Some accountants hold the view that development of a Conceptual Framework for General Purpose Financial Reporting (simply, the Conceptual Framework) in the Public Sector is needless and a mere information overload on the Accountants. This argument is predicated on the fact that the Conceptual Framework does not establish authoritative requirements for financial reporting by public sector entities that adopts IPSAS, nor does it override the requirements of the International Public Sector Accounting Standards (IPSAS) or the Recommended Practice Guides (RPGs).
Required:
i) Explain the connection between the Conceptual Framework on one hand and IPSAS and RPGs on the other hand. (2 marks)
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The role of the Conceptual Framework is to establish the concepts that underpin financial reporting in the public sector entities that adopts the accrual basis of accounting. The IPSASB applies these concepts in developing the IPSAS and RPGs applicable to the preparation and presentation of general-purpose financial reports of public sector entities.
In relation to authority, the Conceptual Framework does not establish authoritative requirements for financial reporting by public sector entities that adopt IPSAS. It does not also override the requirements of IPSAS and RPGs.
(1 marks for discussing role and 1 mark for discussing authority = 2 marks)
ii) Illustrate a practical case where the Conceptual Framework would be useful to an accountant in the preparation and presentation of a General Purpose Financial Report for his organisation. (4 marks)
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Primarily, the Conceptual Framework provides a conceptual foundation for developing the IPSAS and the RPGs and therefore is relevant to standard setters.
However, the preparers of the GPFR based on the IPSAS will also find the conceptual framework useful in some instances. Particular, the conceptual framework will provide guidance to preparers in dealing with financial reporting issues not dealt with by the IPSAS or the RPGs. The preparer can refer to and consider the applicability of the definitions, recognition criteria and measurement principles and other concepts in the Conceptual Framework.
For example, a preparer of a financial report finds that there is a peculiar transaction of the entity which there is no specific IPSAS in force to deal with the matter and therefore has to use his own judgement. In solving the problem, the prepare may rely on the definitions, recognitions criteria and measurement principles in the Conceptual Framework to arrive at a treatment of the transaction which will largely conform with the spirit of the IPSAS, if one had existed.
(Award 2 marks for explaining the circumstances when the preparer will rely on the Conceptual Framework. Award another 2 marks for illustration = 4 marks)
iii) Explain TWO (2) constraints on information included in the General Purpose Financial Reports. (4 marks)
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Materiality
Information is material if its omission or misstatement could influence the discharge of accountability by the entity, or the decisions that users make on the basis of the information provided in the GPFR. In developing the IPSAS and RPGs, the IPSASB will consider the materiality of the consequences of the application of a particular accounting policy, basis of preparation or disclosure of a particular item or information. Thus, materiality is a constraint on the information included in the GPFR and thus entities consider the materiality of the information in making the decision on disclosure.
Cost-benefit
Financial reporting involves costs to both the preparer and the user. The benefit of the financial reporting should justify the cost involved in producing that information. Thus, judgment of cost -benefit analysis is required. The standard setters and preparers of financial reports considers the cost in relation to the benefits of the information in making decision on information to be included in the GPFR.
Balance between the Qualitative characteristics
The qualitative characteristics work together to contribute to the usefulness of the information. For example, faithfully representing an irrelevant information in the
GPFR does not achieve usefulness of the information. Thus in some instances, balancing or tradeoff between qualitative characteristics may be necessary to achieve the objectives of financial reporting.
(2 marks each for any constraints explained = 4 marks)