Framework for the Preparation and Presentation of Financial Statements

• It provides the general principles upon which Ind AS will be based .
• The framework is the standard of all standards, but is not an accounting standard.
• It is issued in July 2000.
• In case of conflict between Framework and Ind AdS, Ind AS shall prevail over the Framework, as Ind AS contains specific principles with respect to items of financial statement whereas framework contains general principles with respect to items of financial statement.

The Framework deals with:

1. the objective of financial statements;
2. the qualitative characteristics that determine the usefulness of information provided in financial statements;
3. definition, recognition and measurement of the elements from which financial statements are constructed; and
4. concepts of capital and capital maintenance.

The objective of financial statements is to provide information about

• Financial position,
• Financial performance, and
• Cash flows

of an entity that is useful to a wide range of users in making economic decisions.

• Faithful representation: Information must represent faithfully the transactions it purports to represent in order to be reliable.

• Substance over form: Economic reality of a transaction, not its legal form (Eg. PPE transferrred but sale agreement not yet prepared).

• Neutrality: Free from bias i.e. influence the making of a decision or judgement.

• Prudence: The inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

• Completeness: Information provided in the financial statement must be complete.

• The definition of income comprises of revenue and gains. 
• Revenue arises in the course of the ordinary activities of an entity and is referred by various names including sales, fees, interest, dividends, royalties and rent.
• Gains may or may not, arise in the course of the ordinary activities of an entity. 
• Ordinary Activities are defined as any activities, which are undertaken by an entity as part of its business & incidental to main business.
• Gains represent increases in economic benefits and as such are no different in nature from revenue.
• The definition of income includes unrealised gains.
• Gains are usually displayed separately because knowledge of them is useful for the purpose of making economic decisions.

• The definition of expenses comprises of those expenses that arise in the course of the ordinary activities of the entity and losses.
• Losses may or may not, arise in the course of the ordinary activities of the entity.
• Losses represent decreases in economic benefits and as such they are no different in nature from expenses
• The definition of expenses also includes unrealised losses. 
• Losses are usually displayed separately because knowledge of them is useful for the purpose of making economic decisions.

Measurement is the process of determining the monetary amounts at which the elements of financial statement are recognised and carried in the Financial Statement



(a) Historical cost:

1. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire them at the time of their acquisition.
2. Liabilities are recorded at the amount of cash or cash equivalents expected to be paid to satisfy the liability or at the amount of proceeds received in exchange for the obligation, in the normal course of  business.

(b) Current cost:

1. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset were acquired currently.
2. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.

(c) Realisable (settlement) value:

1. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. 
2. Liabilities are carried at their settlement values, that is, the undiscounted amount of cash or cash equivalents expected to be required to settle the liabilities in the normal course of business.

(d) Present value:

1. Assets are carried at the present value of the future net cash inflows that the item is expected to generate in the normal course of business.
2. Liabilities are carried at the present value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

There are two concepts of capital:

1. Financial concept: Under the financial concept, such as invested money or invested purchasing power, capital is synonymous with the  net assets or equity of the entity.
2. Physical concept: Under the physical concept, such as operating capability, capital is regarded as the productive capacity of the entity. This productive capacity may be defined in terms of volume of production. For eg.- Units of output per annum.

• Under Going concern, it is assumed that the entity will continue in operation for the foreseeable future and has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
• Under Accrual basis, the effects of transactions are recognised on mercantile basis i.e. when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statement of the periods to which they relate.
• Under Consistency, same accounting policies are followed from one period to another so that comparability of the financial statement can be achieved.

CA PARAS JAIN
parasjain2807@gmail.com
+91 9819815706