The CONCEPTUAL FRAMEWORK (CF)

for FINANCIAL REPORTING, Part 1

TECHNICAL KNOWLEDGE
 To know the nature of conceptual framework.
 To describe the purpose and usefulness of a conceptual framework.
 To understand the authoritative status of a conceptual framework.
 To understand the objectives of financial reporting.
 To understand how financial reporting will satisfy the needs of users for
information about financial position, financial performance and cash flows.
 To know the limitations of financial reporting.
 To understand the underlying assumptions of accounting.

DEFINITION
 a complete, comprehensive and single document promulgated by the
International Accounting Standards Board (IASB)
 summary of terms and concepts that underlie the preparation and
presentation of financial statements (FS) for external users
 overall theoretical foundation for accounting
 a guide for standard-setters in the development of new accounting
standards and revision of previously issued ones
 concerned with general purpose FS prepared at least annually to meet
common needs of wide range of users
 special purpose financial reports are outside the scope of the CF

PURPOSES OF CONCEPTUAL FRAMEWORK

 assist the FRSC develop and review GAAPs review and adoption of IFRS
 assist the preparers of FS apply GAAP and deal with accounting issues
 assist users of FSinterpret information in the FS
 assist auditorsform an opinion conformity of FS to Philippine GAAP
 provide information to those interested in the work of FRSC in the
formulation of PFRS
AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK
 accounting standards and Interpretations has primary authority
 absent standards and interpretations that applies to a specific transaction,
CF can be used to develop and apply accounting policy to provide relevant
and reliable information.

USERS OF FINANCIAL INFORMATION

 Primary usersInvestors and creditors
 Other usersemployees, customers, suppliers, government and general
public

SCOPE OF CONCEPTUAL FRAMEWORK

 Objective of financial reporting
 Qualitative characteristics of useful financial information
 Definition, recognition and measurement of the elements from which FS
are constructed
o Financial statements and reporting entity
o Elements of financial statements
o Recognition and derecognition
o Measurement
o Presentation and disclosure
 Concepts of capital and capital maintenance

OBJECTIVE OF FINANCIAL REPORTING

 forms the foundation of the CF
 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.
 Target usersinvestors and creditorsnot management
 Specific objectives of CF for Financial Reporting are to provide information:
  Useful in making decisions about providing resources to the entity
 Useful in assessing the cash flow prospects of the entity
 About entity resources, claims and changes in resources and claims
 Economic resources and claims
 Statement of Financial Position or the Balance Sheet
 Financial positionassets (resources) and liabilities and equity
(claims)
 At a particular moment in time
 Shows financial strength and weakness
 Helps assess entity’s liquidity, solvency and the need for
additional financing or the overall financial stability
 Changes in economic resources and claims
 Income Statement and Statement of Comprehensive Income
 Financial performancerevenues and expensesnet income
 Also known as the results of operations
 Helps assess entity’s profitability level of income earned through
effective and efficient use of the entity’s resources
 Useful in assessing the entity’s ability to generate future cash
inflows from operations
 Accrual Accounting
 “Income is recognized when earned regardless of when cash is
received and expense is recognized when incurred regardless of
when paid.”
 Limitations of financial reporting
 Do not and cannot provide all information needed by users
 Not designed to show the value of an entity but provide information
to help the primary users estimate the value of the entity
 Intended to provide common information and cannot accommodate
every request for information
 To a large extent are based on estimate and judgment rather than
exact depiction
 Management stewardship
 How efficiently and effectively management has discharged its
responsibility to use the entity’s economic resources

END OF LECTURE NOTES