CHAPTER 2

CONCEPTUAL
FRAMEWORK
Objective of
Financial
Reporting
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 CHAPTER 2
✘ The conceptual Framework for Financial Reporting is a
complete, comprehensive and single document promulgated by
the International Accounting Standards Board.
✘ Conceptual Framework
✘ It is a summary of the terms and concepts that underlie the
preparation and presentation of financial statements for
external users.
✘ It describes the concept for general purpose for
financial reporting.
✘ It is intended to guide standard setting decision,
preparers and users of financial information in the
preparation and presentation of statements.
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The conceptual Framework provides the foundation for

Standards that:
a. Contribute to transparency by enhancing international
comparability and quality of financial information.
b. Strengthen accountability by reducing information gap
between the providers of capital and the people to whom
they have entrusted their money.
c. Contribute too economic efficiency by helping investors
to identify opportunities and risk across the world.

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Purposes of Revised Conceptual Framework

a. To assist the International Accounting Standards Board
to develop IFRS Standards based on consistent
concepts.
b. To assist preparers of financial statements to develop
consistent accounting policy when no Standard applies
to a particular transaction or other event or where an
issue is not yet addressed by an IFRS.
c. To assist preparers of financial statements to develop
accounting policy when a Standard allows a choice of an
accounting policy.
d. To assist all parties to understand and interpret the IFRS 4
 CHAPTER 2

Authoritative status of Conceptual Framework

✘ If there is a standard or an interpretation that 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.
✘ However, it is to be stated that the Conceptual Framework is not an
International Financial Reporting Standard.
✘ Nothing in the Conceptual Framework overrides any specific International
Financial Reporting Standard.
✘ In case where there is a conflict, the requirements of the International
Financial Reporting Standards shall prevail over the Conceptual Framework.
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Users of Financial Information
A. Primary Users
✗ The primary users of financial information are the parties to whom general
purpose financial reports are primarily directed.
✗ Such users cannot require reporting entities to provide information directly to
them and therefore must rely on general purpose financial reports for much
of the financial information they need.
Existing and Potential Investors
✗ They are concerned with the risk inherent in and return provided by
their investments.
✗ The investors need information to help them determine whether they
should buy, hold or sell.
✗ Shareholders are also interested in information which enables them to
as
assess the ability of the entity to pay dividends.
Lenders and other creditors
✗ Existing and potential lenders and other creditors are interested in
information which enables them to determine whether their loans, 6
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B. Other users
✗ They are users of financial information other than the existing and potential
investors, lenders and other creditors.
✗ They are parties that may find the general purpose financial reports useful
but the reports are not directed to them primarily.
Employees
✗ They are interested in information about the stability and profitability of
the entity.
Costumers
✗ They have an interest in information about the continuance of an
entity specially when they have a long-term involvement with or
dependent on the entity.
Government and their agencies
✗ They are interested in information in the allocation of
resources and therefore the activities of the entity.
Public
✗ Entities affect members of the public in a variety of
ways.
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✗ For example, entities make substantial contribution to
 CHAPTER 2

Scope of Revised Conceptual Framework

a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. Financial statements and reporting entity
d. Elements of financial statements
e. Recognition and derecognition
f. Measurement
g. Presentation and disclosure
h. Concepts of capital and capital maintenance

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OBJECTIVE OF FINANCIAL REPORTING

✘ It forms the foundation of the Conceptual Framework.
✘ 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.
✘ 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 the effectiveness of the entity’s management.
✘ The principal way of providing financial information to external users is
through the annual financial statements.

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Target users
✘ Financial reporting is directed primarily to the existing and potential
investors, lenders and other creditors which compose the primary user
group.
✘ Information that meets the needs of the specified primary users is likely to
meet the needs of the specified primary users such as employees,
customers, governments and their agencies.
Specific Objectives of Financial Reporting
✘ The overall objective of financial reporting is to provide information that is
useful for decision making.
Accordingly, the specific objectives of financial reporting are:
a. To provide information useful in making decisions about providing
resources to the entity.
b. To provide information useful in assessing the cash flow prospects of
the entity.
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c. To provide information about entity resources, claims and changes in
 CHAPTER 2
Economic Decisions
✘ Existing and potential investors need general purpose financial reports in order to
enable them in making decisions whether to buy, sell or hold equity investments.
Assessing Cash Flow Prospects
✗ Decisions by existing and potential investors about buying, selling or holding
equity instruments depend on the returns that they expect from an
investments, for example, dividends.
✗ Decisions by existing and potential leaders and other creditors about
providing or settling loans and other forms of credit depend on the principal
and interest payments or other returns that they expect.
Economic Resources and Claims
✗ General purpose financial reports provide information about the
financial position of a reporting entity.
✗ Financial position is information about the entity’s economic
resources and the claims against the reporting entity.
✗ The financial position compromises the assets, liabilities and equity
of an entity at a particular moment in time
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Economic Resources and Claims
✘ Information about financial position can help users to assess the entity’s
liquidity, solvency and the need for additional financing.
✘ Liquidity is the availability of cash in the near future to cover currently
maturing obligations.
✘ Solvency is the availability of cash over a long term to meet financial
commitments when they fall due.
Changes in Economic Resource and Claims
✗ Changes in economic resources and claims result from financial
performance and from other events or transactions, such as issuing
debt or equity instruments.
✗ The financial performance of an entity comprises revenue, expenses
and net income or loss for a period of time.
✗ The financial performance of an entity is also known as results of
operations and is portrayed in the income statement and statement of
comprehensive income.
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Usefulness of Financial Performance
✘ Information about the return the entity has produced provides an indication
of how well management has discharged its responsibilities to make efficient
and effective use of the entity’s economic resources.
✘ Information about post financial performance is usually helpful in predicting
future returns on the entity’s economic resources.
✘ Information about financial performance during a period is useful in
assessing the entity’s ability to generate future cash inflows from
operations.
Accrual Accounting
✗ Accrual accounting depicts the effects of transactions and other events
and circumstances on an entity’s economic resources and claims in the
periods in which those effects occur even if the resulting cash receipts
and payments occur in a different period.
✗ Accrual accounting means that income is recognized when earned
regardless of when received and expense is recognized when incurred
regardless of when paid. 13
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Limitations of Financial Reporting

a. General purpose financial reports do not and cannot provide all the
information that existing and potential investors, lenders and other
creditors need.
b. General purpose financial reports are not designed to show value of
an entity but the reports provide information to help the primary
users estimate the value of the entity.
c. General purpose financial reports are intended to provide common
information to users and cannot accommodate every request for
information.
d. To a large extent, general purpose financial reports are based on
estimate and judgement rather exact depiction.
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Management Stewardship
✘ Information about how effectively management has
discharged its responsibilities to use the entity’s
economic resources helps users to assess management
stewardship of those resources.
✘ Such information is also useful for predicting how
management will use the entity’s economic resources in
future periods.
✘ Hence, the information can be useful for assessing the
entity’s prospects for future net cash flows.
✘ For example, management can decide not to dispose or
sell investments when prices are declining in order to 15
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