CONCEPTUAL FRAMEWORK

AND ACCOUNTING STANDARDS

I. NATURE
The conceptual framework’s purpose is to serve as a guide in developing,
understanding, and interpreting the standards.
The conceptual framework is not a standard. In case of a conflict between these two,
the standard prevails.
The conceptual framework is concerned with the general purpose financial reporting.
General purpose financial reporting involves the preparation of general purpose
financial statements.
The objective of general purpose financial reporting is to provide information that is
useful to primary users in making decisions about providing resources to the entity. To
make those decisions, primary users need information on the entity’s:
a. Financial position and financial performance; and
b. Management Stewardship
The primary users are (a) existing and potential investors and (b) lenders and other
creditors.
Financial reports do not and cannot provide all the information needs to the primary
users. Only their common needs are catered by financial reports.
The fundamental qualitative characteristics are (1) Relevance, and (2) Faithful
representation.
The enhancing qualitative characteristics are (3) Comparability, (4) Verifiability, (5)
Timeliness, and (6) Understandability.
Relevant information has (a) Predictive value and (b) Feedback value.
Materiality is an entity-specific aspect of relevance. It is a matter of judgment. The
overriding consideration when making materiality judgment is whether information could
reasonably be expected to influence the decisions of users. This is in keeping with the
objective of financial reporting of providing useful information.
The materiality process involves the following steps: (1) Identity, (2) Assess, (3)
Organize, and (4) Review.
The elements of faithful representation include (a) Completeness, (b) Neutrality, (c)
Free from error.
Cost of Pervasive constraint – It affects virtually all aspects of financial reporting.
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 ability to generate future net cash inflows; and
b. Management’s stewardship over economic resources.
A reporting entity is one that is required, or chooses, to prepare financial statements.
The elements directly related to the measurement of financial position are assets,
liabilities, and equity.
The elements directly related to the measurement of financial performance are income
and expenses.
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.
Liability is a present obligation of the entity to transfer an economic resource as a result
of past events.
Equity is assets less liabilities.
Income and expenses are changes in assets and liabilities, excluding owner
contributions/distributions and capital maintenance adjustments.
An item is recognized if it: (a) meets the definition of an element; and (b) recognizing it
would provide useful information (i.e., relevant and faithfully represented)
An item is derecognized if it ceases to meet the definition of an asset or liability.
The measurement bases used in financial reporting are broadly classified into historical
cost and current value (i.e., fair value, value in use/fulfillment value, and current cost).
Financial information is communicated to users through presentation and disclosure in
the financial statements.
The two concepts of capital are financial and physical.
II. RECOGNITION
Asset Recognition Criteria
a. Right
b. Potential to produce economic benefit
c. Control
Liability Recognition Criteria
a. Obligation
b. Transfer of economic resource
c. Present obligation as a result of past events
Equity
a. Residual interest in the assets of the entity after deducting all its liabilities.
Income Recognition Criteria
a. Increase in assets, or decrease in liabilities
b. Results in increase in equity
c. Excludes contributions from the entity’s owners
Expense Recognition Criteria
a. Decrease in assets or increase in liabilities
b. Results in decrease in equity
c. Excludes distributions to the entity’s owners

III. MEASUREMENT
Conceptual Framework describes the following measurement bases:
1. Historical Cost – is the consideration paid to acquire the asset plus transaction
costs.
2. Current Value – measures reflect changes in values at the measurement date.
a. Fair Value – the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participation at
the measurement date.
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.
– 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.
c. Current cost – 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.

IV. PRESENTATION AND DISCLOSURE

Information about assets, liabilities, equity, income and expenses 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.