Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Accounting

- is a complete, comprehensive and single document promulgated by International Accounting

Standards Board (IASB).
- is a summary of the terms and concepts that underlie the preparation and presentation of financial
statements for external users.
- is an attempt to provide and overall theoretical foundation for accounting.
- is the underlying theory for the development of accounting standards and revision of previously
issued accounting standards.

The Conceptual Framework provides the foundation for Standards that:

 Contribute to transparency by enhancing international comparability and quality of financial

information.
 Strengthen accountability by reducing information gap between the providers of

capital and the people to whom they have entrusted their money.

 Contribute to economic efficiency by helping investors to identify opportunities and risks across the
world.

Purposes of Revised Conceptual Framework

 To assist the International Accounting Standards Board to develop IFRS Standards based on
consistent concepts.
 To assist preparers of financial statements to develop consistent accounting policy when no
standard applies to a particular transaction.
 To assist preparers of financial statements to develop accounting policy when Standard allows a
choice of an accounting policy.
 To assist all parties to understand and interpret the IFRS standards.

Authoritative status of Conceptual Framework

The Conceptual Framework is not an International Financial Reporting Standard.

If there is a standard or an interpretation specifically applies to a transaction, the standard or

interpretation overrides the Conceptual Framework.

In the absence of a standard or an interpretation that specifically applies to a transaction, management

shall consider the applicability of the Conceptual Framework in developing and applying an accounting
policy that results in information that is relevant and reliable.
In case where there is conflict, the requirements of the International Financial Reporting Standards shall
prevail over the Conceptual Framework.

Users of Financial Information

Primary users

– parties to whom general purpose financial reports are primarily directed. They are mostly existing and
potential investors, lenders and creditors.

Other users

– are users of financial information other than the primary users. They are

parties that may find the general purpose financial reports useful but the reports are not directed to
them primarily. Examples are employees, customers, government and the public.

Scope of Revised Conceptual Framework

1. Objective of financial reporting

2. Qualitative characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital expenditures

Objective of Financial Reporting

 The overall objective of financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.
 The objective of financial reporting is the why, goal or purpose of accounting.
 Financial reporting is the provision of financial information about an entity to external users that is
useful to them in making economic decisions and for assessing effectiveness of entity’s
management.

Objective of Financial Reporting

 Financial reporting encompasses not only financial statements but also other information such as
financial highlights, summary of important financial figures, analysis of financial statements and
significant ratios.

Financial reports also include nonfinancial information such as description of major products and a
listing of corporate officers and directors.

Specific Objective of Financial Reporting

 To provide information useful in making decisions about providing resources to the entity.
 To provide information useful in assessing the cash flow prospects of the entity.
 To provide information about entity resources, claims and changes in resources and claims.

Qualitative Characteristics of Useful Financial Information

Qualitative characteristics

are the qualities or attributes that make financial accounting information useful to the users.

Qualitative characteristics are classified into:

a. Fundamental qualitative characteristics

b. Enhancing qualitative characteristics

Fundamental Qualitative Characteristics

 Relevance and faithful representation are the fundamental qualitative characteristics of financial
information.

 The fundamental qualitative characteristics relate to the content or substance of financial information.

 Information must both be relevant and faithfully represented to be useful.

Application of Fundamental Qualitative Characteristics

 RELEVANCE

The capacity of the information to influence a decision is the simplest description of relevance.
 To be relevant, the financial information must be capable of making a difference in the decisions
made by users.

Examples:

 The statement of financial position is relevant in determining financial position, and the income
statement is relevant in determining performance.
 Earnings per share information is more relevant than book value per share in determining the
attractiveness of an investment.

Relevance - Predictive Value and Confirmatory Value

 Predictive value
- means that financial information can be used as an input to processes employed by users to predict
future outcome. This means that the information can help users increase the likelihood of correctly
or accurately predicting or forecasting the outcome of events.
 Confirmatory value
- means that the financial information provides feedback about previous evaluations. This enables
users confirm or correct earlier expectations.

! FOR THE INFORMATION TO BE RELEVANT IT NEEDS TO BE MATERIAL

 Materiality

Materiality is a practical concept in accounting which dictates that strict adherence to GAAP is not
required when the items are not significant enough to evaluation, decision and fairness of financial
statements.

Doctrine of Convenience

The relevance of information is affected by its nature and materiality.

Materiality of an item depends on relative size rather than absolute

size. What is material for one entity may be immaterial for another.

As a general rule an item is material if knowledge of it could reasonably affect or influence the economic
decisions of the primary users of the financial statements.

IASB DEFINITION OF MATERIALITY

- Information is material if omitting, misstating or obscuring it could reasonably be expected to

influence the economic decisions that primary users of general purpose financial statements make
on the basis of those statements which provide financial information about a specific reporting
entity.

Three important aspect in the definition:

- Could reasonably expected to influence

- Obscuring information
- Primary users

 FAITHFUL REPRESENTATION

Faithful representation means that financial reports represents economic phenomena or transactions in
works or in numbers.

Faithful representation means that the actual effects of the transactions shall be properly accounted for
and reported in the financial statements.

Three characteristics of faithful representation:

- Completeness
- Neutrality
- Free from error

 Completeness
- requires that relevant information should be presented in a way that facilitates understanding and
avoid erroneous implications.

A complete depiction includes all information necessary for a user to understand the phenomenon or
transactions being depicted, including all necessary description and explanation.

The PFRS requires that the financial statements shall be accompanied by the notes to financial
statements. The notes provides the necessary disclosures required.

The standard of adequate disclosure means that all significant and relevant information leading to the
preparation of the financial statements shall be clearly reported.