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Conceptual Framework
For Financial Reporting

Learning objectives
After studying this topic, you should be able to:
 Explain the roles and structures of key regulatory bodies

 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

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Self reading

 The IASC 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.

Self reading
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amended or withdrawn in the future.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.

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Self reading

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

Self reading
IFRS Interpretation Committee

This International Financial Reporting

Interpretation 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.

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Appendix – IASB Conceptual Framework

The Conceptual Framework

It is not an accounting standard

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

It does not override any accounting

standards

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Apr 1989
Framework for the Preparation and Presentation of
History
Financial Statements was approved by the IASC Board.

Jul 1989
The Framework was published.

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.

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 information
Chapter 3: Financial statements and the reporting entity
CF 2018

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

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Information to make decisions

Claims
Economic resources

Changes in economic
Changes in economic resources and claims not
resources and claims by resulting from financial
financial performance performance

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Qualitative
characteristics of
useful financial
information

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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.

Financial information has Relevant Information is material if

predictive value if it has value as information also omitting it or misstating it could
an input to predictive processes helps users influence decisions that users
used by investors to form their own confirm or correct make on the basis of the
expectations about the future. prior expectations. reported financial information.

Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Faithful representation
means that the numbers
and descriptions match
what really existed or
happened.

Completeness means Neutrality means that a An information item

that all the information company cannot select that is free from error
that is necessary for information to favor one will be a more accurate
faithful representation set of interested parties (faithful) representation
is provided. over another. of a financial item.

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Enhancing qualitative characteristics

Enhancing Qualities

Information that is occurs when means having the quality of

measured and reported independent information available to information that
in a similar manner for measurers, using the decision-makers before it lets reasonably
different companies. same methods, loses its capacity to informed users see
obtain similar results. influence decisions. itsLO 4
significance.

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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Financial statements and reporting entity

Statement of financial position

Liquidity

Current liability
Current asset
Non current liability

Equity
Non current asset

Economic resources & claims

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
Income tax
Profit or loss after tax

Other comprehensive income

Changes in resources & claims from financial performance

- Components of that return
 Efficiently effective use of the reporting entity’s resources

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

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Financial statements and reporting entity

Statement of cash flows

Net cash from operating activities

Net cash from investing activities
Net cash from financing activities

Changes in cash flows

Cash generating ability
Cash usage

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Basic elements
Elements of Financial Statements

A present economic resource controlled by the entity as a result of

Asset past events. An economic resource is a right that has the potential to
produce economic benefits.

Liability 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.
Equity The residual interest in the assets after deducting liabilities.

Increases in economic benefits during the accounting period in form

of inflows or enhancements of assets or decreases of liabilities that
Income
result in increases in equity, other than equity contributions.

Decreases in economic benefits during the accounting period in form

Expenses of outflows or depletions of assets or incurrences of liabilities result in
decreases in equity, other than equity distributions to participants.

Recognition

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

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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 fulfill
periods in which the events occur.
objectives and commitments.

Periodicity Monetary unit

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

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.

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1

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 asset › An asset or liability can exist even if

exists or is separable from goodwill, the probability of an inflow or outflow
or whether a liability exists. of economic 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.

Derecognition

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

position. normally occurs

normally occurs
Assets

when the entity no

when the entity
longer has a
loses control of all
present obligation
or part of the
for all or part of the
recognised asset
recognised liability.
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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.
Realizable 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
Historical cost
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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.
Current value
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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.

CHAPTER 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 is different parts of the financial

more useful than standardized statements is usually

descriptions’ unnecessary and can make

financial statements less
understandable.

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

Classification Offsetting
of assets and 02
Offsetting occurs when an entity recognizes
and measures both an asset and liability as
separate units of account, but groups them
liabilities 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.

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. me 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 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

Classification of income and expenses

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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Chapter 8: Concepts of capital and capital maintenance
Capital
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.
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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.
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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capital maintenance

FCM - FCM – Constant Physical capital

Monetary term purchasing power maintenance
Profit represents the Profit represents the Profit represents the
increase in nominal increase in invested increase in that capital
Profit money capital over the purchasing power over over the period.
period. the period.

Increases in the prices of Only that part of the
assets may not be increase in the prices of
recognized until the assets that exceeds the
assets are disposed of in increase in the general
Increase in the an exchange transaction. level of prices is regarded
as profit. The rest of the
prices increase is treated as a
capital maintenance
adjustment and, hence,
as part of equity.
All price changes of the
assets and liabilities are
viewed as changes in the
measurement of the
physical productive
capacity of the entity 
as capital maintenance
adjustments that are part
of equity and not as profit.

Example

Jan X0, an inventory was purchased with the price of 100

CU. On 31 Dec X0, the purchasing power increase by 10%.
The current cost of the inventory was 130 CU. The inventory
was sold on Dec X0 at the price of 150 CU.
Required: Calculate the profit under different capital
maintenance views.

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Answer

Financial capital maintenance Financial capital maintenance Physical capital

Accounting items
–Monetary term – Constant purchasing power maintenance
Revenue 150 150 150
Cost 100 100 x 110% = 110 130
Profit 50 40 20

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