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Conceptual
Framework
For Financial Reporting

Learning objectives

Explain the roles and structures of key regulatory bodies.

Learning objectives Describe efforts to construct a conceptual framework.

Understand the objective of financial reporting.

Identify the qualitative characteristics of accounting information.

Define the basic elements of financial statements.

Describe the basic assumptions of accounting.

Explain the application of the basic principles of accounting.

Understand the concepts of capital maintenance.

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Organizational
structure of
IASB

 The IFRS Foundation is an independent foundation based

in the US.

 Its activities are directed by the Trustees who appoint the

members to the IASB, SAC and IFRIC.

 The trustees are individuals of diverse geographical and

functional backgrounds and comprise of 6 members from
North America, 6 from Europe, 4 from Asia Pacific and 3
from other parts of the world.

 Of the 19 members, 5 represent the accounting profession

and others represent the international organisation of
preparers, users and academics.

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International Accounting Standards Board

IASB is responsible for
• developing and issuing new international standards;
• which are known as International Financial Reporting
Standards (IFRS).
IASB consists of 15 members and their foremost qualification
is technical expertise. All members are appointed for a terms
of 5 years, renewable once.
Before a standard, exposure draft or a final IFRIC
interpretation can be published, at least 8 out of the 15
members must approve it.
All existing IASs and SICs remain in force until amended or
withdrawn in the future.
Therefore, IFRS includes IFRSs, IFRIC, IASs and SIC
Interpretation. 5

The objectives of the IFRS

Advisory Council are:
• To give advice to the IASB on
agenda decisions and priorities in
its work;

• To inform the IASB of the views of

organizations and individuals on the
Council on major standards setting
projects;

• To give other advice to the Board or

to the Trustees

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IFRS Interpretations Committee

This International Financial Reporting
Interpretations Committee (IFRIC)
 is a committee of the IASB;
 review, on a timely basis, new financial
reporting issues not specifically
addressed in IFRS;
 clarify issues where unsatisfactory or
conflicting interpretations have
developed, with a view to reaching a
consensus on the most appropriate
treatment.

1. Which of the following best describes the role of the IFRS Advisory
Council?
a. To prepare intepretations of International Accounting Standards
b. To provide the IASB with the views of its members on standard setting projects
c. To promote the use of International Accounting Standards amongst its members
d. To select the members of the IASB

2. The International Accounting Standards Board’s (IASB’s) Conceptual

Framework includes all of the following EXCEPT:
a. Comparability
b. Relevance
c. Neutrality
d. Materiality

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Apr 1989
Framework for the Preparation and
Presentation of Financial
Jul 1989 Statements was approved by the

The Framework was published. IASC Board.

Apr 2001
The Framework was adopted by the IASB.

Sep 2010
The Conceptual Framework for Financial
Reporting 2010 was approved by the IASB.

Mar 2018
WWW.IFRS.ORG

Conceptual Framework for Financial

Reporting 2018 (the Conceptual
Framework) was published.

The Conceptual Framework

It is not an accounting standard

Conceptual
Framework
It is a guidance to the
establishes the
preparation and presentation
of financial statements concepts that
underlie financial
reporting.

It does not override any

accounting standards

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The purposes of the conceptual framework

Aim 01 Aim 02 Aim 03

assist the International assist preparers to develop assist all parties to

Accounting Standards
Board (Board) to develop
IFRS Standards
(Standards) that are based
on consistent concepts
consistent accounting policies understand and
when no Standard applies to a
interpret the
particular transaction or other
Standards.
event, or when a Standard allows
a choice of accounting policy. 11

ASSUMPTIONS PRINCIPLES
CONSTRAINTS
1. Economic entity 1. Measurement
1. Cost
2. Going concern 2. Recognition and
Derecognition Third level
3. Monetary unit The "how"—
3. Presentation and
4. Periodicity implementation
Disclosure
5. Accrual 4. Capital maintenance

QUALITATIVE ELEMENTS
CHARACTERISTICS
1. Assets
1. Fundamental 2. Liabilities Second level
qualities 3. Equity Bridge between
2. Enhancing 4. Income levels 1 and 3
qualities 5. Expenses

OBJECTIVE
Provide information
about the reporting
Conceptual entity that is useful
to present and potential First level
Framework for
equity investors, The "why"—purpose
Financial Reporting lenders, and other of accounting
creditors in their
capacity as capital
providers.

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Contents of the conceptual framework

Chapter 1: The objective of general purpose financial reporting

Chapter 2: The reporting entity
Chapter 3: Qualitative characteristics of useful financial information
CF 2010

Chapter 4: The Framework (1989): The remaining text

Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of elements of financial statements
Concepts of capital and capital maintenance

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Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial

reporting
Chapter 2: Qualitative characteristics of useful financial
CF 2018

information
Chapter 3: Financial statements and the reporting entity
Chapter 4: The elements of financial statements
Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance
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Conceptual framework 2018

The objective of general

purpose financial reporting
to provide financial information about the reporting entity that
is useful to existing and potential investors, lenders and
other creditors in making decisions relating to providing
resources to the entity
Users’ decisions involve decisions about:

buying, selling or  providing or settling  voting, or otherwise 

holding equity and  loans and other  influence 
debt instruments forms of credit management’s actions  
1
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Information to make decisions

Claims
Economic resources

Changes in economic Changes in economic

resources and claims by resources and claims not
financial performance resulting from financial
performance 17

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Qualitative
characteristics of
useful financial
information

Chapter 2

19

Relevance

Fundamental Qualities

Conceptual Framework
for Financial Reporting
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Fundamental qualitative characteristics

Fundamental Quality—Relevance

To be relevant, accounting information must be capable of making

a difference in a decision.

LO 4

Fundamental qualitative characteristics

Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to

predictive processes used by investors to form their own expectations
about the future.

LO 4

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Fundamental qualitative characteristics

Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.

LO 4

Fundamental qualitative characteristics

Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.

LO 4

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Faithful Representation

Conceptual Framework
for Financial Reporting
25

Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.

LO 4

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Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.

LO 4

Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor

one set of interested parties over another.

LO 4

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Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

LO 4

Enhancing qualitative characteristics

Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.

LO 4

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Enhancing qualitative characteristics

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.

LO 4

Enhancing qualitative characteristics

Enhancing Qualities

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.

LO 4

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Enhancing qualitative characteristics

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.

LO 4

Which of the following is a fundamental quality characteristic of the

Financial Statements according to the CF 2018?
a. Comparability.
b. Relevance.
c. Going concern.
d. Timeliness.

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1.Which of the following accounting treatments correctly applies the principle of

faithful representation?
a. Reporting a transaction based on its legal status rather than its economic substance
b. Excluding a subsidiary from consolidation because its activities are not compatible
with those of the rest of the group
c. Recording the whole of the net proceeds from the issue of a loan note which is
potentially convertible to equity shares as debt (liability)
d. Allocating part of the sales proceeds of a motor vehicle to interest received even
though it was sold with 0% (interest free) finance.

2.Which of the following is a fundamental quality of useful accounting

information?
a. Conservatism
b. Comparability
c. Faithful representation
d. Consistency.

Qualitative characteristics - Exercises

Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(a) Qualitative characteristic being Relevance
displayed when companies in the Faithful representation
same industry are using the same Predictive value
accounting principles.
Confirmatory value
(b) Quality of information that confirms Neutrality
users’ earlier expectations.
Materiality
(c) Imperative for providing comparisons Timeliness
of a company from period to period.
Verifiability
(d) Ignores the economic consequences Understandability
of a standard or rule. Comparability
LO 5

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Qualitative characteristics - Exercises

Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(e) Requires a high degree of consensus Relevance
among individuals on a given Faithful representation
measurement. Predictive value
(f) Predictive value is an ingredient of this Confirmatory value
fundamental quality of information. Neutrality
(g) Four qualitative characteristics that Materiality
enhance both relevance and faithful Timeliness
representation.
Verifiability
(h) An item is not reported because its Understandability
effect on income would not change a Comparability
decision.
LO 5

Qualitative characteristics - Exercises

Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(i) Neutrality is a key ingredient of this Relevance
fundamental quality of accounting Faithful representation
information. Predictive value
(j) Two fundamental qualities that make Confirmatory value
accounting information useful for Neutrality
decision-making purposes.
Materiality
(k) Issuance of interim reports is an Timeliness
example of what enhancing
Verifiability
ingredient?
Understandability
Comparability
LO 5

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39

Financial statements and reporting entity

Statement of financial position

Liquidity

Current liability
Current
asset Non current liability

Equity Economic resources & claims

Non current asset Strengths & weaknesses
Liquidity & solvency

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Financial statements and reporting entity

Statement of comprehensive income

Revenue
Profit or loss from
Expenses operating activity

Financial income Profit or loss from financial

Financial expenses activity

Other income Profit or loss from other

activity
Other expenses
Profit or loss before tax Changes in resources & claims
Income tax from financial performance
Profit or loss after tax
‐ Components of that return
 Efficiently effective use of the
reporting entity’s resources
Other comprehensive income

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Financial statements and reporting entity

Statement of changes in equity
Share Retain Revaluation
Total
capital earnings surplus

Balance as at 1/1/X6
Retrospective application
Issuance of new share
Dividend
Transfers between equity components
Balance as at 31/12/X6 Changes in Resources & claims
NOT from financial performance
debt or equity instruments

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Financial statements and reporting entity

Collecting sales Cash paid for investment
in cash
Net cash from Net cash from
Statement
Operating Investing
activities Of Cash flows activities
Payment to Cash received from
suppliers investment settlement

Net cash from

Financing
activities

Interest payment in cash

Cash received from
issuing shares Loan repayment

Evaluate -Changes in cash flows

Statement
Cash generating ability
Of Cash flows Cash usage

Which of the following basic elements of financial statements is more

associated with the statement of financial position than the income
statement?
A) Equity
B) Income
C) Gains
D) Expenses

© 2013 The McGraw-Hill Companies, Inc.

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Slide 45

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Slide 46

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Basic elements

Conceptual Framework
for Financial Reporting
47

The elements of financial statements

Asset Income
Liability

Equity
Expenses

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Basic elements
Elements of Financial Statements

A present economic resource controlled

Asset
by the entity as a result of past events.

Liability An economic resource is a right that has

the potential to produce economic
benefits.
Equity

Income

Expenses

LO 5

Basic elements
Elements of Financial Statements

Asset
A present obligation of the entity to
transfer an economic resource as a result
Liability
of past events.

Equity

Income

Expenses

LO 5

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Basic elements
Elements of Financial Statements

Asset

Liability

The residual interest in the assets of the

Equity
entity after deducting all its liabilities.

Income

Expenses

LO 5

Basic elements
Elements of Financial Statements

Asset

Liability

Equity Increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of
Income
liabilities that result in increases in equity,
other than those relating to contributions
Expenses from equity participants.

LO 5

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Basic elements
Elements of Financial Statements

Asset

Liability

Equity Decreases in economic benefits during the

accounting period in the form of outflows
Income or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
Expenses
equity participants.
LO 5

Recognition

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Chapter 5: Recognition and 
Derecognition
55

Recognition, measurement, disclosure concepts

These concepts explain how companies should recognize,

measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Recognition
3. Monetary unit 3. Derecognition
4. Periodicity 4. Presentation and
disclosure
5. Accrual

LO 6

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Basic assumptions
Economic entity
Company keeps its activity separate from
its owners and other business unit.

Accrual
Going concern
Transactions are recorded in the
Company to last long enough to
periods in which the events
fulfill objectives and
occur.
commitments.

Periodicity Monetary unit

Company can divide its economic Money is the common
activities into time periods. denominator.

57

How recognition links the elements of financial statement

Principles

Recognition
is the process of capturing
for inclusion in the
statement of financial
position or the statement(s)
of financial performance an
item that meets the
definition of one of the
elements of financial
statements—an asset, a
liability, equity, income or
expenses.

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Recognition criteria
When? 

 Meets the definition of an element

 Provides users of financial statements with  relevant information and 
faithful representation
 And information which results in benefits which exceed the cost of providing
that information.

59

Recognition criteria
whether recognition of an item results in relevant
information may be affected
v by, for example:

Existence uncertainty Low probability of an inflow or

outflow of economic benefits

› it is uncertain whether an › An asset or liability can exist

asset exists or is separable even if the probability of an
from goodwill, or whether a inflow or outflow of economic
liability exists. benefits is low.

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Recognition criteria
a faithful representation may be affected by the level of
measurement uncertainty or by other factors.
v

Measurement uncertainty Other factors

› the depiction of resulting income,

› a measurement of an asset
or liability is available but the
level of measurement
uncertainty is so high.
expenses and changes in equity.
› whether related assets and liabilities
are recognized.
› presentation and disclosure of
related information can enable a
recognized amount to form part of a
faithful representation.

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Derecognition

Derecognition is the
removal of all or part of a
recognised asset or
liability from an entity’s › derecognition normally
› derecognition statement of financial occurs when the entity
Liabilities

normally occurs no longer has a present

Assets

position.
when the entity obligation for all or part
loses control of all of the recognised
or part of the liability.
recognised asset
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Measurement

Measurement

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Measurement
Historical cost
Assets are recorded at the amount of cash
or cash equivalent paid or the fair value of
the consideration given to acquire them.
Liabilities are recorded at the amount of
proceeds received in exchange for the
debt.
Realisable value
Assets are carried at the amount of cash or
cash equivalent that could currently be
obtained by selling the asset in an orderly
disposal. The liabilities are carried at their
settlement values being undiscounted
amounts of cash that need to be paid in the
course of business.
Measurement
 Measurement bases
 Factors to consider when selecting a measurement basis
 Measurement bases
Historical cost
 historical cost, amortized cost, carrying
amount...
 Derived from the transaction or event that
created them
 Do not reflect changes in prices, do reflect
change in consumption (depreciation or
amortization), impairment, or fulfilment.
 historical cost of the asset is no longer
recoverable.
10/10/2021
Current cost
Assets are carried at the amount of
cash or cash equivalent that would be
paid if the asset were acquired
currently. Liabilities are carried at the
discounted value or cash equivalent
that would be required to settle the
debt currently.
Present value
Assets are carried at the discounted value of
the future cash inflows that the items are
expected to generate in the normal course of
business. Liabilities are carried at the
discounted value of the future net cash
outflows required to settle the liabilities in the
normal course of business.
65
Current value
 fair value, value in use, fulfilment value is
updated at measurement date.
 capture any positive or negative changes
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Measurement
 Measurement bases
 Factors to consider when selecting a measurement basis

 Factors to consider when

selecting a measurement basis

 Must be relevant and it must faithfully represent what it purports to represent

 Should, as far as possible, be comparable, verifiable, timely and
understandable
 Benefits of the information must be sufficient to justify the cost of providing
that information

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Cost constraint

Cost Constraint

Companies must weigh the costs of providing the information against

the benefits that can be derived from using it.

 Rule-making bodies and governmental agencies use cost-benefit

analysis before making final their informational requirements.

 In order to justify requiring a particular measurement or

disclosure, the benefits perceived to be derived from it must
exceed the costs perceived to be associated with it.

LO 8

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Which of the following measurement base(s) should be used by

an entity according to the conceptual framework for financial
reporting?
a. Historical cost
b. Current cost
c. Present value
d. Any of the above.

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Chater 7:
Presentation and disclosure
PRESENTATION AND DISCLOSURE
PRINCIPLES

CLASSIFICATION

 Classification of assets and liabilities

Offsetting

 Classification of equity

 Classification of income and

expenses
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Presentation and disclosure principles

Effective communication in
financial statements

entity-specific information No duplication

› duplication of information in
› entity-specific information
different parts of the
is more useful than
financial statements is
standardised descriptions,
usually unnecessary and
sometimes referred to as
can make financial
‘boilerplate’
statements less
understandable.

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Classification
01 Classification is applied to the unit of
account selected for an asset or liability.

Classification
of assets and 02
Offsetting
Offsetting occurs when an entity
recognises and measures both an asset

liabilities and liability as separate units of account,

but groups them into a single net amount
in the statement of financial position.

Offsetting vs. A set

03 Offsetting assets and liabilities differs
from treating a set of rights and
obligations as a single unit of account.

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Classification of equity

Classify components of equity separately if some of

those components are subject to particular legal,
regulatory or other requirements.

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Classification of income and expenses

Classification is applied to
(a) income and expenses resulting from the unit of account selected for an asset or liability; or
(b) components of such income and expenses if those components have different characteristics and
are identified separately and expenses resulting from the unit of account selected for an asset or
liability;
The statement of profit or loss
• The statement of profit or loss is the primary source of information about an entity’s financial
performance for the reporting period;
• Profit or loss could be a section of a single statement of financial performance or a separate statement;
• The statement(s) of financial performance include(s) a total (subtotal) for profit or loss;
• In principle, all income and expenses are classified and included in the statement of profit or loss;
• Income and expenses that arise on a historical cost measurement basis are included in the statement
of profit or loss. That is also the case when income and expenses of that type are separately identified
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as a component of a change in the current value of an asset or liability.

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Classification of income and expenses

Other comprehensive income
• In exceptional circumstances, the Board may decide to exclude from the statement of profit or
loss income or expenses arising from a change in current value of an asset or liability and
include those income and expenses in other comprehensive income.
• The Board may make such a decision when doing so would result in the statement of profit or
loss providing more relevant information or a more faithful representation.

Recycling
• In principle, income and expenses included in other comprehensive income in one period are
recycled to the statement of profit or loss in a future period when doing so results in the
statement of profit or loss providing more relevant information or a more faithful representation.
• When recycling does not result in the statement of profit or loss providing more relevant
information or a more faithful representation, the Board may decide income and expenses
included in other comprehensive income are not to be subsequently recycled.
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Capital concept

Capital can be
• the net assets of an entity or
• the amount of capital contributed by
the owners plus increases in the net
assets that remain in the entity.

Capital can be expressed as money

invested or purchasing power invested.

It can also be expressed in terms of

productive capacity.

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Chapter 8- Concepts of capital maintenance
Financial capital maintenance
Nominal monetary units or units of
constant purchasing power)
Capital = Net asset or equity of the entity.
Used if the main concern of the user of the
financial statements is the maintenance of the
nominal value invested capital.
Profit is the difference in money terms between the
opening and closing capital excluding any
contributions from and distribution to owners.
Concepts of capital maintenance
Physical capital
maintenance
 Profit represents the
increase in that capital
Profit over the period.
 All price changes of
the assets and
liabilities are viewed as
changes in the
measurement of the
physical productive
Increase in the capacity of the entity
prices  as capital
maintenance
adjustments that are
part of equity and not
as profit
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Physical capital maintenance
Capital = Productive capacity of the entity
(measured as units of output per day)
Used if the main concern of the user of the financial
statements is the operating capacity of the entity.
Profit is earned only if the operating capacity at the
end of the period exceeds that of the beginning of
the period.
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FCM - FCM – Constant
Monetary term purchasing power
 Profit represents the › Profit represents the
increase in nominal increase in invested
money capital over the purchasing power over
period. the period.
 Increases in the prices  Only that part of the
of assets may not be increase in the prices
recognized until the of assets that exceeds
assets are disposed of the increase in the
in an exchange general level of prices
transaction. is regarded as profit.
The rest of the
increase is treated as
a capital maintenance
adjustment and,
hence, as part of 78
equity
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Example

On 1 Jan X0, an inventory was purchased with the

price of 100 CU. On 31 Dec X0, the purchasing
power increase by 10%. The present value of the
inventory was 130 CU. The inventory was sold on 1
Jan X0 at the price of 150 CU.
Required: Calculate the carrying amount of
inventory, P/L and OCI under different capital
maintenance views.

79

Answer

Accounting items FCM – Monetary term FCM – Constant PP term Physical CM

Inventory (1.1.x0) 100 100 100

Inventory (31.12.x0) 100 100 x 110% = 110 130
Changes in equity (31.12.x0) 0 110 – 100 = 10 130 – 100 = 30
Profit or Loss (31.12.x0) 50 40 20

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The
End!
Address: Contact:
196 Tran Quang Khai st., School of Accounting –
District 1, HCMC, Vietnam University of Economics, HCMC

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