Conceptual Framework for Financial Accounting

Lois and decrees on accounting standards – 1996-2000 - CONCEPTUAL FRAMEWORK FOR FINANCIAL ACCOUNTING OBJECTIVES OF THE CONCEPTUAL FRAMEWORK 01 - The conceptual framework of financial accounting constitutes the theoretical reference structure that supports and guides the development of accounting standards. The conceptual framework is a set of objectives, fundamental concepts, and elements that maintain links of coherence and complementarity among themselves. 02 - Its objective is to help:

• the development of coherent standards that can facilitate the production of data and financial statements;
• arbitration in case of divergent understanding or opposition of interests, and the search for appropriate solutions;
• the interpretation of financial statements;
• the resolution of accounting issues not yet addressed by standards.
  03 - The conceptual framework essentially allows to:
• explain accounting situations
• standardize accounting concepts
• understand the accounting logic with a view to disseminating it.
  Scope of application of the conceptual framework 04 - The conceptual framework for accounting concerns the preparation of general-purpose financial statements of economic enterprises. It may also serve as a reference for other institutions. Structure of the conceptual framework 05 - The conceptual framework is structured according to the following hierarchy:
• at the first level, users, their needs, and the objectives of financial statements are stated.
• at the second level, fundamental concepts which include:
  . qualitative characteristics of information contained in financial statements . underlying assumptions and accounting conventions.
  . accounting terminology and the consideration of elements in financial statements.
• at the third level, operational guides dealing with measurement processes (attributes or characteristics to be measured, scale or unit of measurement).
• at the fourth level, information communication mechanisms derived from the objectives of financial statements.
  USERS OF FINANCIAL STATEMENTS, THEIR NEEDS AND THE OBJECTIVES OF THESE STATEMENTS 06 - Financial statements constitute the main means of communicating financial information to different users, who are internal and external to the enterprise. Internal Users:
  07 - These are management, administrative bodies, and the various internal structures of the enterprise.
  Management is responsible for preparing and presenting financial statements. They are naturally interested in the information contained in these statements.
  They also need management information to enable them to properly fulfill their responsibilities for planning, conducting, and controlling the enterprise's activities. To the extent that this type of information meets specific needs of management, which have the means to determine its form and content, its production and disclosure fall outside this conceptual framework. Although primarily intended to provide information meeting external users' needs, financial statements can, to a certain extent, prove useful to management, particularly in the case of small and medium-sized enterprises that often have limited means to produce information meeting their specific management needs. External Users:
  08 - These are primarily capital providers as well as government and other institutions endowed with regulatory and supervisory powers, other enterprise partners, and other interest groups.
  Capital Providers
  09 - These are investors, lenders, and grantors.
  Investors providing risk capital as well as lenders are concerned with the risk inherent in their investments and loans, while grantors are interested to know whether the enterprise has achieved its assigned objectives, thereby justifying the resources and other benefits they have made available to it. In general, these different users want to know if the enterprise is profitable, generates positive cash flows, safeguards its assets, can continue its operations within its intended framework, and honor its commitments in the foreseeable future. Government and other institutions endowed with regulatory and supervisory powers 10 - This group particularly includes tax, monetary, and financial authorities as well as bodies responsible for national accounting and statistics, and any other organization with planning, regulatory, and supervisory powers. They are interested in the distribution of income and resources. They use financial information to regulate enterprise activities, inform their fiscal, social, and economic policies. They also use the information as a basis for calculating national income and similar statistics, and to evaluate the enterprise's contribution to job creation, exports, national income, or for calculating taxes. These agencies can, through financial statements, evaluate the impact of their policies and potentially require the production of additional specific information. Other enterprise partners 11 - These are employees and their unions, suppliers and other creditors as well as customers and other beneficiaries of goods and services produced by the enterprise. They are particularly interested in the enterprise's ability to generate cash flows enabling it to honor its commitments and its ability to continue operations. Other interest groups 12 - These include, in particular, professional and advocacy organizations, specialized press and media, researchers, various bodies and associations, and the general public. These groups want to know if the enterprise works for the interest of the community members they represent or whose interests they defend. They are particularly interested in recent trends and developments in the enterprise's growth and the consequences of its activities on economic and social development and on the environment in general. Particular needs of certain users:
  13 - Some financial statement users may have specific needs and generally possess the necessary power and resources to determine the nature of the information they require. However, most users do not have sufficient power and means to dictate the nature of the information communicated to them and are therefore constrained to rely on the information provided in financial statements. Importance of investors' and funders' needs:
  14 - Analysis of the concerns of different users shows that several needs are common or, even if different, can be met by the same information.
  Investors and funders make risk investments in the enterprise, and their information needs are naturally broader. Normally, preparing financial statements meeting their needs can also meet the needs of other users. They are the privileged users of financial statements. 15 - To satisfy user needs, information contained in financial statements must allow, within an economic decision-making context (decisions regarding investment "buy, hold, or sell securities" or credit):
• the assessment of economic resources and related rights regarding performance, and the evaluation of solvency and liquidity;
• the assessment of how management has fulfilled its corporate mandate.
  Information must also allow:
• determining the basis for taxation,
• assisting in preparing national statistics, plans and budgets, and generally defining economic policies;
• justifying actions and tracking benefits granted and subsidies awarded.
  OBJECTIVES OF FINANCIAL STATEMENTS
  16 - The objectives of financial statements stem from user needs. Given these needs, the essential objectives of financial statements are to:
• provide useful information for decision-making regarding investment, credit, and other similar decisions;
• present useful information to estimate the probability of realization of future cash flows, as well as their magnitude and timing;
• provide information on:
  . the financial position of the enterprise, particularly regarding economic resources it controls as well as obligations and the effects of transactions, events, and circumstances likely to modify resources and obligations; . financial performance; . how the enterprise obtained and spent cash through its operating, financing, and investing activities, and through other factors affecting liquidity and solvency. . the degree and manner in which management has achieved its assigned objectives within the corporate mandate:
  . the degree of compliance of the enterprise with laws, regulations, and other contractual provisions.
  17 - Information on financial position is essentially provided by the balance sheet. Information on performance is essentially provided by the income statement, and information on cash flows is essentially provided by the statement of cash flows. 18 - Other information is useful for economic decision-making. This information reflects the need to refine or complement the range of information intended for users, particularly regarding:
• financial prospects of enterprise activities;
• activities related to human resource management;
• the impact of enterprise activities on its ecological environment as well as on actions taken to ensure environmental protection;
• technology used and the degree of adoption of technological innovations in production and management.
  FUNDAMENTAL CONCEPTS
  QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION 19 - Qualitative characteristics are the attributes that financial information conveyed in financial statements must possess and which are indispensable to guarantee the production and disclosure of useful financial information for decision-making. The four main qualitative characteristics are understandability, relevance, reliability, and comparability. UNDERSTANDABILITY 20 - To be useful, information provided by financial statements must be understandable by users. This means that the information is explicit, clear, and concise, and within the reach of users. Users are presumed to have a reasonable knowledge of business and accounting, and are keen to study and process information with diligence. RELEVANCE 21 - The quality of relevance of information is assessed by the relationship between the information and its use. Information is relevant when it is capable of favoring adequate decision-making by financial statement users by helping them evaluate past, present, or future events, or by enabling them to confirm or correct previous assessments. The relevance of information therefore encompasses two underlying qualities: predictive value and feedback (or confirmatory) value. It also implies that information is prepared and disclosed in a timely manner. Predictive Value 22 - Financial information has predictive value when it helps users make predictions or confirmations regarding future economic results and events likely to affect the enterprise's operations. Feedback (or Confirmatory) Value 23 - Feedback value is closely linked to predictive value. Financial information is retrospective in that it can be used to understand or correct previous results, events, and predictions. Timeliness of Disclosure 24 - To be relevant, information must be prepared and disclosed at a time when it is likely to be useful for users' decision-making. Information loses its relevance when provided late. RELIABILITY 25 - Accounting information is reliable when it enables users to rely on it as faithful, neutral, and true information, and that it does not contain errors or bias. The criteria constituting the components of the reliability concept are essentially faithful representation, neutrality, and verifiability. Faithful Representation 26 - Faithful representation is the correspondence or concordance between the measurement or description and the phenomena they are supposed to represent in accounting. These phenomena are the economic resources and obligations of the enterprise as well as transactions and events that modify these resources and obligations. Neutrality 27 - Accounting information is neutral when it is free from bias and, consequently, does not result in biased data and predetermined outcomes. Verifiability 28 - Accounting information is verifiable in that it results from the correct application of a measurement method and relies on corroborating evidence and evaluations whose methods are disclosed
  with the information itself. COMPARABILITY 29 - Information must enable users to make comparisons over time, to determine trends in the financial situation and performance of the enterprise. Users must also be able to compare financial information from similar enterprises to relatively evaluate financial situations, performance, and their developments. Constraints to take into consideration:
  30 - These characteristics must be considered taking into account two limits or constraints of financial information: the cost-benefit balance and materiality.
  Cost-Benefit Balance:
  31 - The balance between benefits and costs is a general constraint. Information contained in financial statements must provide greater benefit than the cost of their production. Evaluating this constraint is a matter of judgment. It must be the concern of standard-setters, in particular, as well as preparers and users of financial statements. It should be considered, however, that the benefits of financial information do not necessarily accrue to those who have borne the costs. Materiality 32 - This second constraint concerns the appropriateness of providing financial statement users with information that does not have a significant impact on the economic decisions they are likely to make. Any accounting information whose omission or inaccuracy is likely to influence decisions taken by users is considered material. The concept of materiality generally depends on the size of the item or error, judged in the particular circumstances of the omission or inaccuracy. Trade-off between qualitative characteristics:
  33 - Several qualitative characteristics are interdependent and complementary, while others are visibly antithetical. A balance between them is indispensable to favor the usefulness of information disseminated through financial statements. Although it is commonly accepted that relevance and reliability constitute the fundamental qualities underpinning the decision-making process, it is not easy to determine definitively the importance to be attached to each quality. The trade-off is ultimately a matter of professional judgment considering the fundamental objective sought through financial statements, namely satisfying users' needs regarding economic decision-making. UNDERLYING ASSUMPTIONS AND ACCOUNTING CONVENTIONS:
  34 - Underlying assumptions and accounting conventions stem from a particular economic, social, and legal environment and constitute a basis for the development of accounting standards and the search for appropriate solutions to posed problems. UNDERLYING ASSUMPTIONS:
  Going Concern
  35 - Going concern assumes that the enterprise normally continues its operations in the foreseeable future and has neither the intention nor the obligation to cease its activities or substantially reduce their scope. It establishes that the enterprise is able to realize envisaged operations and honor its commitments in a foreseeable future. Otherwise, financial statements must be prepared on a different basis. Accrual Accounting 36 - The effects of transactions and other events are taken into account as soon as these transactions or events occur, not at the time of cash receipts or payments. Financial information, with the exception of information contained in the statement of cash flows, established on this basis, informs users not only about past transactions that have resulted in liquidity flows, but also about obligations and other events leading to future receipts and payments. ACCOUNTING CONVENTIONS 37 - Accounting conventions are concrete rules that guide accounting practice. They are developed through practices in conformity with objectives and qualitative characteristics. Entity Convention 38 - The enterprise is considered to be an autonomous accounting entity distinct from its owners. Financial accounting assumes a clear separation between the enterprise's equity and that of its owners or shareholders. It is the transactions of the enterprise, not those of the owners, that are taken into account in the financial statements of the entity. An accounting entity does not only represent a company enjoying legal status by law. It extends to any set carrying out an economic activity and controlling and using economic resources; Monetary Unit Convention 39 – The necessity of a unique unit of measure to record an enterprise's transactions led to the choice of currency (the Dinar) as the unit of measure for information conveyed by financial statements. Only transactions and events capable of being quantified monetarily are accounted for. Some other non-monetary information expressed in other units of measure may be disclosed primarily in notes to financial statements. Periodicity Convention 40 - Financial information must reflect the periodic evolution of the enterprise's performance to serve as a basis for economic decision-making. It must consequently be produced and provided at regular periodic intervals, the period being designated as "accounting year". For practical considerations, it is accepted that the accounting year covers a twelve-month period. Generally, it coincides with the calendar year. In some cases, the accounting year extends until operations reach their lowest level. Historical Cost Convention 41 - According to this convention, historical cost (or original value) serves as an adequate basis for accounting for the enterprise's asset and liability items. Goods and services acquired by the entity are generally accounted for at their transaction cost, i.e., the amount actually paid or owed. When transactions are carried out
  without payment (donations or standard exchange, ...), their cost is defined as the amount of money that would have had to be spent if the transaction had been concluded otherwise. Furthermore, when it concerns a liability item, the original value applies in the same way as for an asset. The choice of historical cost is justified by the fact that original value constitutes true information based on evidence and is, therefore, objective. Revenue Realization Convention 42 - This convention serves as the basis for identifying, recognizing, and measuring revenue in accounting. Revenue results from the creation of goods and services by an enterprise during a specific period of time. It can only be accounted for when it is realized. Realization is subject to the triggering event test; in other words, its recognition is only carried out in one of the following cases:
  a. - revenue realization at the time of sale; b. - revenue realization upon contract execution;
  c. - revenue realization at the end of the manufacturing process, or
  d. - revenue realization upon collection of sales.
  The measurement of revenue corresponds to the amount expressed in cash, disbursed in exchange for the goods sold, shares issued, services rendered, or obligations contracted. When it concerns sales not settled in cash, revenue equals the fair market value of the transaction object, which may be the goods and services sold or the goods and services received in exchange, depending on which are easier to determine. Matching of Expenses to Revenues Convention 43 - This convention consists of establishing a direct or indirect correspondence between the enterprise's revenues and expenses. When revenues are accounted for during an accounting year, all expenses that contributed to the realization of these revenues must be determined and matched to this same accounting year. This convention is the corollary of the autonomy of accounting years. Objectivity Convention 44 - Transactions and events taken into account in accounting and disclosed in financial statements must be justified by evidence. When corroborating documents are available, ...