The Conceptual Framework for

Financial reporting

CPA. Kishamba Ansbert

 Introduction …
• The Conceptual Framework for Financial
Reporting establishes the concepts that
underlie financial reporting.
• The framework is a coherent system of
concepts that flow from an objective.
• The objective identifies the purpose of
financial reporting.
• The concepts provide guidance on
identifying the boundaries of financial
reporting, selecting the transactions,
other events, and circumstances to be
represented, how they should be
recognized and measured (or disclosed),
and how they should be summarized
and reported.
• The framework is based on
Company law and other relevant laws
International Accounting Standards and
international financial reporting Standards
The influence of other national standard–
setting bodies eg. NBAA
Stock exchange requirements
Overseeing by the professional bodies such
as ICAEW, ACCA or IFAC to ensure that the
professional standards for accounting and
auditing are followed in practice
• The framework does not define standards for
the recognition, measurement and disclosure
of financial information nor does it override
any specific IFRS.
• If there is no IFRS for a particular situation,
managers should consider the principles set
out in the framework when developing an
accounting policy , which should aim at
providing the most useful information to users
of the entity’s financial information
 Importance of the conceptual
Framework
• To assist in the development of new
IFRS and in review of existing IFRS
• To assist national standard-setting
bodies on developing national
standards
 Importance of the conceptual
Framework …
• To prevent material manipulations or
error in financial statements
• To ensure that items are treated in
consistent manner or an explanation
is given as to why not
• To help in global harmonization
Scope of Conceptual framework
i. The objective of financial statements
ii. Qualitative characteristics of useful financial
information
iii. The definition, Recognition and measurements
of elements from which financial statements
are constructed; and
iv. Concept of capital and capital maintenance.
 The Objective of Financial
Statement
• The objective of financial statements is to
provide information about the financial
position, financial performance, and cash
flows of an entity that is useful to a wide range
of users in making economic decisions
Underlying assumptions of financial
statement
• IAS 1 sets out two assumptions for
preparations and presentations of financial
statements which are;
• Going concern and
• Accrual basis
 Qualitative characteristics of financial
statements
• Users and Preparers of Financial Information
– User of financial information are assumed have a
reasonable knowledge of business and economic
activities and are able to read a financial report.
– Preparers of financial reports exercise due care in
implementing a financial reporting requirement.
• Qualitative characteristics of financial
information are attributes of the financial
statements that make them useful in making
economic decision. Conceptual frame work for
financial reporting identifies Fundamental
qualities characteristics and enhancing
qualitative characteristics
 Fundamental qualitative
characteristics
• Fundamental qualitative characteristics are;
• Relevance; and
• Faithfull representation
 Fundamental qualitative
characteristics
Relevance
Relevant information is capable of making
a difference in the decisions of users by
helping them to evaluate the potential
effects of past, present, or future
transactions or other events on future cash
flows (predictive value) or to confirm or
correct their previous evaluations
(confirmatory value).
 Fundamental qualitative
characteristics
Faithful representation
• Financial reports represents the economic
phenomena in words and numbers
• For information to be reliable (free from
material error and bias) in decisions, it
must be a faithful representation of the
real-world economic phenomena that it
purport to represent
 Enhancing qualitative
characteristics
• Comparability, verifiability, timeliness and
understandability are qualitative
characteristics that enhance the usefulness
of information that is relevant and faithfully
represented.
• The enhancing qualitative characteristics
may also help determine which of two ways
should be used to depict a phenomenon if
both are considered equally relevant and
faithfully represented
The Enhancing Qualitative
Characteristics…
Comparability
• Comparability is the quality of information
that enables users to identify similarities
in and differences between two sets of
economic phenomena.
The Enhancing Qualitative
Characteristics…
Verifiability
Verifiability means that different
knowledgeable and independent
observers could reach consensus,
although not necessarily complete
agreement, that a particular depiction is a
faithful representation.
The Enhancing Qualitative
Characteristics…
Timeliness
Timeliness means having information
available to decision-makers in time to be
capable of influencing their decisions.
The Enhancing Qualitative
Characteristics…
Understandability
• Understandable information is that
which enables users who have a
reasonable knowledge of business and
economic activities and financial
accounting, and who study the
information with reasonable diligence,
to comprehend its meaning.
Elements of financial statements
• Financial statement portray the financial
effects of transactions and other events by
grouping them into broad classes according to
their economic characteristics. These broad
classes are known as elements of financial
statements
Elements of financial statements…
• There are five elements of financial
statements namely:
• assets,
• liabilities,
• equity,
• income, and
• expenses
Elements of financial statements…
1. Asset
• An asset as defined as ‘a resource controlled by the
entity as a result of past events and from which
future economic benefits are expected to flow to the
entity. Economic benefits embodied in an assets is
the potential to contribute, directly or indirectly to
the flow or cash and cash equivalent to the entity.
Elements of financial statements…

2. Liabilities

• A liability is defined as ‘a present obligation

of the entity arising from past events, the
settlement of which is expected to result in
an outflow from the entity of resources
embodying economic benefits’.
Elements of financial statements…

3. Equity

• The residual interest in assets of the entity

after deducting all of its liabilities.
Elements of financial statements…

4. Income
• Increase in economic benefit during the
accounting period in the form of inflows or
enhancements of assets or decrease of
liabilities that result in increases in equity,
other than those relating to contributions
from equity participants.
Elements of financial statements…

5. Expenses

• Decreases in economic benefit during the

accounting period in the form of outflows or
depletions in assets or incurrence of
liabilities that result in decreases in equity,
other than those relating to distributions to
equity.
Recognition and measurements of
financial statements
Recognition
• Conceptual framework (para 4.37) defines
recognition as the process of incorporation in the
statement of financial position or income statement
item that meets definition of an element and the
element can be measured reliably
• An element of financial statements will be recognised
if it satisfy the criteria for recognition set out in its
relevant IAS or IFRS.
Recognition and measurements of
financial statements
Measurement
• Conceptual framework (para 4.54) defines
measurement as the process of determining the
monetary amounts at which the elements of the
financial statements are to be recognised and carried
in the balance sheet and income statements. The
elements can be measured based on:
• Historical cost
• Current cost (Market value)
• Realizable (Settlement) value
• Present value
Concepts of capital and capital
maintenance
Concept of capital–Financial concept

• A financial concept of capital is adopted

by most entities in preparing their
financial statements
• Under a financial concept of capital, such as
invested money or invested purchasing power,
capital is synonymous with the net assets
or equity of the entity.
Concept of capital – Physical concept

• Under a physical concept of capital, such as

operating capability, capital is regarded as the
productive capacity of the entity based on,
for example, units of output per day
 Concept selection
• Selection of the appropriate concept of capital
by an entity should be based on the uses of
financial statement of that entity
 Concepts of capital maintenance
Finance Capital Maintenance
• Profit is earned under this concept only if the
financial (or money) amount of the net assets at the
end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period,
after excluding any distributions to, and
contributions from, owners during the period.
• Financial capital maintenance can be measured in
either nominal monetary units or units of constant
purchasing power.
 Concepts of capital maintenance
Physical Capital Maintenance
• Under this concept 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
capacity) at the end of the period exceeds the physical
productive capacity at the beginning of the
period, after excluding any distributions to, and
contributions from, owners during the period.
 Concept of Capital …
• The concept of capital maintenance is
concerned with how an entity defines the
capital that it seeks to maintain.
• It provides the linkage between the concepts
of capital and the concepts of profit because it
provides the point of reference by which profit
is measured;
– it is a prerequisite for distinguishing between an
entity’s return on capital and its return of capital
– only inflows of assets in excess of amounts
needed to maintain capital may be regarded as
profit and therefore as a return on capital.
 Limitation of financial statements
1. The historical cost of asset reflected in the
financial statements may not represent
either their realizable or replacement value
2. There are many nonmonetary factors that
affect the future of the business as much as
the assets and liabilities in the statement of
financial position
3. Individual primary users have different and
possibly conflicting, information needs and
desires. The financial information may not
cutter to the needs of all stake holders