Introduction to the
Conceptual Framework
•Definition:
•A system of interrelated objectives and fundamentals that provide
the foundation for
accounting standards and practices.
•Purpose:
•To guide the development of accounting standards.
•To assist preparers and auditors in resolving accounting issues.
•To provide a basis for understanding and interpreting financial
information.
Basic Objectives of Financial
Reporting
•Primary Objective:
•To provide financial information that is useful to existing and potential investors, lenders, and other
creditors in making decisions about providing resources to the entity.
•Specific Objectives:
•Assessing the entity's economic resources and claims.
•Evaluating changes in economic resources and claims.
•Determining the entity's performance and cash flows.
Subsidiary Objectives of
Financial Reporting
• Supporting Objectives:Accountability:
• Providing information on the stewardship of management.
• Decision Usefulness:
• Helping users make informed investment, credit, and similar resource
allocation decisions.
• Predictive Value:
• Assisting in predicting future cash flows and financial performance.
Information Needs of Users
•Primary Users:
•Investors, lenders, and other creditors.
•Other Users:
•Employees, customers, suppliers, government agencies, and the public.
•Types of Information:
•Financial Position:
•Information about assets, liabilities, and equity.
•Financial Performance:
•Information about revenues, expenses, gains, and losses.
•Cash Flows:
•Information about cash inflows and outflows.
Qualitative Characteristics of
Information Needs
•Fundamental Qualitative Characteristics:
•Relevance:
•Capable of making a difference in decisions.
•Includes predictive value and confirmatory value.
•Faithful Representation:
•Complete, neutral, and free from error.
•Enhancing Qualitative Characteristics:
•Comparability:
•Enables users to identify similarities and differences.
•Verifiability:
•Ensures that different knowledgeable observers can reach consensus.
•Timeliness:
•Information is available in time to influence decisions.
•Understandability:
•Information is presented clearly and concisely.
Financial Accounting and Reporting
Standards
•Purpose of Standards:
•To ensure consistency, comparability, and reliability of financial statements.
•Key Standard-Setting Bodies:
•International Accounting Standards Board (IASB):
•Develops International Financial Reporting Standards (IFRS).
•Financial Accounting Standards Board (FASB):
•Develops Generally Accepted Accounting Principles (GAAP) in the USA.
•Framework Components:
•Recognition and Measurement:
•Criteria for recognizing and measuring elements of financial statements.
•Presentation and Disclosure:
•Guidelines for presenting financial information and disclosures.
Recognition and Measurement
in Financial Reporting
Recognition:
•Criteria for including items in financial statements.
•Examples: Recognizing revenue when it is earned and realizable.
•Measurement:
•Bases for measuring items in financial statements.
•Examples: Historical cost, fair value, current cost, present value.
Presentation and Disclosure
•Presentation:
•How information is displayed in financial statements.
•Examples: Balance sheet, income statement, statement of cash flows.
•Disclosure:
•Providing additional information to explain items in financial statements.
•Examples: Notes to the financial statements, management discussion and analysis (MD&A).
Case Study: Application of
Conceptual Framework
•Example: Revenue Recognition
•How the conceptual framework guides the recognition and measurement of revenue.
•Comparison of IFRS 15 and ASC 606 standards.
•Example: Lease Accounting
•Application of the conceptual framework in recognizing and measuring leases.
•Comparison of IFRS 16 and ASC 842 standards.
