CFFR

STATUS AND PURPOSE OF CONCEPTUAL FRAMEWORK

The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective
of, and the concepts for, general purpose financial reporting. The purpose of the Conceptual
Framework is to: (a) assist the International Accounting Standards Board (Board) to develop IFRS
Standards (Standards) that are based on consistent concepts; (b) assist preparers to develop
consistent accounting policies when no Standard applies to a particular transaction or other event,
or when a Standard allows a choice of accounting policy; and (c) assist all parties to understand and
interpret the Standards.

The conceptual framework is not a standard, nor does its contents override any standards or any
requirement in a standard.

The objective of general-purpose financial reporting is to provide useful financial information that
will aid primary users (existing and potential investors, lenders and other creditors) in making
financial decisions relating to providing resources to the reporting entity.

These decisions involve:

a. Buying, selling or holding of equity or debt instruments (Ex: if I should buy or sell stocks of a
certain company)
b. Providing or settling loans and other form of credit (Ex: Should I loan money to a business)
c. Exercising rights to vote, or otherwise influence management to affect the use of entity’s
economic resources

To make these decisions, they need information about: (a) the economic resources of the entity (to
see its liquidity, solvency, ability to pay off short- and long-term debts etc.), claims against the entity
and changes in those resources and claims and (b) how efficiently and effectively the entity’s
management and governing board have discharged their responsibilities to use the entity’s
economic resources

Another way that help users evaluate a company is through their: Past cash flows (To see how to
business handles cash. How cash flows in and out of the entity. Past and present cash flows help
estimate future cash flows)…

 Purpose of financial reports are not to show the value of the entity but to help users give
their own estimates to the value of the business

--------- Financial reports should contain useful financial information-------

Qualitative Characteristics of Useful Financial Information

Relevance – Relevant/Material: If such information has the capacity to affect the decision making of
current and potential investors, lenders and other creditors to the entity.

It has the capacity to affect decisions if such information holds predictive and/or confirmatory value
Faithful Representation – Data should be complete, Neutral, and free from error

Complete – Wala gi kuhaan, wala gi pun-an… Tanan nga kinahanglan gi hatag for ex: Book Value,
FMV, Cost, Accumulated Depreciation of the Asset Etc.

Neutral - Not manipulated to the interest of any party may it be the reporting entity or selected
investors … Neutral = Presenting the data for what it is

Free from error does not mean accurate – it means trying ones best to be free from error when
providing estimates (needs the exercise of prudence)

Implicit characteristic: Prudence

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ENHANCING QUALITATIVE CHARACTERISTICS

COMPARABILITY – Information is more useful to primary users if it can be compared to other pieces
of information. Consistency is not the same as comparability. Consistency helps achieve it.

VERIFIABILITY - Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent.

TIMELINESS - To have information available by the time it is needed by decision makers. The older
the information is, the less useful it is, or even in some cases, irrelevant. However, this is not always
the case as there are some users who need ‘’old’’ information to help them identify and assess
trends.

UNDERSTANDABILITY - Classifying, characterizing and presenting information clearly and concisely

makes it understandable.

the enhancing qualitative characteristics, either individually or as a group, cannot make information
useful if that information is irrelevant or does not provide a faithful representation of what it
purports to represent

THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING

- Providers of financial information expend most of the effort involved in collecting,

processing, verifying and disseminating financial information, but users ultimately bear
those costs in the form of reduced returns.
- it is not possible for general purpose financial reports to provide all the information that
every user finds relevant
- In applying the cost constraint, the Board assesses whether the benefits of reporting
particular information are likely to justify the costs incurred to provide and use that
information.

FINANCIAL STATEMENTS

- Financial statements provide information about economic resources of the reporting entity, claims
against the entity, and changes in those resources and claims

- The objective of financial statements is to provide financial information about the reporting entity’s
assets, liabilities, equity, income and expenses that is useful to users of financial statements in
assessing the prospects for future net cash inflows to the reporting entity and in assessing
management’s stewardship of the entity’s economic resources
Consolidated Financial Statements – reporting entity is both the parent entity and its subsidiaries (or
FS of both parent and subsidiary).

Unconsolidated FS- Reporting entity is parent entity alone (FS OF THE PARENT ALONE)

Combined FS – Reporting entity comprises two or more entities that are not linked by a parent –
subsidiary relationship (FS of two or more entities that do not have a parent-subsidiary rs.)

ELEMENTS OF FS

ASSETS = LIABILITIES + OE (FINANCIAL POSITION)

INCOME AND EXPENSES (FINANCIAL PERFORMANCE)

CONTROL

- An entity has control over an economic resource when they have the capacity to direct its
use and reap economic benefits from it. It also follows that when an entity has control over
an economic resource no other entity should have control over it. In other words, other
entities should not be able to reap economic benefits from that resource, unless permitted
by the controlling entity. Ex: Gipahuwam og cash

LIABILITY

- present obligation of the entity to transfer an economic resource as a result of past events.
- For a liability to exist, the three must all be satisfied
(A) The entity has an obligation
(B) The obligation is to transfer an economic resource
(C) Such obligation is a present obligation that exists as a result of past events
 However, a requirement for one party to recognise a liability and measure it at a specified
amount does not imply that the other party (or parties) must recognise an asset or measure
it at the same amount.

The entity has an obligation

- An obligation is a duty or responsibility that an entity has no practical ability to avoid.

Transfer of Economic Resource

- the obligation must have the potential to require the entity to transfer an economic
resource to another party (or parties). For that potential to exist, it does not need to be
certain, or even likely, that the entity will be required to transfer an economic resource—the
transfer may, for example, be required only if a specified uncertain future event occurs. It is
only necessary that the obligation already exists and that, in at least one circumstance, it
would require the entity to transfer an economic resource

Present Obligation as a result of Past Events

- A present obligation exists as a result of past events only if: (a) the entity has already obtained
economic benefits or taken an action; and (b) as a consequence, the entity will or may have to
transfer an economic resource that it would not otherwise have had to transfer

- A present obligation can exist now even if the unavoidable transfer of resources will still occur
in the future. Ex: An obligation to pay cash can exist even if the payment of such obligation is still
due at a future date.

- An entity can not yet have an obligation if it has not yet reaped economic benefits or taken an
action that would require it to transfer an economic resource that it would not otherwise have
had to transfer. Ex: Contract stipulates that when D completes his/her work, Company A will pay
him 200,000 cash. If D has not yet completed his work, Company A is not yet obliged to pay him.

UNIT OF ACCOUNTS

How to treat Liabilities, Contracts, Assets etc. – As one, as three, as two (depending on which
best fulfills the objective of financial statements on relevance and faithful representation)

EXECUTORY CONTRACTS

Contracts that are not yet fulfilled meaning both parties have not yet done their respective parts
or only partially. When THE entity fulfilled its part first, he is entitled to receive resources from
the other party. This is an asset for the ENTITY. IF on the other hand, the other party
accomplished its part first, the Entity is now obligated to transfer resources to the other party.
This is a liability on the part of the entity.

EQUITY – The residual interest of assets after subtracting liabilities

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INCOME AND EXPENSES

Income is increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims

Income and expenses enables primary users to evaluate the entity’s financial performance

Assets, Liabilities and Equity = Financial Position

Income and Expenses = Financial Performance

Income and Expenses are pieces of financial information that are just as important as ALE in
helping primary users make informed decisions regarding the entity.

CHAPTER 5 PAGE 40
The Recognition Process

- The process of recognizing/selecting an item to be recorded in the financial statements – an

asset, liability, equity, income or expenses. The amount in which an Asset, liability or… is
recognized in the statement of financial position is referred to as the carrying amount.
- Recognition links the elements of the FS because the recognition of one item (or a change in
its carrying amount) required the recognition or derecognition of one or more other
items (or a change in their respective carrying amounts) i.e. the rule of debit and credit
(Matching Principle)… [when an account is debited, another should be credited]

Recognition Criteria

- Only assets, Liabilities and Equity shall be recognized in the Balance Sheet. Similarly, only
items that meet the definition of income and expenses are recognized in the statement of
financial performance (income statement).
- Failing to recognize an item makes the financial statements less complete and useful.
However, we must still consider to recognize only those items that provide useful
information to primary users. Hence, if something meets the definition of an asset, but does
not, in any way, provide utility to primary users, it may be disregarded from the statement
of financial position; but such is a rare case. In such rare circumstance that an item is not
recognized for being “not useful enough”, the reporting entity may still include it in its notes.
- An item can be considered ‘’not relevant enough’’ if it is (a) uncertain whether such
asset/liability exists. Or (b) an asset or liability exists but the probability of an inflow/outflow
of economic benefits is low.

DERECOGNITION

-Removal of part or all of the recognized asset or liability from an entity’s financial statement of
financial position. Occurs when the item no longer meets the definition of an asset or liability.

Ex: A liability is derecognized when a company no longer holds such present obligation to
transfer economic resources to another party. E.G. When a debt is already paid.

Derecognition aims to faithfully represent (a) any assets and liabilities retained after the
transaction or other event that led to the derecognition (including any asset or liability acquired,
incurred or created as part of the transaction or other event); and (b) the change in the entity’s
assets and liabilities as a result of that transaction or other event.
 MEASUREMENT

Historical Cost - Historical cost is the transaction price or the acquisition price at which the asset
was acquired. i.e., Acquisition cost. For assets (ex: inventory) H. Cost may also include the
transportation cost + other transaction costs. For Liability, H. Cost is the amount owed minus
transaction cost (e.g., transpo cost)

 When something is acquired not at market value, it may not be possible to identify the cost
or the cost may not provide relevant information about the asset or liability. In such case, a
‘’current value’’ is used as a deemed cost and that is then used as a starting point for
subsequent measurement at historical cost.

 Historical Cost of an asset may be updated in cases like depreciation or amortization,

payments received (i.e. decrease AR), events that cause part of the asset to no longer be
recoverable (impairment), accrual of interest to reflect financing component of an asset

 Historical Cost of a Liability may be updated when there is fulfillment of part or the
wholeness of the obligation , when the obligation to transfer economic resources become
onerous (can no longer reap the benefit of paying the debt ex: U pay rent but u don’t stay
there anymore), accrual of interest

CURRENT VALUE

Does not base itself to the cost of acquiring the asset/liability.

Ex: Fair Value, Value in Use (for assets), Fulfillment Value (for liabilities), current cost

Fair value – depends on those who participate in the market

 Does not concern itself with the transpo cost of the asset/liability unlike historical cost

Credit risk – chance of others not paying the entity

Own Credit risk – chance of the entity not paying its debts

Value in Use (for assets), Fulfillment Value (for liabilities)--- entity specific perspective

- Refers to the present value of cash flows, or other economic benefits expected (ex: PV or
NPV in finance)

CURRENT COST

Similar to Historical cost but instead reflects conditions at the measurement date. Therefore, it is
possible that the H. Cost is the same as the current cost. It is also an entry value unlike Fair value
and value in use and fulfillment value.

RELEVANCE
- The relevance of an information provided by a certain measurement basis is dependent on
the characteristic of an item and how that item (asset/liability) contributes to future cash
flows.

Characteristic of an asset – particularly if the item is subject to market factor and other risks
(volatility of prices). In this case, historical cost will not be relevant to items that have
volatile prices
 Moreover, because measurement at historical cost does not provide timely
information about changes in value, income and expenses reported on that basis
may lack predictive value and confirmatory value by not depicting the full effect of
the entity’s exposure to risk arising from holding the asset or liability during the
reporting period
Contribution to future cash flow (direct or indirect)
FOR indirect, Historical cost or current cost is likely to provide relevant info
For direct, current cost is likely to provide relevant info
Measurement uncertainty – uncertainty of the value of the item itself
Outcome uncertainty – uncertainty of the value or timing of expected economic benefits
(cashflow) arising from the item.
Existence uncertainty – uncertainty of the existence of the item.

PRESENTATION DISCLOSURE

Effective communication of information in financial statements makes that information

more relevant and contributes to a faithful representation of an entity’s assets, liabilities,
equity, income and expenses.

It also enhances the understandability and comparability of information in financial

statements. Effective communication of information in financial statements requires:

(a) focusing on presentation and disclosure objectives and principles rather than focusing on
rules;
(b) classifying information in a manner that groups similar items and separates dissimilar
items; and
(c) aggregating information in such a way that it is not obscured either by unnecessary detail
or by excessive aggregation.

Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of
shared characteristics for presentation and disclosure purposes.

Aggregation is the adding together of assets, liabilities, equity, income or expenses that have
shared characteristics and are included in the same classification

CONCEPTS OF CAPITAL
Financial Concept of capital – capital regarded as the net assets of the entity
Physical Concept of capital – capital regarded as the productive capacity of the entity
Financial Capital Maintenance - Under this concept, a profit is earned only if the financial (or
money) amount of the net assets at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.

Physical Capital maintenance – Profit is earned only if Physical productive capacity End >
Beginning. Requires Current cost basis measurement.

Financial Capital Maintenance – increase in the price of assets are recorded in the form of
holding gains which are conceptually profits.

Physical Capital Maintenance – increase in the price of assets are treated as capital
maintenance adjustments that are a part of equity and not profits. This is because profit is
seen as an increase as physical productive capacity and not the increase of monetary value
or price of the asset itself as supposed to financial capital maintenance.

CAPITAL MAINTENANCE ADJUSTMENTS

The revaluation or restatement of assets and liabilities gives rise to increases or decreases in
equity. While these increases or decreases meet the definition of income and expenses, they
are not included in the income statement under certain concepts of capital maintenance.
Instead these items are included in equity as capital maintenance adjustments or
revaluation reserves.