Topic 4 :

Conceptual Framework for Financial

Reporting
 Table of Content
1 The Development of Conceptual Framework

2
The Purpose and Benefit of Conceptual Framework

3 Objective of Financial Reporting

Qualitative Characteristics of Accounting Information 2

4 • Relevance Faithful Representation Comparability Verifiability Timeliness
Understandability

Cost Constraint on Useful Financial Reporting

5 • Balance between Benefits and Costs
3
 INTRODUCTION

 Due to changes of business environment, the search for clear

framework and principles base on financial reports actively research

 attempts have been made to clarify the purpose of financial

accounting reports and to provide a more solid foundation for the
development of accounting rules

 Framework deploy to address : Who are the user, what kind of

reports should be prepared and the substance, and measurement

4
 THE DEVELOPMENT OF CONCEPTUAL
Process // FRAMEWORK

MASB revised
Financial Accounting conceptual
Standards Board (FASB) IASB issue framework
•Issue conceptual framework its own equivalent to
IASB

1970 2011 2018

Followed by Malaysia
Canada, Applicable for
Australia the
presentation if
FS in
accordance
with MFRS 5
 Basic contents of IFRS
framework

 Identifying the objectives of financial statements

 The reporting entity
 The users of financial statement
 The qualitative characteristics
 The elements of financial statements

6
 Basic contents of IFRS
framework…cont’

Guidelines in preparing and Recognition

presenting financial Whether the transactions concerning elements of financial statements had
Statements instead of an taken place, relates to the timing of when the transaction were taking place.
accounting standard
Measurement
The amount of the elements which need to be recorded.

Recording
The debiting and crediting procedures for the relevant accounts

Presentation
Transactions are disclosed in the financial statements.

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 THE PURPOSE AND BENEFIT OF
CONCEPTUAL FRAMEWORK

╺ FACILITATE discussion of accounting issues

╺ GIVE precise definitions that
╺ PROVIDING guidance to accounting standard setters when developing and
╺ REVIEWING financial reporting rules

╺ ENSURE that accounting standards are normally consistent

╺ ASSIST preparers and auditors to resolve financial reporting
problems in the absence of an accounting standard
╺ LIMIT the volume of accounting standards by providing an over-
arching theory of accounting that can be applied to specific
reporting problems. 8
 THE PURPOSE AND BENEFIT OF
CONCEPTUAL FRAMEWORK…cont’
The aim of Conceptual Framework among others are :
 As a basis for setting standards and concepts to use as tools for resolving accounting and reporting questions
 As a guidance in developing its analysis of issues for consideration
 As recommendations when developing accounting standards
 As a basic reasoning on which to consider the merits of alternative solutions to complex financial accounting
or reporting problems
 As a way to tightens the range of alternative by elimination some inconsistent solution.
 As contribution to greater efficiency and consistency in the standard-setting process by avoiding the
necessity of having to redebate fundamental issues such as “what is an asset?”
 Finally, the benefit encompasses different users:
 to prepares who apply those standards as useful reference
 to auditors who examine the resulting reports
 to students who study accounting to the faculty who teach it.

o For better understanding of information and its limitations
o provides a frame of reference for understanding the resulting standards
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 OBJECTIVE OF
FINANCIAL REPORTING

╺ Elements of General-Purpose
Financial Equity Investors Entity Perspective
the objective Statements and Creditors
of financial
reporting
Focus on the most Company are
Provide information
critical user to viewed as separate
for all type of users
provide information from their owner

Should consider
Investors and Focus on the
cost effective when
creditor needs of
providing this
shareholder
information
 QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION
Fundamental
Qualitative
Capable of Characteristics Faithfully
making a represents what
difference is purports to
in decision present
Faithful
Relevance
User can representation
use the
information
to forecast
trends Including
Predictive Completeness numbers and
words
Value

Enable to
check and Confirmatory Neutrality
confirm Value unbiased

Can Free from

ignore if Materiality Error
the info
will not
mislead
 QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION

Enhancing Qualitative Characteristics

Comparability Verifiability Timeliness Understandability

Enable comparison Different party can presentation in

reach some having information understandable
From different
consensus available in time manner clarify,
time/other entities classify and
Maintain consistency characterising
information
 COST CONSTRAINT ON USEFUL
FINANCIAL REPORTING

╺ Balance between Benefits and Costs

PROVIDERS financial information expend most of the effort involved in collecting, processing, verifying
and disseminating financial information, but users ultimately bear those costs in the form of reduced
returns

USERS of financial information also incur costs of analysing and interpreting the conceptual framework
information provided. If the needed information is not provided, users incur additional costs to obtain that
information elsewhere or to estimate it

 It is a judgmental process
 It is difficult to apply cost-benefit test in any particular case.
 Nevertheless, standard setters in particular, as well as preparers and users should be aware of
this constraint

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Extract of The Conceptual Framework for Financial Reporting

14
 Purposes and Development of
Benefit of CF conceptual
framework

Conceptual
Framework
(CF)

Cost constraints
Comparability
Objective of
Qualitative Financial
Characteristics Reporting Verifiability

Timeliness
Faithful Enhancing Qualitative
Relevance Characteristics
representation Understandability
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