estimate is required to evaluate these kind of items. Okay.
As long as estimates are fair, the financial statements are considered as a free from error. Even if actual outcome differs from the original estimate, right? So whenever there is an estimate, not necessarily the actual outcome will be same, it will differ. But you have to use the best estimate in measuring those kind of provisions. So friends as we discussed what is the fundamental qualitative characteristics information has to be relevant and information has to be represented faithfully. For considering it to be relevant it provides it has to be material. It provides predictive value as well as confirmatory value and information has to be represented faithfully. Right? It has to be substance over form concept has to be applied. It has to be complete free from any error and it has to be neutral. Right? Okay. So friends, today let me let me clarify. Today due to some urgencies, I will conclude my session by 9:30. Okay. I will conclude my session by 9:30 and it's 812 now. Let's have a 10 minutes break and we'll start at 8:22. Okay. So I'm taking a break right now and then we will start. Okay.
Ashoke Gre All right.
Yes. So we discussed fundamental qualitative characteristics. Now we are going to discuss enhancing qualitative characteristics. What is meant by enhancing qualitative characteristics?
Right? So for a useful financial information or for making a financial information useful right the information has to be comparable verifiable the information has to be provided on a timely basis right and information has to be understandable okay so comparability consistency helps not same as uniformity comparability means the number has to be comparable and how the number has to be comparable. In the first year, you have used the cost model. In the second year, you have used the used the revaluation model for PPME for fixes.
Whether the information is comparable, answer is right. Verifiability.
Verifiability means it the information has to be verifiable. Right? For example, for example, the company is into a fixed contract kind of a business. fixed contract kind of a business the company okay and the company whatever revenue is there for example if the company is selling goods worth 100 rupees 10% is the margin in which the company operates in the current year the in the last year the turnover was 1,000 crores the profit was roughly 100 cr okay so it is not accurate it has to be in line with okay so 1,000 cr was the turnover over profit was 102 cr. So this year the company's the company's uh revenue was doubled.
Okay. And uh it becomes 2,000 crores. So the investors bankers and the lenders are expecting that this company has a 10% margin. So if that revenue is 2,000 cr the profit has to be more than 200 crores largely. Yes. So information has to be verifiable. Another example could be for an airline company for example the departures have incre increased departures have increased if departures have increased the passenger count have increased so airport charges and the revenue both should have been increased okay both have should been increased means the information has to be verifiable okay the information has to be verifiable for example the gross block there is additions to the fixed assets there is an addition to the fixed asset huge addition in the fixed asset.
If there is a huge addition in the fixed asset, there has to be increase in depreciation also. Right? And information has to be available within time to influence decision because if a information which is very stale, if a information is very stale, it cannot be useful. Right? Understandability.
So it assumes reasonable business knowledge of the users. But information has to be understandable. It has to be in the in the acceptable language. The words and the jarens should not be the shashi tur kind of words and jarens. It has to be simple words and jargon. Okay.
So on the classic example of timeliness all these listed companies they are required to publish their results on a quarterly basis within 45 days from the end of the quarter. only for the year end they have a timeline of 60 days from the end of the year. Okay.
So friends applying the fundamental qualitative credit this part we have discussed talking about enhancing qualitative characteristics there has to be comparability means users decision involved choosing between the alternatives information is more useful if it can be compared with similar info about other entity or the same entity in another period. Comparability means Same entity different period different period. Okay.
And other entity of the same sector.
Okay. Other entity of the same sector.
For example, if somebody has to invest in the petroleum stocks in the in the oil marketing company stocks whether they will go with the IOC, BPCL or HPCL.
Okay. So comparability is not equal to uniformity right consistency same method for same item is a mean to comparability not the same as it right so how you achieve comparability by applying the consistency okay by applying a consistency right so the information has to be comparable so that the analyst can compare the two companies results in the same sector or the analyst can compare the results of one company in the current year with the last year or the previous year. Verifiability as I told you the different knowledgeable independent observers can reach consensus. Okay. Not necessarily complete agreement that a depiction is faithful representation. For example, direct counting cash indirect verifying inputs to a model and recalculating outputs. For example, checking inventory quantity cost and recomputing ending inventory using FIFO. Right?
Like the example I have taken that the entity margin is 10%. Right? So what is verifiability? Whatever is the revenue it has to be nearly 10%. Like for airline if the departures have increased, passenger has gone up, their airport charges should have been gone up and the revenue should have been gone up. Right?
For example, if gross block has increased, the depreciation is has to be largely increased. So, so you are you are applying input and processing output and you are you are reconciling whether that output is right or wrong. Okay.
Timeliness. Timeliness. Okay.
Information must be available in time to influence decisions. Okay. Older information is generally less useful.
For example, report issued 6 months after year end lose most decision relevance for the current investment decisions. Understandability means classify, characterize and present information clearly and concisely.
Right? Some situations are complex and cannot be made easy. Excluding them would make report incomplete and misleading. Example or note assumes user have reasonable knowledge of business and economic activity and review information diligently. They may seek advisor for complex items. There are investors, there are analysts, there are lenders. So might be they're reaching out to some advisers for the complex items but they're able to understand the normal and regular business informations in the financial statement. So friends, what we discussed, we discussed in the qualitative characteristics while developing and drafting the standard, right? So in your general purpose financial statement standards are required for general purpose financial statement. In the general purpose financial statement the financial information has to be useful. For making the financial information useful there are fundamental qualitative characteristics and enhancing qualitative characteristics. Fundamental qualitative characterist information has to be relevant and faithfully represented. Relevance means it can provide confirmatory value and predictive value and it should be material enough. And for representing faithfully means substance over form.
Information has to be complete free from any bias. It has to be neutral. Okay.
And enhancing qualitative characteristics means right a financial information can be enhanced the the it can be enhanced if it is comparable, verifiable, it is provided within time and it is understandable.
Right?
So now friends the next part is financial statement objective and scope.
What is the objective of the financial statement? We discussed the objective of the financial statement is to provide the information about the entity's resources which is asset claims which is liabilities and equity and the performance which is income and expenses and cash flow performance as well as the shareholder performance also. And how this information is provided? Balance sheet, profit and loss, statement of cash flow, statement of changes in equity and notes to accounts. Right? In balance sheet, it provides financial position. The balance sheet provides financial position. Financial position.
Okay? It provides financial performance. Okay. And it provides other others provides liquidity performance, shareholder performance, funds performance and the quantitative and qualitative disclosures. Okay?
So the financial statement has to be prepared for a reporting period. A reporting period is at least one year.
Right? If it is a listed company, listed companies are publishing the results on a quarterly basis. But on a yearly basis, they are preparing full-fledged financial statement. Okay? Right. So the financial statement has to be prepared from the entity perspective not from the user perspective. Not from the user perspective means the financial statement should not be prepared in a manner to please a single set of investor or a particular category of investor. It has to be prepared in a manner that it will complete all it. It will cover all the required information. It will be faithfully represented and it provides the information about the company's resources and claims. Provide the financial performance. Provide the liquidity performance, shareholder performance and the quantitative and qualitative disclosure. The financial statement has to be prepared on a going concern basis. It has to be prepared on a going concern basis. Going concern means assuming on the reporting date assuming the business the entity will run in the foreseeable future. Foreseeable future means 12 months. Foreseeable future means 12 months. Okay. Foreseeable future means 12 months.
The reporting entity.
The reporting entity. What is meant by reporting entity? Very simple. You all are aware. Reporting entity is an entity which is required or which prepare the financial statement right? It can be a single entity, a portion of an entity or comprise more than one entity. A reporting entity is not necessarily a legal entity. For example, if a branch is publishing a branch is uh there is a branch in uh China and that branch is also required to file their financial statement in ch with the Chinese authority. So that can be a reporting entity but normally typically a reporting entity is just like a legal entity which present the consolidated financial statement standalone financial statement right. So what is a standalone financial statement? What is a consolidated financial these two are relevant right?
What is a consolidated financial statement? What is standalone financial statement? Standalone financial statement mean separate financial statement. to know a standalone means the entities the parent financial statement and the subsidiaries associate and joint venture financial statement.
Okay.
What are the elements of the financial statement friends? You remember component we discussed now we discussed element also there are five element three from the balance sheet. These three elements are the balance sheet elements. The last two elements are the P&L elements.
Any transaction you think about for example you purchase a ticket for a Durand movie show you spent 500 rupees what is that is the expenses the money you spend is expenses and cash has gone out okay you purchased a car by taking a loan car is an asset loan is a liability okay think about any commercial transaction it will get fitted into these five elements of the financial statement. Asset, what is meant by asset? Asset is a economic resource. Why I'm using the word economic?
Have you heard the word in your office?
Your boss must have told you you are a good resource. You are a good resource.
Are you an economic resource? You are a good resource. You are a human being.
Right? An asset is a economic resource means economic means which can provide some benefit. Okay sir, we can also provide some benefit but you are a human being. Okay. So an asset is a economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. For example, machinery. So machine is a economic resource which has a right. So machine is economic resource means it is a right which has a potential to produce output.
Okay. So what is the economic resource?
It is a right that has the potential to produce the economic benefit. Okay. So asset is a resource controlled by the entity. Asset is a economic resource controlled by the entity as a result of past event. Example of the asset could be machinery, car, vehicle, right?
Intangible asset, investment property, trade receivable investments. These are example of cash and cash equivalent.
Bank balance, fixed deposit. These are example of asset. Liability. What is a liability? Liability is a claims, right?
It's an obligation. Liability is an obligation. Asset is a resource. Asset is a resource and liability is a obligation. Right?
Asset is a resource. Asset is a right and liability is an obligation. Okay?
Liability is a claim. It's an obligation.
a present obligation of the entity to transfer an economic resource as a result of past event. In the past, the company has purchased a raw material on a credit basis. So since the company purchased the raw material on credit basis, the company is presently obligated to transfer the economic resource which is cash which is bank. Right? So this is the definition of liability. What is equity? Equity is always a residual interest. Residual interest the residual interest in the asset of the entity after deducting all its liabilities.
So I was the shareholder of Satyam, right?
So I still remember it was 26th September or 28th September 2008.
I purchased shares of Satyam. Satyam was a good IT big IT company. So due to the accounting fraud so their share price have collapsed and Satyium was kind of collapsed. So I purchased the share at that point of time at 200 rupees per share. 100 shares I purchased at that point of time just in few days on 28th September it went down to 11 rupee. So friends, equity shareholders are the residual.
They are the last. If the company will become bankrupt, insolvent, if something will be left after settling all the liabilities, if something will be left, it will be distributed among equity shareholders. Normally nothing. You can say that, right? So equity is a residual interest in the asset of the entity after deducting all the liability. What is the income? It is increase in assets or decrease in liability. When the assets are increasing or liability is decreasing, right? It is considered as a as a income that resulting in equity other than those relating to the equity contribution from holder of equity claims. What does it mean?
So what is the income? Income is an increase in asset or decrease in liability. Okay. due to a transaction from the parties who are not the shareholders, who are not the equity providers. For example, the company has done a right issue, right?
Due to right issue, there will be increase in asset because bank will be increased, right? Increase in assets, asset to increase, right issue say.
But whether this transaction is with shareholder or other than shareholder this transaction is with shareholder. So this will not be considered as an income. This will be considered as equity transactions.
Vice versa expense are reverse decrease in assets or increase in liability right arising from a transaction which is not happening with the shareholder.
For example, dividend dividend paid.
So by paying a dividend your asset will be decreased but it is a transaction with shareholder or other than shareholder. With shareholder so it is not meeting the definition of expense.
Sir what is the definition of expense then? Example interest cost on the borrowings by paying a interest on borrowing whether your whether your asset will be decreased. Yes your cash balance will decrease. Is it a transaction with shareholder? No. This is a transaction with banker. Yes. Okay. It is a expense.
It is a expense. Right?
So these are the definition. Asset, liability, equity, income and expense.
So there are three key aspects of any asset. There must be a right. Okay.
There has to be a right. Right to receive. Okay. So there has to be potential to produce economic benefits and there has to be control. An asset is a economic resource. Right? An asset is economic resource. And what is a economic resource? Economic resource is a right. An asset is a economic resource, right?
Which has a potential to produce economic benefit. Potential to produce economic benefits, right? So an asset is a resource which provides a future economic benefits, right? As a past of the which provides a control as a as a result of the past event. Okay. future economic benefits and where the entity has a control. Whether entity has a control. Okay.
Rights that do not constitute assets.
Which are those kind of right which do not constitute the assets? Rights available to all parties without significant cost. For example, public right of way. Know how in public domain.
Okay. Right. Public right of way. So you are using roads.
You are using the public infrastructure right so government has given a right to free Wi-Fi on the airport can you have the right you can use that free Wi-Fi and by using the free Wi-Fi you went to the airport 3 hour prior to departure and you are doing all your office work using the airport Wi-Fi right so whether you will capitalize that as an as an intangible asset right to use Wi-Fi answer is no Okay.
Treasury shares. An entity cannot have a right to obtain benefit from itself.
What are the treasury shares? Company's own shares. You will read this in in Dash 32. Companies own shares which are held for cancellations. Okay. Debt. So treasury shares are never an asset. It has to be shown as a part of the equity.
It has to be shown as a reduction from the equity. Debt or equity instrument of one legal entity within a reporting entity held by another legal entity within the same reporting entity. Okay.
So debt or equity instruments examples unit of account for example land ownership of land gives the entity multiple rights right to use right to sell right to give on lease right to place a security for loans etc. However these rights are normally bundled as a single asset. So there are multiple unit of rights but this has to be considered as a economic right economic resource.
Okay. So this right has been collected as a asset which is land.
So bundled as a single asset land as such classification provides a faithful representation of those rights in the most concise and understandable way.
When you say land under property plant and equipment somebody can understand it is your land. You can sell, you can lease, you can use, you can just let it as as it is.
Existence uncertaintity. An entity and another party might dispute whether the entity has a right to receive an economic resource from that other party until that existence uncertainty resolved. For example, by a court ruling, it is uncertain whether the entity has a right and consequently whether an asset exists. For example, contingent asset.
When you read India's 37, it says that an asset will be considered as a contingent if it is probable that the benefits will be received. Right? For example, insurance claim, right?
Insurance claim will be disclosed as a contingent asset if there are more than 50% chances that the benefits will be received. But if it is virtually certain that the benefit will be received, it will be classified. It will be recognized as an asset. it will be recognized as an asset my dear friends.
So if there is a uncertaintity, if there is uncertaintity for example, if there is a uncertaintity, if there is a uncertaintity, right? If there is a uncertaintity, if there is a uncertaintity, okay, that the insurance claim may not be received means it is not virtually certain. You cannot recognize You cannot recognize and measure this as an asset.
As an asset. Okay? You cannot recognize and measure this as an asset.
Is that clear? Is that clear my dear friends? Great. Now another example. Low probability still an asset exist. So while there is a low probability to recover but whether it will be considered as an asset, the company has sold goods to a customer on a credit basis. the customer become bankrupt and the company is pursuing through a court of law.
So while the company will let's say there is a 100 cr rupees of 100 rupee of trade receivable and the customer becomes bankrupt. So the company will disclose it as a provision for doubtful date 100 right provision for doubtful date 100 and it has to be nil provision for doubtful date 100 and it has to be nil okay but whether the company will show it as an asset answer is yes the company is not losing the right might be the measurement could be n but the company's right has not been foregone right So when the if if that company which becomes bankrupt if the liquidator will sell the assets of the company if something will left it will be provided to the to the entity. Okay. So a receivable from a bank c bank bankrupt customer is a right and hence still meet the definition of asset even if the measurement principle that is expected credit loss provision for doubtful debt renders the net carrying amount as nil.
So net carrying amount could be nil in the balance sheet but you have to show it as a gross value of trade receable less provision for doubtful debt. Okay.
The definition is not driven by probability recognition and measurement R. Right? So the definition does not says that you are not able to recover.
It means it is not a right. It is a right. Ah the only thing is if you're not able to recover you have to measure it as as nil. Okay.
What is liability? Liability is an obligation. Right? Where so obligation present obligation. Okay. So it could be a legal obligation. It could be a constructive obligation. Legal obligation means contractual.
Constructive obligation means legal obligation means contractual.
Constructive obligation means due to a customary practices, published policy, specific statements, etc., etc. Okay.
So, it could be a legal obligation, it could be a constructive obligation of transfer of economic resources, right?
Transfer of economic resources means either you end up settling by pay payment of cash. Citor citor is a liability. Why it is known as a creditor? Because you in the past you have purchased some goods and services on the credit. Now you have to settle either you have to exchange in terms of some some asset or you have to pay cash in bank. Right? It it is a contractual obligation. Okay. What is a constructive obligation? For example, the company there is the company is emitting lot of carbon emissions through its chimneys.
There is no environmental legislation in the state. But company says that but company says that for every cubic meter of the carbon emission for every cubic unit of the carbon emission we will compensate the environment. We will we will plant the trees or we will deposit money in the environmental uh authorities worth xx xxx rupees and the company this policy and published on the website. The company made this policy and published on the website. Okay friends, friends while there is no environmental legislation, nobody will come from the environ environment uh uh department and nobody will claim the penalty and fines but the company has made a policy and publish on the website. So it means company is promising to compensate it the damage to the environment. So let's say there is a one lakh cubic unit of environmental pollution and the company has not created any provision or company has not spent any money right. So going by the concept of constructive obligation right the company has to made a provision of that amount. So whether it is an obligation, it's a constructive obligation. Whether it is arising out of the past event, the past event is damaging the environment, right? And whether that there will be a transfer of economic resources, yes, when the company will pay a cash, there will be transfer of economic resources, right?
So friends, there is a concept of executo.
What is meant by executo contract? You will read in India as 37. See, in every aspect, I am using I am telling you some name of the standard. Okay? So you can relate this conceptual framework all these concepts are there to build the standard. What is mean by executo contract? Executo contract means a contract where either neither party has performed the obligation or both the parties have performed the obligation or the parties equally performed the obligation. Okay. For example, you are a chartered accountant. You got a contract from a company to file the GST returns for every quarter and there is a 25,000 rupees which is payable every quarter.
In the first quarter you have not filed the return and the customer has not paid the money to you. So neither you have performed your obligation nor that customer has performed their obligation.
Right? Or you have you have performed your obligation. You filed your quarter 1 return. the customer will pay you the quarter 1 amount. So the customer will make a provision for quarter 1 25,000 rupees. So executory contract means where both the entity has equally performed their obligation or not performed their obligation. Right?
Example of constructive obligation we have discussed environmental policy.
Equity is a residual interest. We discussed income. We discussed increase in asset decrease in liability with the transaction other than shareholder.
Expenses decrease in asset increase in liability with the transactions from the party other than shareholders. Okay.
Now the recognition recognition what is mean by recognition?
Recognition means capturing that item or including that item in the balance sheet or P&L right in the in the component of the financial statement. Okay.
So you spent one lakh rupee in purchasing chairs. What is chair?
Furniture. Now how it is going to be recognized?
Either it has to be recognized as an asset in the balance sheet or as an expense. Right? So recognition means a process of capturing or including that item in the balance sheet or the statement of profit and loss right an item which meet the definition of one of the element of the financial statement asset liability equity income or expenses right see your two primary component is balance sheet and P&L see you have a journal entry you have a journal entry journal entry getting transformed into the ledger balance from the ledger balance there is a trial trial balance. There is a trial balance.
From the trial balance, you will prepare your financial statement. In the financial statement, from your trial balance, you will prepare balance sheet and P&L. Your statement of changes in equity, cash flow statement, notes to accounts, these are the culmination from your balance sheet and P&L. Okay? Right?
So, whatever you are recognized in the balance sheet is known as a carrying amount. You know now balance sheet numbers have to be carried forward. P&L numbers are not required to be carried forward. Right? If Tata still has purchased a land in Jampur in 1910, it will come into the balance sheet of 2026 also if that land has not been drecognized. If that land has not been sold out. Okay. So what is the recognition link between the balance sheet P&L and equity? So in the opening balance sheet there has to be asset on the one side there has to be asset on the other side there is there has been equity and liability. So asset minus liability is equal to equity accounting equation you have learned in class 11th.
So for example there is a asset minus liability is equal to equity net there is a retained earning. Okay then there is a P&L. In the P&L there is income minus expenses equal to profit. This profit will go to retained earnings.
Right? In your closing balance sheet, your net equity will change. So your opening balance sheet to closing balance sheet, it will be changed from two items. Number one, through statement of P&L, right? Income, expenses, profit, through other equity changes. For example, dividend paid, right? Issue, revaluation, surplus, right? So these items are not coming in P&L but these items are other equity changes through other equity changes also your closing balance sheet numbers will get changed your equity will get changed your asset liability will get changed okay so this is the linking this is just giving as a linking right recognition of income you need to credit income and debit asset or debit asset right or you need to credit income debit liability Right? Means liability is decreasing means income is coming. Your asset is increasing. Asset is getting debited means your income is coming. Or it could be debit liability.
Derecognize or the carrying amount recognizing the carrying amount.
Recognition of expense expense account debit to bank, right? Credit asset or or bank account debit to liability for example, right? So recognition criteria you have to recognize an asset and liability in a manner right that it provides the it it meets the qualitative characteristics right fundamental qualitative characteristics means the information has to be relevant and it has to be faithfully represented. It has to be faithfully represented. Okay.
Now recognition ulta derecognition.
Derecognition what is meant by derecognition?
Recognition means capturing or including an item an element an item in the balance sheet or statement of profit and loss. What is mean by drecognition?
Removing removing all or part of a recognized asset or liability from the balance sheet. Derecognition never happens in the P&L. Remember what is going to be drecognized? Something which is recognized in the balance sheet, right? Something which is coming in the balance sheet is drecognized. So drecognition occurs when the item no longer meet the definition of an asset.
Right? For example, loss of control or of a liability no longer has a present obligation.
For example, the company has purchased a machinery from China.
for rupees 1 cr.
The company has purchased a machine.
Machine is a property, plant and equipment. The company will recognize as an asset.
The moment machine came to India, government has banned the output produced from such machineries.
Friends, will that machinery meet the definition of an asset? Whether this machinery is a economic resource which gives a right to provide a future economic benefit. Whether company has a control over this machinery to use it at its own whims and fences. Answer is no.
So while this is a brand new machinery, this is lying with the company. But whatever money the company has spent, the company will drecognize it. The company will deregnize it. Or another example, the company has a truck. The company has capitalized the truck as a property plant and equipment. The company was using the truck, the company was running the truck beautifully. After 3 years, the truck met with an accident.
Right? The driver saved because the truck after 3 years the truck was you know flowing in uh the truck was uh running towards a bridge and uh due to imbalance the driver jumped and the truck fell into the river. The truck was completely damaged. Completely damaged.
Right? So it is not repairable at all friends.
While this truck which met with an accident and not repairable, completely damaged.
Whether the company will still continue to recognize this truck and continue to depreciate in its balance sheet year on year, answer is no. Now the company has lost the control. The company will not be able to get any benefit. The company will drecognize the truck. Okay. Or the company will drecognize the liability if it does not have a present obligation.
For example, the company has taken a loan from a bank at 10% rate of interest. The loan amount is 1 cr.
So the company has paid the interest for first year which is 10 lakh rupee. In the second year due to the cash crunch with the company, the company was not able to pay the interest in the second year. The carrying amount of the liability loan is 1 cr 10 lakh 1 cr principal 10 lakh rupee this year interest. Another year the company has not been able to pay the interest. In the second year again 10 lakh rupee for example. So the closing balance of the liability carrying amount is 1 cr 20 lakh. The company has recognized it in the balance sheet of that year end.
Subsequently the company spoke to the bank and company requested that I am running into a huge financial crunch. It will be great if you can wave the interest of the last two years. I will continue to pay in the future years. The bank has agreed to wave the interest and bank has given an approval for the for the waiver of the past 2-year interest.
Friends, the company has shown a liability of 1 cr 20 lakh. Now this 20 lakh rupee interest whether the company will dregnize or not recognize the company will drecognize. So the company will partly derecognize the liability. Okay.
The company will partly drecognize the liability or for example the loan has been taken by the farmer. The new government came and waved all the liability of the farmer. So the liability has to be removed. Okay?
So you have to drecognize it. Okay? You have to drecognize it. Is that clear?
So let's take an example from the ICI board of studies material. As on 31st March 20x2, Natasha Limited, this is the name of the company, carries trade receivable of 280 crores, carries trade receivable of 280 crores. It enters a factoring agreement with Samantha Limited, a financial institution. Right?
So as at 31st March, Natasa Limited carries trade receivable of 280 crores.
It enters into a factoring agreement with Samantaa Limited, a financial instit financial institution. transfer the receivable in exchange for an immediate cash payment of 250 cr. So it is known as a factoring right? Have you heard about the word factoring?
Factoring means you are selling your receivables to a recovery agent.
I don't know if you're aware or if you have heard.
So bankers used to do this. You know there is a recovery department of the bank. They engaged the goons and the bouncers and the recovery agents who can give lot of French who can who can who can abuse who can shout. Okay. So what they do for all the old recoveries they sell these recoveries amounts from the borrowers or defaulters to these recovery agents at 20%, 30% 40%. Right?
So likewise this company has a trade receivables of 280 crores. This company has sold these trades receivable to a recovery agent for 250 cr. Any shortfall between amount collected and 250 crores will be reimbured by Nakasa to Shantaa.
So while it seems like the 280 cr receivable has been paid to has been given to the recovery agent in collection of 28 250 crores. But the recovery agent told listen whatever I will receive in in in addition to 250 cr that is mine but if I will recover less than 250 cr the differential has to be reimbured by reimbured by you. This Natashasa limited said okay any excess over 250 cr less interest repaid to Natasha aa so it it is saying that any excess over 250 cr less interest okay so they will they will charge interest but any excess over 250 cr excluding interest will be repaid to Natasa so any shortfall has to be reimbured by Natasa any excess has to be taken by Natasa directors of Natasa proposed to dreg recognize the receivables. The directors of Natasha proposed to deregnize the receivables. Okay. Now you have to analyze using the conceptual framework in India 109 whether you need to drecognize or not. Conceptual right to cash flows expired. Whether conceptual right to cash flow cash flows expired in the books of Natasa. No. Why?
Receivable still exists in the books and are expected to be collected.
I told you now the right has not been expired. The measurement could be less than the carrying amount. For that you need to carry a provision but the contractual right still exist. The moment Natasa has transferred this to uh to uh this uh Samantha the right has not expired right because when Samantha will recover in addition to 250 cr Samantha will repay to Natasana now whether transferred substantially all risk and rewards no natasa still remain liable for any shortfall and receive excess collection so credit risk retained and reward also retained framework whether control lost No natasa retain exposure to significant positive or negative variation in economic benefit still control the asset. Conclusion do not be recognized recognize 250 crant as a financial liability. So NATASA has to still continue to recognize trade receivable at 280 cr less provision for doubtful debt. Right?
and recover financial liability 250 crores. Okay.
Right. So the framework says about this index 109 says about this. Okay. Now let's come to the measurement guys. So guys what we learned so far? What we learned so far in this six chapters?
What we learned? We learned the introduction of the framework, objective of the general purpose financial reporting, fundamental qualitative characteristics and enhancing qualitative characteristics, the component of the financial statement, meaning of reporting entity, element of the financial statement, recognition and drecognition. Now we are going to cover measurement, presentation and disclosure.
What is the measurement? There are two category of measurement historical cost and current value. Let's understand it with a small example.
Your grandfather has purchased a land 80 years ago.
The cost of the land was 1 lak rupee. 80 years ago your grandfather has purchased 5 acres of land at 1 lak rupee.
80 years ago. Now the value of the land is Now the value of the land is 100 cr rupees. Tell me what is historical cost?
What is current value? Historical cost is 1 lakh. Current value is 100 crores.
Her current value is 100 crores. Right?
So friends when we talk about measurement once we recognize the asset now we have to measure it right to capture into into the books of accounts.
So the measurement basis is an identified feature for example historical cost fair value of an item being measured. Applying a measurement basis create a measure for the asset or liability and income and expenses. There are two type of measurement basis.
Historical cost like I took an example.
Historical cost means it derived from the price of the transaction or event that gave rise to them. Entry value when you entered into that transaction 100 years ago, 80 years ago, 5 years ago, 2 years ago, 3 months ago, what was the value? That is known as a historical cost. Okay.
Not updated for value changes except for impairment, owners, liability, interest, acrual, consumption.
So the market value has changed. But you have not changed the value and you are showing it at a book value, historical cost. Right?
You must have seen in the accounting policy section of the financial statement that the assets have been presented at historical cost basis.
So this historical cost will be changed only by the depreciation impairment, right? But it will not be affected by the revaluation, change in market value.
No. Okay. So historical cost pretty simple. In our accounting standard at lot of places we are using only historical cost. But in Indas there is a heavy use of fair value also. What is current value? Current value means a key value, market key value, fair value, current value, right? Means how market value this asset or liability. Then value in use, right? Value in use for asset fulfillment value for liability.
What is meant by value in use? For example, you have an asset. So you have two option. Either you can sell the asset. For example, you have an asset.
So how you will get the benefit from the asset?
How you will get the benefit from the asset? Either by sell or by use. When you get the benefit by sell means market value, fair value, right? So measuring the benefits by selling the asset is covered under fair value. Measuring the benefits by using the asset is covered under value in use. Is covered under value in use. Means means if you use the asset if you use the asset what are the expected cash flows in future when you discount those future cash flows what is the total value which you are getting that is known as a value in use or what is mean fulfillment value for example liability the liability is 100 crores but you know that the actual payment has to happen for 80 lakh rupee only right so 80 lakh rupee is the fulfillment value of the liability Current cost. What is mean by current cost? Right? Cost could be different than market value also. Current cost means entry value at the measurement date. If I replace I have a raw material I purchased at 60 rupee per kg. The today's value of the raw material if I'm going to purchase it. So it will cost me let's say 80 rupee. I purchased at 60 rupee. So current cost is known as a replacement cost. Okay.
How it is different from fair value. So current cost is more like a replacement cost. In the fair value, the margins may be inbuilt. Okay. From the market participant perspective. Okay. So friends, as we discussed for assets and liabilities, asset has to be recognized at whatever you paid plus directly attributable cost. Right? For example, you purchased a building. You purchased a building.
building the cost is 20 cr and stamp duty registration charges is 2 cr. So the cost of the asset is 22 cr right 22 cr.
Okay. What is the value of the liability? What is the value of the liability?
You you took 100 crores. You took 100 crores. Okay. Consideration received and you also paid transaction cost also. you paid transaction cost also. So your liability will be net of that. Your liability will be net of that means you have to you have to apply effective interest rate method. Okay. Technically speaking let's say 100 cr borrowings you have taken 100 crores borrowing.
Okay. Less there is a processing fee.
There is a processing fee of 10 cr what you get? You get 90 cr. Effectively you get a 90 cr.
You get a 90 cr rupees but and but what is the principal amount? 100 cr. See please understand today you receive 90 cr net net from the bank.
Bank account debit to loan account 90 cr but after 5 year you have to pay 100 cr rupees plus interest. Let's say the repayment after a certain period of time the repayment will be 100 cr after let's say 3 years after 3 years. So it means in 3 years you have to pay 20 cr as an interest. So your effective interest rate will go up. This 90 cr will be this interest will be added back to the to the 90 cr and at the end of the year it will it will become 110 cr right. So the liability has to be recognized at consideration received right minus transaction cost.
Okay clear? So your current value is fair value more from the market participant perspective. Your value in use is more from the entity perspective and current cost is more like the entry value replacement cost. Okay.
So again while applying a measurement basis right so whatever measurement basis you're applying it has to be relevant and it has to be faithfully represented. Okay. The the amount has to be comparable, understandable and verifiable. Okay. Right.
If more than one measurement basis, right? So more than one measurement basis plus measurement of equity, for example, offmarket transaction, a parent provides an interest free loan to it subsidiary, an offmarket transaction. So in the parent book, this subsidiary loan has to be recognized at fair value.
Okay?
So there could be a chances where for example more than one basis fair value through OCI there is a interestbearing financial asset measured at fair value through OCI. So P&L interest income at amortage cost basis OCI the fair value changes has to be captured. So friends you will be able to understand when you read financial instrument right so these are the conceptual framework concept which you will actually see in the in the standards. Okay. In the standards talking about presentation and disclosure. So it's more like a communication tool of financial statement. The there should be a balance between the flexibility to provide relevant faithfully represented information and requiring information which is comparable both from period to period within an entity and across an entity within the sector.
Friends, the information has to be properly classified. information has to be aggregated properly and offseted right properly classified means like in the P&L like in P&L your expenses has been classified classified on nature basis on nature bas you remember in the day one I have covered a removal of option the nature based classification of expenses in balance sheet your assets and liabilities are classified into current and non-current non-current right so the classification has to be consistent and proper aggregation all the like items needs to be aggregated all the immaterial items needs to be aggregated and shown as a single item offsetting you have to recognize your assets and liability as a separate unit of account but when the offsetting when the offsetting provides more relevant and more faithful representation of the information has to be offseted. Classic example is defer tax asset and defer tax liability. It has to be offseted and and shown as a single line item. Okay.
So presentation and disclosure is like you need to provide a disclosure to provide then disclosure has to be this disclosure has to be qualitative.
Qualitative and quantitative. Quantitative. Okay.
Qualitative and quantitative.
The last concept is concept of capital and capital maintenance. Friends, there are two kind of capital maintenance.
financial capital maintenance and physical capital maintenance right so normally you remember I started with an example your salary in the last year was 10 lakh rupee this year your salary is 11 lakh rupee this year your salary is 11 lakh rupee right but the inflation is 12%.
So you are enjoying you are happy that you know my salaries increased by 10% it increased by 1 lakh rupee but are you able to live your life in a same manner in which you are living till the last year your expenses has been inflated in the more ratio in the more pro proportion in comparison to your hike in the income right hike in the income so friends friends It means it means so if we will look one side of it if we will look one side of it seemingly we have earned a profit but if we will look with the with the environment with the inflation so it means we are not generating a profit are you getting me what I'm saying so the concept of capital and capital maintenance is that so if 10 becomes 11 probably you have increased your capital but are you able to maintain your capital. So that is kind of the concept which framework talks about and you know this is the only area where a practical question may be asked. So it says that profit is earned only after capital has been maintained. The concept of capital and the concept of capital maintenance together determine profit. How it mean?
Let me tell you. So first let's talk about financial capital maintenance. It says that profit is earned only if the financial or money amount of net assets at the end is greater than at the beginning excluding honor contribution and distribution. It says that it says that the profit will be considered as earned only if the financial or monetary amount of net net assets at the end is greater than at the beginning excluding honor contribution or distribution.
Measurement measured in nominal monetary unit or unit of constant purchasing power. I will discuss with the help of an example. Nominal means all price increases. All price increases. Right?
Holding gains are profit. Constant purchasing power means only that part of price increase exceeding general inflation is profit. The rest is a capital maintenance adjustment part of equity. What is physical capital maintenance? Profit is earned only if the physical productive capacity or operating capability at the end is greater than at the beginning excluding honor contribution in distribution.
Measurement requires the replacement cost measurement basis. All price changes if affecting assets or liabilities are viewed as changes in the physical productive capacity.
Let's understand this with the help of an example. Right?
There is an entity. The entity has 6,000 units at 2 rupee per unit. Okay. Sales at 3 rupee per unit. Withdraw 6,000 rupees. Okay. So the entity has invested the entity has purchased 6,000 unit of a product at at 2 rupees per unit. What is the opening capital? What is the net net equity? 6,000 multiply by 2 12,000 rupees. Right? Opening capital is 12,000 rupee. The company sold all 6,000 unit at three. What is the cash they have generated? 18,000 rupees.
So opening capital is 12,000 rupees.
Okay. The cash they have generated is 18,000 rupees. 18,000 rupees. So means for 12,000 they got 18,000. But there are 6,000 rupees of drawings. There are 6,000 rupees of drawings. Okay? Means whatever additional 6,000 was there it was withdrawn. Okay. The closing cash is still 12,000. The general price index is 100 becomes 120. The product price has been increased from 2 to 250 pesa a specific index 125.
Right? So if I go by the nominal if I go by the nominal monetary unit approach nominal approach and I'm maintaining my financial capital at the historical cost. Okay. So my closing capital is 12,000 only because 18 - 6 12,000. My opening capital to be maintained is 12,000 rupees. Right? And my retained profit or loss my retained profit or loss is how much? My retained profit or loss is how much?
This is this is retained profit or loss and should have restricted drawing to 6,000 as done means so to cut a long story short if I am going by a nominal approach if my opening equity is 12,000 what should be my closing equity when I can say that I have maintained my capital at historical cost 12,000 rupees as simple as historical cost approach.
But for example, is this drawing would have been 8,000 rupees. Then then my closing capital would have been 10,000.
Then I can say that even going by the historical cost, I was not able to maintain my capital. I miss my capital maintenance by 2,000 rupees. Have you understood it? So going by the historical cost approach, you have to maintain your capital at least to the level of the opening capital. Now going by the constant purchasing power. Going by the constant purchasing power. Right?
Going by the constant purchasing power.
I purchased my 6,000 units at 2 rupee per unit. I purchased my 6,000 unit at 2 rupee per unit. At 2 rupee per unit.
Okay. At 2 rupee per unit. Okay.
So friends, friends friends, so in 12,000 rupees of capital I was able to purchase 6,000 quantity.
But friends, now there is a 20% of inflation. There is a 20% of inflation means this 2 rupee product become 2.4 for example.
So friends tell me how much money I should need? how much money I should need to purchase the equivalent quantities at the current price at the current inflation.
So 6,000 quantity 6,000 quantity multiply by 2 * 120%. Right? So it will come at 14,400.
So how much opening capital I need to maintain to to to maintain my financial capital at the constant purchasing power. What is meant by constant purchasing power? Constant purchasing power means are you able to maintain your capital in a way that you are constantly able to purchase equivalent number of quantity.
Are you getting me? Are you getting me my dear friends? Are you getting me? You are able to purchase equivalent number of quantity.
Means for maintaining my capital I need 14,400 rupee right to purchase 6,000 quantity. To purchase 6,000 quantity but how much capital I have? 12,000 rupees is the closing cash. It means I I lost 2400 rupee going by the constant purchasing power methodology. Constant by constant by purchasing power methodology. Okay. Historical cost means you are not worry about inflation or anything. You're just looking at whether 12,000 is 12,000. Okay. But in constant purchasing power you are looking at a quantity. Here look you are looking at the amount.
Here you are looking at the quantity.
Okay. Is that clear? Is that clear? So in this case to maintain my capital of 14,400 I have to restrict my drawings to 3600.
Is that clear? Now coming to the physical capital maintenance. What is meant by physical capital maintenance?
While the inflation is 120 20% high but now my product price become 2.5 the specific index of that commodity has been 25%.
So tell me if I have to maintain my physical capital.
Okay same physical capital means quantity again quantity.
So I need to I need 15,000 rup 6,000 multiply by 2.5 15,000 rupee I need 15,000 rupee I need 15,000 rupee I need for for uh for maintaining my capital for purchasing my goods right and my dear friends tell me how much is my closing capital how much is my closing capital. How much is my closing capital?
My closing capital is how much?
If you see 12,000 was my opening capital. I received 18,000 rupees, right? I received 18,000 rupees. Okay?
And my borrowings were 6,000 rupees. Out of this, my borrowings were 6,000 rupees. So, I have only 12,000. But in this 12,000 rupees, so 25% price index have been increased by 25%. Means this 12,000 closing capital is worth of 9,000 rupees only.
Are you getting me? Are you getting me what I'm saying?
I'm left with 12,000 rupees. Right? But but my my purchasing power has been down by 25%.
Right? So my cash after adjusting cost stock at current cost only coming at 9,000 rupees it means I have loed 6,000 rupees of I have lost 6,000 rupees of borrowings 6,000 rupees of borrowings I have you I have loed so so basically sorry I have loed 6,000 rupees and if I have to restrict I have to maintain my physical capital my borrowing should be nil my borrowing should be nil right no drawing no drawing is possible capital. So physical requires maintaining productive capacity. So physical capital only always requires maintaining a maintaining a productive capacity.
So how much amount I need for uh buying 6,000 and 15,000 rupees 15,000 rupees and how much I have 12,000 rupees. How much sort? I have 3,000 rupees of sautes I have. Okay.
What are the key takeaways my dear friends? We have discussed this conceptual framework is a constitution of India. It is not a standard and does not override ind. The objective of general purpose financial reporting is to provide a decision making right a useful information to the investor, lender and other creators. General purpose financial reporting does not show the value of the entity. They help user estimate it. There are fundamental qualitative characteristics which is relevance plus faithful representation.
Relevance include having a predictive value, conver confirmatory value, metality. Faithful representation includes your uh uh your uh comparability, verifiability. Okay, sorry. Faithful representation includes uh you know faithful representation includes your substance over form. Okay.
Uh free from error, complete, neutral and enhancing qualitative characteristic is comparability, verifiability, timeliness. Okay. These are the enhancing qualitative characteristics.
Metality is entity specific. Asset means a right to receive the potential benefits and where there is a control over the entity and this potential benefits could be a small probability.
Also liability is a obligation present obligation to transfer the resource as a result of past events. Recognition means including or capturing the item in the financial statement which is largely in balance sheet and P&L. Trecognition means deregnizing an asset when the control is lost or the liability when no longer it is a present obligation. There are measurement bases which is historical cost versus current cost.
Right? And the capital maintenance we discussed the financial capital maintenance which is nominal historical cost and which is constant purchasing power on the basis of constant purchasing power versus physical capacity. Okay.
So quickly discuss some MCQs. Which of the following is true about the conceptual framework under ind? It is an accounting standard. It sets out concepts, right? It sets out the concept underlying financial reporting. Nothing in it override any index only apply to listed company. Only apply to public sector entity. B is the right answer.
The primary user of general purpose financial report includes management, regulator and member, existing and potential investor, lender and other creator, equity shareholder, employee. B is the right answer. Yes. Which characteristics makes information relevant under the framework? Audit, predictive value, confirmatory value or both. Monetary unit compare with peer companies. This one. Okay. Under the revised framework, an asset is a resource that will produce future economic benefit. A present economic resource controlled by the entity as a result of past event. Any resource owned by the entity, resource which is likely to generate cash flows. Again, B is the right answer. Okay. So friends, these are the these are the kind of you know MCQs which are there as per the framework. When can a right be recognized an asset? Only when the probability of economic benefit is probable. No. Only when it is virtually certain. No. Right. Right. Even if the probability of producing economic benefit is low. Yes. Only if the entity has legal ownership of the resource. No.
A contract requiring an entity to pay salary in return for future employee service where neither party has it performed is a recognized liability at the salary amount exeuto contract. Okay, not a contingent asset, not a financial liability. Friends, there are four more questions and I have given the answer to all the questions as discussed. Due to some urgency, I need to conclude the session. So the remaining four MCQ I have already shared this material. the remaining four MCQ you can solve the answer with the relevant explanation has been given here right so thank you so much and with this I hope you have enjoyed this conceptual framework of financial reporting I'm concluding this session thank you so much thank you Ashok g thank you Ajit Gi yeah you can conclude the session
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