THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
General Purpose Financial Reporting
Objective: 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.
Decisions involving:
a. Buying, selling, or holding equity and debt
instruments
b. Providing or settling loans and other forms of
credit
c. Exercising rights to vote on, or otherwise
influence, management’s actions that affect the
use of the entity’s economic resources
To make the decisions, existing and potential investors,
lenders, and other creditors need information about:
a. The economic resources of the entity, claims
against the entity and changes in those
resources and claims
b. How efficiently and effectively the entity’s
management and governing board have
discharged their responsibilities to use the
entity’s economic resources
Accrual Accounting
- Depicts the effects of transactions and other
events and circumstances on a reporting entity’s
economic resources and claims in the periods in
which those effects occur
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
The qualitative characteristics of useful financial
information discussed identify the types of information
that are likely to be most useful to the existing and
potential investors, lenders, and other creditors for
making decisions about the reporting entity on the basis
of information in its financial report.
Financial reports provide information about the reporting
entity’s economic resources, claims against the reporting
entity and the effects of transactions and other events
and conditions that change those resources and claims.
Fundamental Qualitative Characteristics
To be useful, it must be relevant and faithfully represent
what it purports to represent. The useful of financial
information is enhanced if it is comparable, verifiable,
timely, and understandable.
1. Relevance
 Capable of making a difference in the
decisions made by users if it has:
a. Predictive value – can be used as an
input to processes employed by users to
predict future outcomes
b. Confirmatory value – if it provides
feedback about (confirms or changes)
previous evaluations
 These two are interrelated – information that
has predictive value often also has
confirmatory value
i. Materiality
o Information is material if omitting it or
misstating it could influence decisions
that the primary users of general
purpose financial reports make on the
basis of those reports, which provide
financial information about a specific
reporting entity.
2. Faithful representation
 Represent economic phenomena in words
and numbers
 To be useful, financial information must not
only represent relevant phenomena, but it
must also faithfully represent the substance
of the phenomena that it purports to
represent
 Should be:
a. Complete – involves explanations of
significant facts about the quantity and
nature of the items, factors, and
circumstances that might affect their
quality and nature, and the process
used to determine the numerical
depiction
b. Neutral – without bias in the selection or
presentation of financial information
 not slanted, weighted,
emphasized, or manipulated to
increase the probability that
financial information will be
received favorably or
unfavorably by users
 Supported by the exercise of
prudence (exercise of caution
when making judgements under
conditions of uncertainty) –
assets and income are not
overstated and liabilities and
expenses are not understated
and vice versa
c. Free from error – no errors or omissions
in the description of the phenomenon,
and the process used to produce the
reported information has been selected
and applied with no errors in the process
Enhancing Qualitative Characteristics
1. Comparability
 Enables users to identify and understand
similarities in, and differences among, items;
does not relate to a single item; not
uniformity
 Some degree of comparability is likely to be
attained by satisfying the fundamental
qualitative characteristics
i. Consistency
 o Although related to comparability, is not 
Provide information about the assets,
the same liabilities, equity, income, and expenses of
o Refers to the use of the same methods both the parent and its subsidiaries as one
for the same items, either from period to 2. Unconsolidated financial statements
period within a reporting entity or in a  If a reporting entity is the parent alone
single period across entities  Designed to provide information about the
parent’s assets, liabilities, equity, income,
2. Verifiability and expenses, and not about those of its
 Different knowledgeable and independent subsidiaries
observers could reach consensus, although
not necessarily complete agreement, that a 3. Combined financial statements
particular depiction is a faithful  If a reporting entity comprises two or more
representation entities that are not all linked by a parent-
 Helps assure that information faithfully subsidiary relationship
represents the economic phenomena it
purports to represent
 Can be: ELEMENTS OF FINANCIAL STATEMENTS
a. Direct – verifying an amount or other
representation through direct The elements of financial statements defined in the
observation (e.g., counting cash) Conceptual Framework are:
b. Indirect – checking the inputs to a
a. Assets, liabilities, and equity, which relate to a
model, formula or other technique
reporting entity’s financial position
and recalculating the outputs using
b. Income and expenses which relate to a reporting
the same methodology (e.g.,
entity’s financial performance
verifying the carrying amount of
inventory by checking the inputs and
recalculating the ending inventory)
ITEM DISCUSSED ELEMENT DEFINITION
IN CHAPTER 1
3. Timeliness
A resource
 Having information available to decision-
controlled by the
makers in time to be capable of influencing entity as a result of
their decisions past events.
 The older the information is, the less useful
it is Economic Asset An economic
Resource resource is a right
4. Understandability that has the
potential to produce
 Classifying, characterizing, and presenting
economic benefits.
information clearly and concisely makes it
A present obligation
understandable arising from past
Liability
events.

The residual interest

Claim
FINANCIAL STATEMENTS AND THE REPORTING in the assets of the
Equity
ENTITY entity after
deducting all of its
Objective and Scope of Financial Statements liabilities.

Objective: To provide financial information about the Increases in assets,

reporting entity’s assets, liabilities, equity, income, and or decreases in
expenses that is useful to users of financial statements liabilities, that result
Income in increases in
Going Concern Assumption equity, other than
those relating to
- Financial statements are normally prepared on contributions from
holders of equity
the assumption that the reporting entity is a
Changes in claims.
going concern and will continue in operation for
economic
the foreseeable future
resources and
- Assumed that the entity has neither the intention Decreases in
claims, reflecting assets, increases in
nor the need to enter liquidation or to cease financial Expenses
liabilities, that result
trading performance in decreases in
equity, other than
The Reporting Entity those relating to
distributions to
- An entity required, or chooses, to prepare
holders of equity
financial statements claims.
- Can be a single entity or a portion of an entity or
Contributions from
can comprise more than one entity
- holders of equity
- Not necessarily a legal entity claims, and
Other changes in distributions to
1. Consolidated financial statements economic them.
 If a reporting entity comprises both the
parent and its subsidiaries
 resources and Exchanges
claims assets or liabilities
-
that do not result in
increases
decreases in equity.
Control
- Links an economic resource to an entity
- Includes the present ability to prevent other
parties from directing the use of the economic
resource and from obtaining the economic
benefits that may flow from it
- Control of an economic resource usually arises
from an ability to enforce legal rights
Executory Contracts
- A contract, or a portion of a contract, that is
equally unperformed – neither party has fulfilled
any of its obligations, or both parties have
partially fulfilled their obligations to an equal
extent.
RECOGNITION AND DERECOGNITION
Recognition
- Process of capturing for inclusion in the
statement of financial position or the statement
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
- The amount at which an asset, a liability or
equity is recognized in the statement of financial
position is referred to as its carrying amount
Relevance
- Information about assets, liabilities, equity,
income, and expenses is relevant to users of
financial statements
Faithful Representation
- Recognition of a particular asset or liability is
appropriate if it provides not only relevant
information, but also a faithful representation of
that asset or liability and of any resulting income,
expenses, or changes in equity
Other Factors
- Faithful representation of a recognized asset,
liability, equity, income, or expenses involves not
only recognition of that item, but also its
measurement as well as presentation and
disclosure of information about it
Derecognition
- Removal of all or part of a recognized asset or
liability from an entity’s statement of financial
position
- Normally occurs when that item no longer meets
the definition of an asset or of a liability
a. For an asset, derecognition occurs when the
entity loses control of all or part of the
recognized asset
b. For a liability, derecognition occurs when the
entity no longer has a present obligation for all or
part of the recognized liability
of
or
MEASUREMENT
Elements recognized in financial statements are
quantified in monetary terms.
Measurement Basis
- An identified feature – for example, historical
cost, fair value or fulfillment value – of an item
being measured
1. Historical Cost
 Historical cost measures provide monetary
information about assets, liabilities, and
related income and expenses, using
information derived, at least in part, from the
price of the transaction or other event that
gave rise to them
 Unlike current value, historical cost does not
reflect changes in values, except to the
extent that those changes relate to
impairment of an asset or a liability
becoming onerous
2. Current Value
 Current value measures provide monetary
information about assets, liabilities, and
related income, using information updated to
reflect conditions at the measurement date
 Unlike historical cost, the current value of an
asset or liability is not derived, even in part,
from the price of the transaction or other
event that gave rise to the asset or liability
 Includes:
a. Fair value
b. Value in use for assets and fulfillment
value for liabilities
c. Current cost
3. Fair Value
 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
Value in use
- 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
Fulfillment Value
- Present value of the cash, or other economic
resources, that an entity expects to be obliged to
transfer as it fulfills a liability
Current Cost
Like historical cost, is an entry value: it reflects prices in
the market in which the entity would acquire the asset or
would incur the liability
Of an asset the cost of an equivalent
asset at the
measurement date,
 comprising the aggregation Adding together of
consideration that would assets, liabilities, equity,
be paid at the income, or expenses that
measurement date + the have shared
transaction costs that characteristics and are
would be incurred at that included in the same
date classification
asset A present economic
Of a liability The consideration that resource controlled by the
would be received for an entity as a result of past
equivalent liability at the events
measurement date – the The amount at which an
transaction costs that carrying amount asset, a liability or equity
would be incurred at that is recognized in the
date statement of financial
position
Sorting of assets,
CONCEPTS OF CAPITAL AND CAPITAL classification liabilities, equity, income,
MAINTENANCE or expenses on the basis
of shared characteristics
Concepts of Capital for presentation and
disclosure purposes
- A financial concept of capital is adopted by most Financial statements of a
entities in preparing their financial statements reporting entity that
combined financial
- Under a financial concept of capital, such as statements comprises two or more
invested money or invested purchasing power, entities that are not all
capital is synonymous with the net assets or linked by a parent-
equity of the entity subsidiary relationship.
consolidated financial Financial statements of a
Concepts of Capital Maintenance and the statements reporting entity that
Determination of Profit comprises both the
parent and its
1. Financial capital maintenance
subsidiaries.
 A profit is earned only if the financial amount The present ability to
of the net assets at the end of the period control of an direct the use of the
exceeds the financial amount of net assets economic resource economic
at the beginning of the period resource and obtain the
economic benefits that
2. Physical capital maintenance may
 A profit is earned only if the physical flow from it.
productive capacity of the entity at the end The removal of all or part
of the period exceeds the physical derecognition of a recognized asset or
productive capacity at the beginning of the liability from an entity’s
statement of financial
period
position.
 Requires adoption of the current cost basis
economic resource A right that has the
of measurement potential to produce
economic
benefits.
Appendix Defined Terms A qualitative
enhancing characteristic that makes
qualitative useful
characteristic information more useful.
The enhancing qualitative
characteristics are
comparability, verifiability,
timeliness and
understandability.
The residual interest in
equity the assets of the entity
after
deducting all its liabilities.
A claim on the residual
equity claim interest in the assets of
the
entity after deducting all
its liabilities.
A contract, or a portion of
a contract, that is equally
executory contract unperformed—neither
party has fulfilled any of
its
obligations, or both
parties have partially
 fulfilled measure measurement basis to an
their obligations to an asset or liability and
equal extent. related income and
existence uncertainty Uncertainty about expenses.
whether an asset or An identified feature—for
liability measurement basis example, historical cost,
exists. fair value or fulfilment
Decreases in assets, or value—of an item being
increases in liabilities, measured.
expenses that Uncertainty that arises
result in decreases in measurement when monetary amounts
equity, other than those uncertainty in
relating to distributions to financial reports cannot
holders of equity claims. be observed directly and
A qualitative must instead be
characteristic that estimated.
fundamental financial Grouping an asset and
qualitative information must possess liability that are
characteristic to be useful to the offsetting recognized
primary users of general and measured as
purpose financial reports. separate units of account
The fundamental into a
qualitative characteristics single net amount in the
are statement of financial
relevance and faithful position.
representation. Uncertainty about the
A report that provides outcome amount or timing of any
financial information uncertainty inflow or outflow of
about economic benefits that
general purpose the reporting entity’s will
financial report economic resources, result from an asset or
claims liability.
against the entity and Within an economic
changes in those resource, a feature that
economic potential to already
resources and claims that produce economic exists and that, in at least
is useful to primary users benefits one circumstance, would
in making decisions produce for the entity
relating to providing economic benefits
resources beyond
to the entity. those available to all
A particular form of other parties.
general purpose general purpose financial primary users (of Existing and potential
financial reports that provide general purpose investors, lenders and
statements information about the financial reports) other
reporting entity’s assets, creditors.
liabilities, equity, income The exercise of caution
and expenses. when making judgements
Increases in assets, or under conditions of
decreases in liabilities, uncertainty. The exercise
income that of
prudence
result in increases in prudence means that
equity, other than those assets and income are
relating to contributions not
from holders of equity overstated and liabilities
claims. and expenses are not
A present obligation of understated.
liability the entity to transfer an
economic resource as a The process of capturing
result of past events. for inclusion in the
statement of financial
position or the
Information whose recognition statement(s) of
omission or misstatement financial performance an
could item that meets the
material information influence decisions that definition of one of the
the primary users of elements of financial
general purpose financial statements—an asset, a
reports make on the basis liability, equity, income or
of those reports, which expenses.
provide financial An entity that is required,
information about a reporting entity or chooses, to prepare
specific reporting entity. general purpose financial
The result of applying a statements.
unconsolidated financial Financial statements of a
statements reporting entity that is the
parent alone.
The right or the group of
rights, the obligation or
unit of account the group of obligations,
or the group of rights and
obligations, to which
recognition criteria and
measurement concepts
are applied.
useful financial To be useful, financial
information information
must be relevant and
faithfully represent what it
purports to represent.