Conceptual Framework
Purpose
IASB - Assist the IASB to develop IFRS that are based on consistent concepts
Preparers - Assist the preparers to develop consistent accounting policies when no standard
applies to a particular transaction or other event, or when a standard allows a choice of
accounting policy
All Parties - Assist all parties to understand and interpret the Standards
Hierarchy of the Reporting Standards
1. Accounting standards (PFRS, PAS)
2. Personal judgement
● Requirement in other PFRS dealing with similar transactions
● Conceptual framework
Management may consider:
1. Pronouncement issued by other standard setting bodies
2. Other accounting literature and industry practices
Provides foundation for Standards:
1. Transparency - by enhancing the international comparability and quality of financial
information
2. Accountability - by reducing the information gap between providers of capital and the
management of an entity
3. Efficiency - by helping investors to identify opportunities and risks around the world, thus
improving capital allocation
General Purpose Financial Reporting
The foundation of Conceptual Framework is the objective of the GPFR
● the qualitative characteristics
● the cost constraints
● useful financial information
● a reporting entity concepts
● elements of the financial statements
● recognition and derecognition
● measurement
● presentation
● disclosure
Objective of GPFR
● to provide financial information about the reporting entity that is useful to the existing and
potential investors, lenders and other creditors in making decisions relating to providing
resources to the entity
Primary users - existing and potential investors, lenders and other creditors
Main focus of financial preparation (objective of FR) - to satisfy the needs of these primary
users to help them decide whether they will provide resources to the entity
Decisions:
● whether to buy, sell or hold equity and debt instruments
● provide or settle loans and other forms of credit
● exercise their rights to vote or just to influence the management’s actions that will affect
the use of the entity’s economic resources
● The economic resources of the entity (assets)
● The claim against the entity (liabilities and equity)
● The changes in those resources and claims (income and expense)
● How efficiently and effectively the entity’s management and governing bodies have
discharged their responsibilities to use the entity’s economic resources
Helps primary users by
1.Identify the reporting entity’s financial strengths and weaknesses
2.Assess its liquidity and solvency
3.Identify the need of additional financing and how successful it is if it is likely to obtain
4.Assess management’s stewardship of the economic resources
5.Predict how future cash flow will be distributed among those claims against the reporting
entity
● Changes in the resources and claims resulting from financial performance : return of the
economic resources : better assessing of management stewardship
● Changes in the resources and claims not resulting from financial performance (like
issuing of debt or equity securities) : complete understanding of the changes of these
resources and claims and its effect to its financial performance
Qualitative Characteristics of Useful Information
1. Fundamental
(a) Relevance - making difference in the decision made by users, has predictive value and
confirmatory value
(b) Faithful Representation - financial reports which represent economic phenomena in words or
numbers must faithfully represent the substance of the phenomena that it purports to represent
(i) Predictive value - can be used as an input in the process to predict future outcomes
(ii) Confirmatory value - can provide feedback on previous evaluations
Materiality - (related to relevance) to influence the decisions of the primary users of the general
purpose financial reports (entity-specific), based on the nature or magnitude. Materiality has no
quantitative threshold and is a matter of judgement.
Faithful Representation
1. Completeness
● includes all information necessary for a user to understand the phenomenon
2. Neutrality
● without bias in the selection or presentation of financial information
3. Free from error
● no errors or omissions in the description of the phenomenon
Prudence - (related to neutrality), use of caution of making judgments under conditions of
uncertainty. Assets and income are not overstated and liabilities and expenses are not
understated.
1. Identify an economic phenomenon, information about which is capable of being useful to
users of the reporting entity’s financial information
2. Identify the type of information about the phenomenon that would be most relevant
3. Determine whether that information is available and whether it can provide a faithful
representation of the economic phenomenon
Enhancing Qualitative Characteristics
1. Comparability - enables users to identify and understand similarities in, and differences
among item
(a) Intra Comparability - a single entity of different periods
(b) Inter Comparability - different entities in a single period
● Consistency - the use of the same method for the same items, either from period to
period within the a reporting entity or in a single period across entities
2. Verifiability - different knowledgeable and independent observers could reach consensus
(a) Direct Verification - verifying amount or other representation through direct observation (like
cash count)
(b) Indirect Verification - checking the inputs to a model formula or other technique and
recalculating the outputs using the same methodology
3. Timeliness - having information available to decision-makers in time to be capable of
influencing their decisions
4. Understandability - classified, characterized and presented in clear and concise manner
● Applying the enhancing qualitative characteristics is an iterative process that does not
follow a prescribed order
Cost - pervasive constraint on the entity’s ability to provide useful financial information
Financial Statements and Reporting Entity
Objective - to provide financial information about the reporting entity’s assets, liabilities, equity,
income, and expenses that is useful to users of the financial statements in assessing the
prospects for future net cash inflows to the reporting entity’s economic resources
Provided in the - SFP (Position), SFP (Performance), In other statements and notes to financial
statements
In other statements and notes
● Recognized assets, liabilities, equity, income and expenses
● Unrecognized assets and liabilities
● Cash flows
● Contributions from holders of equity claims and distribution to them
● The methods, assumptions and judgements
● Assets and Liabilities (unrecognized assets and liabilities
● Equity (end or during the reporting period)
● Income and Expenses (for the reporting period)
Going concern
● assumption that entity will continue in operation for foreseeable future
Reporting entity
● required, or chooses, to prepare financial statements (single entity or more, not
necessarily a legal entity)
Elements of Financial Statements
Statement of Financial Position
● Economic Resource (Asset)
● Claim (Liability, Equity)
Statement of Financial Performance
● Changes in economic resources (Income, Expense)
Asset
● present economic resource controlled by entity as a result of past events
Criteria
1. Rights
(a) Correspond to obligation of another party
● To receive cash
● To receive goods or services
● To exchange economic resources
● To benefit from an obligation of another party
(b) Do not correspond to obligation of another party
● Over physical object (ex. Use property or sell inventory)
● To use intellectual property
Obtained by
● Contract, legislation, or similar means
● Acquiring or creating know-how that is not of public domain
● Through obligation of another party that arises
Must conform to two (2) essential ingredients
● Controlled by entity
● Potential to produce economic benefit
2. Potential to produce economic benefits
● To receive contractual cash flows or another economic resource
● To exchange economic resources with another party on favorable terms
● To produce cash inflows or avoid cash outflows by
• Using the asset either individually or in combination to produce goods or provide services
• Using the asset to enhance the value of other asset
• Leasing the asset to another party
● To receive cash or other assets by selling the asset
● To settle a liability
3. Control
● Present ability to direct use of economic resource and obtain economic benefits
● Future economic benefits from the asset must flow to the entity (directly or indirectly)
Liability
● A present obligation of the entity as a result of past events
Criteria of a liability
1. Entity has an obligation
● A duty or responsibility that an entity has no practical ability to avoid
● Legal obligation : arises from contract, legislation or similar means and are legally
enforceable by the party to whom they are owed
● Constructive obligation : arises from entity's customary practices, published policies, or
specific statements if the entity has no practical ability to act in a manner inconsistent
with those practices, policies or statements (if customer is not satisfied, entity must
refund)
● Not necessary to know the identity of party owed
2. Obligation is to transfer an economic resource
● Has potential to require entity to transfer to another party
● To pay cash, to deliver goods or provide services, to exchange economic resources on
unfavorable terms, to transfer an economic resource if a specified uncertain future event
occurs, to issue a financial instrument if it will oblige entity to transfer
3. A present obligation that exists as a result of past events
● Exists only if entity has obtained economic benefits or taken an action
● Consequence, entity will or may have to transfer an economic resource that would not
otherwise have had to transfer
Unit of account
● Right or group of rights (assets), obligation or group of obligations (liabilities)
Possible unit of account
● an individual right / obligation
Executory Contract
● Is equally unperformed, neither party has fulfilled any obligation or have partially fulfilled
to an equal extent
● If any party fulfill its obligation under contract, the contract ceases to be executory
Contract
● Terms of contract create rights and obligations for entity
● Terms with no substance is disregarded
● Includes terms that bind neither party, right that holder will not have practical ability to
exercise in any circumstances
Equity
● The residual interest in the assets of the entity after deducting all its liabilities
● Equity claims may be shares of various types, issued by entity and some obligations of
entity to use another equity claim
● Rights of equity claims : Dividends, proceeds from satisfying the claim (full on liquidation
or in part), other equity claims
Income
● Increases in assets, or decrease in liabilities
● Results in increases in equity
Expenses
● Decreases in assets, or increases liabilities
● Results in decreases in equity
Recognition
● Process of capturing for inclusion, in the SFP or SCI, an item that meets the definition of
any elements of the financial statements
Carrying amount
● Amount at which an asset / liability / equity is recognized in SFP
Matching principle
● Simultaneous recognition of income and related expenses, "matching of cost and
income"
Criteria for recognition
● Meets the definition of elements
● Would provide useful information (relevant and faithfulLy represented information)
Derecognition
● Removal of all or part of a recognized asset or liability
● Occurs when item no longer meets definition
● Asset : entity loses control for all or part
● Liability : entity no longer has present obligation for all or part
Requirements for derecognition
1. Any assets or liabilities retained after transaction
2. Change in entity's assets or liabilities as a result of transaction or other events
Measurement
● An identified feature of an item being measured
● Only applies to asset or liability
● Basis : Historical cost, Current value
● Total carrying amount of equity is not measured directly
Historical cost
● Provides monetary information about assets, liabilities, related income and expenses
● Does not reflect changes in value, except if it relates to impairment of asset or liability
becoming onerous
Adjustments made to historical cost of an asset to update cost over time
● Consumption of part or all of economic resource that constitutes assets (depreciation or
amortization)
● Payment received that extinguish part or all
● Effect of events that cause part or all of historical cost, to be no longer recoverable
(impairment)
● Accrual of interest to reflect any financing component of asset (discount or premium
amortization when asset is measured at amortized cost)
Adjustments made to historical cost of a liability to update cost over time
● Fulfillment of part or all of liability
● Effect of events that increase in obligation, resulting from liability becoming onerous
● Accrual of interest to reflect any financing component of liability
Current value
● Provide monetary information about A, L, I, E, using information updated to reflect
conditions at measurement date
● Current values reflect changes
● Basis : Fair value, Value in use, Current costs
Fair value
● Price to be received to sell an asset, or paid to transfer liability, in an orderly transaction
between market participants at the measurement date
● Not derived from price of transaction or other efents that give rise to asset or liability
● Not increased by transaction cost
● Should reflect the perspective of market participants (agreed price)
Value in use
● Present value of cash flows, or other economic benefits, that entity expects to derive
from uae of asset and from its ultimate disposal
● Does not reflect the perspective of market participants
● Fulfillment value : Present value of cash, or other economic resources, that entity
expects to be obliged to transfer as it fulfills lilability
Current cost
● Of asset : cost of an equivalent asset at measurement date, with consideration that
would be paid at measurement date plus the transaction costs that would be incurred at
that date
● Of liability : an equivalent liability at the measurement date minus the transaction costs
that would be incurred at that date
Entry and Exit values
● Current cost, and Historical cost are entry values (reflect prices on acquisition)
● Fair value, Value in use, and Fulfillment value are exit values (reflect prices in selling /
using an asset or transferring / fulfilling a liability)
Presentation and Disclosure
● Reporting entity information about its assets, liabilities, equity, income and expenses in
its financial statements
Classification
● Sorting assets, liabilities, income of expenses on basis of shares characteristics for
presentation and disclosure purposes
● Includes nature of the item, role (function) within business activities, and how it is
measured
Offsetting
● Occurs when entity recognizes and measures both A and L as separate units of
accounts, but groups into a single net amount in SFP
● Not the same as treating set of rights and obligations as a single unit of account
Equity classification
● Necessary to classify equity claim separately if those equity claims have different
characteristics
● Necessary to classify components of equity separately if some of those components are
subject to particular legal, regulatory or other requirements
Aggregation
● Adding together of assets, liabilities, equity, income or expenses that have shared
characteristics and are included in the same classification
Concept of capital
1. Financial concept of capital
- Invested money or invested purchasing power, the capital is synonymous with the net
asset or equity of the entity. Most of the companies are using this concept in preparing
their financial statements as it is primarily concerned with the maintenance of invested
capital.
2. Physical concept of capital
- Operating capability, capital is regarded as the productive capacity of the entity based
on, for example, units of output per day.
Concept of capital maintenance
1. Financial capital maintenance
- A profit is earned only if the financial (money) amount of the net assets at the end of the
period exceeds the financial (money) amount of net assets at the beginning of the
period, after excluding distributions to, contribution from, owners during the period. It can
be measured in either nominal monetary units or units of constant purchasing power;
however it does not require the use of a particular basis of measurement.
2. Physical capital maintenance
- A profit is earned only if the physical productive capacity (or operating capability) of the
entity (or the resources or funds needed to achieve that capability) at the end of the
period exceeds the physical productive capacity at the beginning of the period, excluding
distributions to, and contributions from, owners during the period. It requires the adoption
of the current cost basis of measurement.
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● Conceptual framework is not a standard
● Conceptual framework can be revised based on the Board’s experience working with it
● Revisions of the Conceptual Framework will not automatically revise the accounting
standard
● General purpose financial reporting deals with providing information that caters the
common needs of the primary users, however, it cannot provide all the information to
these users
● Other sources for information needs should also be considered such as general
economic conditions and expectations, political events and climate, and industry
outlooks
● The Board will seek to provide information that will meet the needs of the maximum
number of primary users
● Financial information help primary users to assess the entity’s management stewardship
● GPFR only show the estimate of the value of the reporting entity
● Financial reports are based on estimates, judgements and models rather than the exact
values
● Conceptual Framework establishes the concepts that underlie on the different basis
