Mastering the Foundations: Understanding F3 ACCA Frameworks

In the world of accounting and finance, the ACCA (Association of Chartered Certified Accountants) qualification is a prestigious milestone, and at its core lies the foundational knowledge imparted in the F3 paper. The Frameworks are central to this F3/Financial Accounting exam, which serve as the cornerstone of financial understanding. In this article, We, Mirchawala’s Hub Of Accountancy will discuss the frameworks in detail as per the syllabus. This would be a great help for you in your exams, so let’s dive deep into the world of F3 ACCA frameworks and unlock the doors to your financial expertise. 

The Important Concepts of Frameworks

To start with the frameworks, we first, would’ve to talk about some important accounting concepts one by one, and pretty clearly, they are;

• The Separate Entity Concept

• The Money Measurement Concept

• The Duality Concept

• The Prudence Concept

• The IAS (International Accounting Standards) 37: Provision Concept

• The Accruals/Matching Concept

• The Going Concern Concept

• The Historical Cost Concept

• The Revaluation Concept
• The Materiality Concept
  
• The Substance Over Form Concept

• The Separate Entity Concept

In Accounting, the business should be kept separate from the personal life of its owner. The personal expenses of the owner are not the expenses of his business. So, Drawings, which are the amounts taken out of the business account for personal use by the owner, are never recorded as business expenses because the personal life of the owner and the business are always kept separate.

• The Money Measurement Concept

In Accounting, everything is recorded at its monetary value. This valuation is done in amount so that financial statements remain comparable. For example, if a car is our asset, then we would record its monetary value like it has a monetary value of 10000 dollars.  

• The Duality Concept

This Duality Concept says that when it comes to Accounting, every transaction made has a dual effect. This Concept is the basis of the Double Entry Bookkeeping system. It means that whenever a transaction is made, some of the things are debited, and as a result, other things are credited.

• The Prudence Concept

It says that if ever a condition exists of an expense, then it should be reported to the owners in Advance. Expenses and Liabilities should never be ignored or underestimated, they should be reported immediately when the chances are more than 50%.

• The IAS (International Accounting Standards) 37: Provision Concept

This Concept says that the Income and the Assets should never ever be overstated. They should only be recorded and reported when there is a virtually certain chance of it to occur which means that it should have a 95% chance of occurring.

• The Accruals/Matching Principle Concept

According to this concept, routine expenses and income should be recorded when they are utilized or realized/used. Expenses should be when they are utilized rather than when they are paid. 

Similarly, Income should be recorded when the organization gives services rather than when the amount is received for those services. 

• The Going Concern Concept

We explain the Going Concern Concept in a way that it is an assumption of an estimate of the management that their company won’t shut down in the foreseeable future, this foreseeable future should at least be 1 year at the minimum.

These Going Concern assumptions are based on the fact that there is no need or intention to cease the company. 

To check if the Going Concern is valid, companies check for these problems and if these don’t exist then it means that the Going Concern is valid, these problems are;

• Cash Flow Problems.
• Legal Cases Running Against the Company.
• Major Losses.

If, in case, these problems exist, then the Company is considered to not be a Going Concern and then its Non-Current Assets and Non-Current Liabilities will be shown as Current Assets and Current Liabilities because now they would have to be redeemed and paid within an year.

Now, all the Assets would be recorded at their Saleable Value or Net Realizable Value or Break-up Value. 

• The Historical Cost Concept

When it comes to this accounting, Assets should be valued at their original costs. Original Cost is the Cost that the assets were bought for.

This should be done because the Original Cost is a reliable amount as it has been recorded in the past but it does lack relevance as the original cost is not according to the real present market. 

This concept of original cost is now an outdated concept but on the other hand, it is very easy to verify/audit. 

• The Revaluation Concept

According to this concept, assets should be valued at their market prices/values. The Revelation Concept promotes relevance for users, as the market is a real and relevant value.

Market value does lack reliability as it is an estimate. As per the Accounting Framework, it is a choice of the management to follow whichever policy they want, but they should show consistency when using a specific policy.

• The Materiality Concept

In the world of finance and accounting, Materiality is a relative concept, which means that what is viewed as material can have a different meaning when going from one organization to another, depending on its size, industry, and precise circumstances.

The important reason for the materiality thought is to ensure that financial statements show an authentic and truthful illustration of an entity’s economic role and performance. By focusing on material info, accountants and auditors make sure that the financial info introduced to stakeholders, such as investors, employees/workers, and shareholders, is significant and influences their decision-making processes.

 This thinking courses accounting specialists to find out what has to be reported in financial statements and what must be disclosed one by one in the notes to the financial statements, hence promoting transparency and accountability in financial reporting.

1. The Substance Over Form Concept 

The “Substance over Form” Concept in accounting is a crucial concept that emphasizes the financial actuality/reality of transactions over their legal or formal aspects. This concept ensures that financial statements precisely signify the genuine monetary role or financial position of an entity by means of stopping manipulation and encouraging transparency. 

By adhering to the Substance over Form concept, accountants keep the integrity and reliability of financial reporting, allowing users of the financial statements to make well-informed decisions primarily based on the proper financial substance of transactions.

In short, it says that whenever there is a clash between the legality and the economic reality of a transaction, then the economic reality will prevail over the legality

Now that we are done with the accounting concepts, we will now proceed to the “Pillars Of Accounting”.

The Pillars Of Accounting

There are two pillars on whom the whole world of Accounting stands, they are;

• Accounting Standards.
• Conceptual Frameworks.

• Accounting Standards

First, we will talk about the Accounting Standards as they are the specific guidelines for Accounting, examples of such specific guidelines are IAS 2, IAS 10, IAS 16, IAS 37, IAS 38, and IFRS 15.

When you study at Mirchawala’s Hub Of Accountancy, you get the best understanding of the IAS as we have the top-level IAS in our teaching force, However, IAS stands for International Accounting Standards and IFRS stands for International Financial Reporting Standards, while they have different names, they actually do have the same meanings, the only big difference that we can say exists between them is that IAS are accounting standards that were released before 2001 but they are still applicable and are still very well recognized while IFRS on the other hand, are the Accounting Standards that were launched after 2001.

Two Types Of Accounting Standards

The two types of Accounting standards that we are going to talk about are the;

• GAAP ( Generally Accepted Accounting Principles/.Practices )
• IFRS ( International Financial Reporting Standards )

The Differences between GAAP And IFRS

• Geographic Applicability: GAAP is primarily used in the United States, while IFRS is adopted in many countries globally.
• Rule-based vs. Principles-based: GAAP is more rules-based, while IFRS is principles-based, requiring more judgment in application.
• Inventory Valuation: GAAP allows LIFO, whereas IFRS does not, mandating the use of FIFO or weighted average cost.
• Development and Hierarchy: GAAP is developed by multiple bodies, with the FASB (Financial Accounting Standards Board) as a key authority in the U.S., while IFRS is developed by the IASB (International Accounting Standards Board), offering a more unified international standard.
• Income Statement Presentation: GAAP permits both single-step and multi-step income statement formats, whereas IFRS follows a more standardized single-step format for presentation.

IFRS/IAS was launched in 1973 but only a few countries adopted them in the beginning.

International Financial Reporting Interpretation Committee

This committee was created because of the mass confusion and dual meanings of a lot of standards in the IFRS, so the IASB decided to Interpret the standards too to avoid all these issues, and so they formed this committee. 

We, MHA have a well-known IFRS expert as our teacher, mentor, and director, Sir Mustafa Mirchawala, he is one of the best teachers out there when it comes to IFRS and its subjects.  Another purpose of this committee was to remove the short defects in the IFRS by launching Interpretations in urgent and quick ways.

IFRS Advisory Council

It had an old name, it was the Standards Advisory Council (SAC), the purpose of this council was to be present all over the world collecting feedback and feeding it to the IASB in order to improve and develop new IFRS and it also had a purpose of advising the IASB.

Now, we are done with our Accounting Standards and we will now proceed to our Conceptual Frameworks.

2. Conceptual Frameworks

These are the General Guidelines, we can take them as the constitution that contains some Accounting Concepts. First, there are some underlying assumptions that we need to talk about, they are the Going Concern and the Matching Principle, we already talked about these in our previous paragraphs.

Qualitative Characteristics                     

These are some rules that should be followed when setting up financial statements for users; there are two types of qualitative characteristics, they are;

• Fundamental Qualitative Characteristics
• Enhancing Qualitative Characteristics

• Fundamental Qualitative Characteristics

Let’s talk about the Fundamental Qualitative Characteristics, there are two of them;

1. Relevance: It means that in Financial Statements, relevance plays an important role, it impacts the decision-making of the users, so relevant info should be included with timeliness, and this relevant information must be material.
2. Faithful Representation: Faithful representation means that financial information accurately reflects the underlying economic substance of transactions, events, and conditions. (Substance Over Form)

It encompasses both completeness (all relevant information is included) and neutrality (information is free from bias or error).

Faithful representation ensures that financial statements provide a true, Free From Error, and accurate picture of an entity’s financial position and performance.

   Enhancing Qualitative Characteristics

This is the last part of this article and it’s about the four enhancing qualitative characteristics; 

1. Comparability:

Enhances the usability of financial information by allowing users to identify and analyze similarities and differences between different entities or periods.

There can be two types of comparisons, one can be the comparison with the company’s own past and the other can be with their competitors. This helps users to identify if the company is improving or not.

2. Verifiability:

Enriches the reliability of financial information by emphasizing that different knowledgeable and independent observers can arrive at the same conclusions.

3. Timeliness:

Enhances the relevance of financial information by ensuring it is available to users in a timely manner.

Information that is provided promptly is more likely to be useful for decision-making, as it corresponds with the time when decisions need to be made.

4. Understandability

It means that Financial Statements must be made in a way that they are understandable to users with minimum business knowledge. 

Conclusion

Key Takeaway: Mastering the F3 ACCA frameworks is imperative for a strong basis in accounting and finance. 

Confidence in Exam Preparation: A complete grasp of these frameworks will improve your self-assurance when preparing for the F3 ACCA exam. Future 

Success: Beyond the exam, this understanding will lay the groundwork for your success in the dynamic world of accounting and finance. 

Deep Dive: We’ve delved into these crucial concepts, unlocking doorways to economic expertise. Empower Your Financial Journey: Armed with this knowledge, you are well-prepared to start your journey in the Economic and financial world, equipped to handle complex challenges and make knowledgeable decisions. We hope that you learned from this article from the team of Mirchawala’s Hub Of Accountancy, stay tuned for more, and Good Luck for all of your incoming exams.

Frequently Asked Questions  (FAQs)

Q1. What is the difference between IFRS and IAS?

IFRS (International Financial Reporting Standards) is the global accounting framework developed by the International Accounting Standards Board (IASB), while IAS (International Accounting Standards) specifically refers to the predecessor standards issued by the International Accounting Standards Committee (IASC) before the establishment of the IASB.

Q2. What is the main purpose of the IFRS Advisory Council?

The main purpose of the IFRS Advisory Council is to provide a platform for stakeholders to offer input and perspectives on International Financial Reporting Standards (IFRS) to the International Accounting Standards Board (IASB).

Q3. Why is the IFRS so important?

IFRS (International Financial Reporting Standards) is crucial because it establishes a globally recognized accounting framework, promoting consistency and transparency in financial reporting across borders, facilitating international comparisons, enhancing investor confidence, and fostering efficient capital markets.

Written by Agha Zulfiqar Bright student of Mirchawala’s hub of accountancy