CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
Introduction – Chapter 1
Conceptual Framework
Function
- Describes the objective of and the
concepts for, general purpose financial
reporting
Purpose
- Assist the international accounting
standards board to develop IFRS
Standards that are bases on consistent
concepts
- Assist prepares to develop consistent
accounting policies when no standards
applies to a particular transaction or
other event, or when a standard allows
a choice of accounting policy and;
- Assist all parties to understand and
interpret the standards.
Must remember:
- The conceptual framework is not a
standard
- Nothing in the conceptual framework
overrides any standard or any
requirement in a standard.
- Requirement in the standards may
depart from the conceptual framework
- Revision of the conceptual framework
will not automatically lead to changes
to the standards
- IASB mission is to develop standards
that bring transparency accountability
and efficiency to financial markets
around the world
- The conceptual framework provides the
Foundation for standards that:
a. Contribute to transparency by
enhancing the international
comparability and quality of
financial information
b. Strengthen accountability by
reducing the information gap
between the providers of capital
and the people to whom they have
entrusted their money
c. Contribute to economic efficiency
by helping investors to identify
opportunities and risk across the
world, thus improving capital
allocation.
Chapter 1
Objective of general purpose financial
reporting
The objective of general purpose financial is to
1. Provide financial information
2. About the reporting entity that is
3. Useful to existing and potential
investors, lenders, and other creditors
4. In making decisions relating to
providing resources to the entity.
Primary users
- Who? Our existing and potential
investors, lenders and creditors;
- Those who provide capital and
financing to the entity.
Primary user decisions:
a. Buying selling or holding equity and
debt instruments;
b. Providers or selling loan and other
forms of credit; or
c. Exercising rights to vote on, or
otherwise influence, management’s
actions that affect the use of the
entity’s resources

Primary users Specific information needs
(Note: the answers of the primary users are not
stated categorically your Financial statement
users will have to make their own assessment.)
- Dividends, principal and interest
payments or market price increases
Assessment of the amount, timing and
uncertainty of (the prospect for) future net cash
inflows to the entity and on their assessment of
management’s stewardship of the entity’s
economic resources.
1. The economic resources (assets) of the
entity, claims (liabilities) against the
entity and changes in the resources and
claims.
2. How efficiently and effectively the
entity’s management and governing
board have discharged their
responsibilities to use the entity’s
economic resources.
Nature of General Purpose Financial Reports
- Do not and cannot provide all of the
information that existing and potential
investors, lenders and other creditors
need.
- Focuses on common information needs.
- Not designed for the financial
information needs of management
- Based on estimates, judgement and
models rather than exact depictions.
- Not designed to show the value of a
reporting entity.
Information about the nature and amounts
of a reporting entity’s economic resources
and claims
- Liquidity and solvency
- Needs for additional financing
- Likelihood of obtaining needed
financing
- Properties and payment requirements
- Distribution of cash flows among those
with a claim against the reporting entity
What causes the economic resources and claims
to change?
- Financial performance – assessment of
returns
- Issuing debt or equity instruments
Accrual accounting
- Accrual accounting depicts the effects
of transactions and other events ad
circumstances on a reporting entity’s
economic resources and claims in the
periods in which those effects occur.
Even if the resulting cash receipts and
payments occur in a different period.
Financial performance
- Operational efficiency
- Past and future ability to generate cash
flows
- Reaction to the market
Past cash flows
- Cash management- how well they
manage cash
Other transaction
- Capital management –
Chapter 2
Qualitative Characteristics of useful financial
information
Fundamental Qualitative characteristics
- Relevance
- Faithful Representation
Need to have two of these characteristics to be
useful.
Enhancing Qualitative Characteristics
- Verifiability
- Comparability
- Understanding
- Timeliness
To help financial statement users to choose
between two useful information.
NOTE: IASP will be the one who is useful for
conceptual framework.
Fundamental Qualitative characteristics
Relevance
- Capable of making a difference
- Predictive value – ability to give future
outcomes. Forward looking.
- Confirmatory value - Backward looking.
a. Materially
- Could be influence decisions.
- A variation of relevance
Faithfull representation
- Must also faithfully represent the
substance of the phenomena that its
purports to represent.
- Elements - Completeness, neutrality
and freedom from error.
a. Completeness
- A complete depiction includes all
information necessary for a user to
understand the phenomenon being
depicted. Including all necessary
descriptions and explanation.
What constitutes a complete depiction of a
group of assets?
- A description of the nature of the assets
in the group.
- A numerical depiction pf all the assets
in the group, and
- A description of what the numerical
depiction represents
- Explanations of significant facts about
the quality and nature of the items
- Factors and circumstances that might
affect their quality and nature
- The process used to determine the
numerical depiction.
b. Neutrality
- Without bias in the selection or
presentation of financial information
- Not slanted, weighted, emphasized, de-
emphasized or otherwise manipulated
to increase the probability that financial
information will be received favorably
or unfavorably by user.
it is the exercise of caution when
making judgements under conditions of
uncertainty.
Asymmetric prudence vs cautious prudence
Asymmetric prudence
- A need for systematic asymmetric
- Asymmetric prudence – unintentionally
choose the one who is least favorable
to the entity.
Cautious prudence
- A need to be cautions when making
judgement under conditions of
uncertainty, but without needing to be
 more cautious in judgements relating to
gains and assets than those relating to
losses and liabilities.
- Cautious prudence - not taking in
account whether the potential effect is
favorable or unfavorable to the entity
but the requirement is to simply
exercise extreme caution.
Note: Erratum: contingent assets; not
contingent gain.
C. Freedom from error
- Does not mean accurate in all respects
- Means there are 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.
- Even a high level of measurement
uncertainty does not necessarily
prevent such an estimate from
providing useful information.
Substance over form principle
- Leases, rental agreement and sales
transactions.
- It is the substance to prevail the
transaction.
Applying the Fundamental qualitative
characteristics.
- Identity an economic phenomenon,
information about which is capable of
being useful to users of the reporting
entity’s financial information.
- Identify the type of information about
the phenomenon that would be most
relevant
- Determine whether that information is
available and whether it can provide a
faithful representation of the economic
phenomenon.
Enhancing Qualitative Characteristics
Verifiability
- means that different knowledgeable
and independent observers much
consensus. Although not necessarily
complete agreement. That a particular
depiction is a faithful representation.
- Direct verification means verifying an
amount or other representation
through direct observations for
example, by counting cash.
- Indirect verification means checking
the inputs to a model, formula or other
techniques and recalculating the output
using the same methodology
Comparability
- comparability is the qualitative
characteristics that enables users to
identify and understand similarities in,
and differences among items.
Consistency
- refers to the same use of methodology,
procedures, and other policies
throughout multiple periods or
throughout entities in the same
industry.
Note: comparability can be viewed as the goal
while consistency is the means of achieving
towards comparability.
Uniformity
Understandability
- classifying characteristics and
presenting clearly and concisely make t
understandable.
Timeliness

- timeliness means having information

available to decision-makers in time to
be capable of influencing their
decisions.