BALIWAG POLYTECHNIC COLLEGE

College of Accountancy, Business, Information

Technology and Engineering

M. Manayao, CPA

Conceptual Framework for Financial Reporting

The IASB’s conceptual framework for Financial Reporting describes the objectives of, and the concepts for,
general purpose financial reporting.
 Purpose of the Conceptual Framework
The Conceptual framework prescribes the concepts for general purpose financial reporting. Its purpose is
to:
o Assist the Board to develop IFRS Standards based in consistent concepts.
o Assist preparers to develop consistent accounting policies when no Standard applies to a
particular transaction or other event, or when a Standard allows a choice in accounting policy, and
o Assist all parties to understand and interpret the Standards.
 Scope of the Conceptual Framework
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
The Objective of Financial Reporting
To provide financial information that is useful to users in making decisions relating to providing resource
to the entity based on
i. Economic resources, claims and changes
ii. Financial performance reflected on accrual accounting
iii. Financial performance reflected by past cash flows
Types of User’s Decisions
a. Buying, selling or holding equity or debt instruments;
b. Providing or settling loans and other forms of credit;
c. Voting or otherwise influencing management decisions
Qualitative Characteristics of useful financial information
The qualitative characteristics of useful financial information identify the types of information that are
likely to be most useful to the primary users in making decisions using an entity’s financial report.
1. Fundamental qualitative characteristics – these are the characteristics that make the information
useful to the users.
a. Relevance
Information is relevant if it can affect the decisions of the users.
i. Predictive value - the information can be used in making predictions
ii. Confirmatory value – the information can be used in confirming past predictions.
Materiality
 Information is material if omitting it or misstating it could influence decisions of the user.

b. Faithful representation
Faithful representation means information provides a true, correct and complete depiction of what
it purports to represent.
i. Completeness – all information necessary for users to understand the phenomenon being
depicted is provided.
ii. Neutrality – information is selected or presented without bias.
iii. Freedom from error – there are no errors in the description and in the process by which
the information is selected and applied.
2. Enhancing qualitative characteristics – these are the characteristics that enhance the usefulness of
information.

CFAS002 – Conceptual Framework for Financial Reporting Page 1 | 4

 a. Comparability – the information helps users in identifying similarities and differences between
different sets of information.
b. Verifiability – different users could reach consensus as to what the information purports to
represent.
c. Timeliness – the information is available to users in time to be able to influence their decisions.
d. Understandability – users are expected to have:
i. reasonable knowledge of business activities; and
ii. willingness to analyze the information diligently.
Financial Statements and the Reporting Entity
The objective of general purpose financial statements is to provide financial information about the
reporting entity’s assets, liabilities, equity, income and expenses that is useful in assessing:
a. The entity’s prospects for future net cash inflows; and
b. Management’s stewardship over economic resources.
Reporting period
• Financial statements are prepared for a specific period of time (i.e., the reporting period) and include
comparative information for at least one preceding reporting period.
Going concern
Financial statements are normally prepared on the assumption that the reporting entity is a going
concern, meaning the entity has neither the intention nor the need to end its operations in the foreseeable
future.
The elements of financial statements

Asset is “a present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.” (Conceptual Framework 4.3 & 4.4)
Liability is “a present obligation of the entity to transfer an economic resource as a result of past events.”
(Conceptual Framework 4.26)

“Equity is the residual interest in the assets of the entity after deducting all its liabilities.”
(Conceptual Framework 4.63)

Income is “increases in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.” (Conceptual Framework 4.68)
Expenses are “decreases in assets, or increases in liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.” (Conceptual Framework 4.69)
Recognition and derecognition
Recognition is the process of including in the statement of financial position or statement of financial
performance an item that meets the definition of one of the financial statement elements. This involves
recording the item in words and in monetary amount and including that amount in the totals of either of
those statements.
An item is recognized if:
a. it meets the definition of an asset, liability, equity, income or expense; and
b. recognizing it would provide useful information, i.e., relevant and faithfully represented
information.

Relevance
• The recognition of an item may not provide relevant information if, for example:
a. it is uncertain whether an asset or liability exists; or
b. an asset or liability exists, but the probability of an inflow or outflow of economic benefits is
low. (Conceptual Framework 5.12)

CFAS002 – Conceptual Framework for Financial Reporting Page 2 | 4

 Faithful representation
• The level of measurement uncertainty and other factors can affect an item’s faithful representation,
but not necessarily its relevance.
Measurement uncertainty
• Measurement uncertainty exists if the asset or liability needs to be estimated. A high level of
measurement uncertainty does not necessarily lead to the non-recognition of an asset or liability if
the estimate provides relevant information and is clearly and accurately described and explained.
• However, measurement uncertainty can lead to the non-recognition of an asset or a liability if
making an estimate is exceptionally difficult or exceptionally subjective.

Derecognition
• Derecognition is the removal of a previously recognized asset or liability from the entity’s statement
of financial position.
• Derecognition occurs when the item ceases to meet the definition of an asset or liability.

Unit of Account
Unit of account is “the right or the group of rights, the obligation or the group of obligations, or the group
of rights and obligations, to which recognition criteria and measurement concepts are applied.” (Conceptual
Framework 4.48)

Measurement
Measurement bases:
1. Historical cost
The historical cost of:
a. an asset is the consideration paid to acquire the asset plus transaction costs.
b. a liability is the consideration received to incur the liability minus transaction costs.
Historical cost is updated over time to depict the following:
 Depreciation, amortization, or impairment of assets
 Collections or payments that extinguish part or all of the asset or liability
 Unwinding of discount or premium when the asset or liability is measured at amortized cost
2. Current value
a. Fair value – is “the price that would be received to sell an asset, or paid to transfer a liability,
in an orderly transaction between market participants at the measurement date.” (Conceptual
Framework 6.12)
b. Value in use and fulfilment value
Value in use is “the present value of the cash flows, or other economic benefits, that an entity
expects to derive from the use of an asset and from its ultimate disposal.” (Conceptual Framework 6.17)
Fulfilment value is “the present value of the cash, or other economic resources, that an entity
expects to be obliged to transfer as it fulfils a liability.” (Conceptual Framework 6.17)
c. Current cost
The current cost of:
 an asset is “the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs
that would be incurred at that date.”
 a liability is “the consideration that would be received for an equivalent liability at the
measurement date minus the transaction costs that would be incurred at that date.”
(Conceptual Framework 6.21)

Considerations when selecting a measurement basis

When selecting a measurement basis, it is important to consider the following:
a. The nature of information provided by a particular measurement basis; and
b. The qualitative characteristics, the cost-constraint, and other factors.
Measurement of Equity
• Total equity is not measured directly. It is simply equal to difference between the total assets and
total liabilities.
• Because different measurement bases are used for different assets and liabilities, total equity cannot
be expected to be equal to the entity’s market value nor the amount that can be raised from either
selling or liquidating the entity.
• Equity is generally positive, although some of its components can be negative. In some cases, even
total equity can be negative such as when total liabilities exceed total assets.

CFAS002 – Conceptual Framework for Financial Reporting Page 3 | 4

 Presentation and disclosure
 Information is communicated through presentation and disclosure in the financial statements.
 Effective communication makes information more useful. Effective communication requires:
a. focusing on presentation and disclosure objectives and principles rather than on rules.
b. classifying information by grouping similar items and separating dissimilar items.
c. aggregating information in a manner that it is not obscured either by excessive detail or by
excessive summarization.
Presentation and Disclosure objective and principles
• The objectives are specified in the Standards.
• The principles include:
a. the use of entity-specific information is more useful that standardized descriptions; and
b. duplication of information is usually unnecessary.
Classification
• Classifying means combining similar items and separating dissimilar items.
• Offsetting of assets and liabilities is generally not appropriate.
Classification of income and expenses
• Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income.
Aggregation
 Aggregation is “the adding together of assets, liabilities, equity, income or expenses that have
shared characteristics and are included in the same classification.” (Conceptual Framework 7.20)
Concepts of capital and capital maintenance
The Conceptual Framework mentions two concepts of capital, namely:
 Financial concept of capital – capital is regarded as the invested money or invested purchasing
power. Capital is synonymous with equity, net assets, and net worth.
 Physical concept of capital – capital is regarded as the entity’s productive capacity, e.g., units of
output per day.
Concepts of capital maintenance
 Financial capital maintenance – profit is earned if the net assets at the end of the period exceed
the net assets at the beginning of the period, after excluding any distributions to, and contributions
from, owners during the period.
 Physical capital maintenance – profit is earned only if the entity’s productive capacity at the end
of the period exceeds the productive capacity at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.

- End -
“Believe in yourself and all that you are. Know that there is
something inside you that is greater than any obstacle”
-Christian D. Larson

CFAS002 – Conceptual Framework for Financial Reporting Page 4 | 4