First sem

New Conceptual Framework

A. Definition and Purpose of Conceptual Framework
  The conceptual framework is an analytical tool. The conceptual framework
serves as a tool in analyzing the state of things (variables or concepts) and their
interactions for a comprehensive understanding of a phenomenon. The purpose of the
conceptual framework is to guide your thinking when the data comes in.

B. Scope of Conceptual Framework

Scope The Conceptual Framework deals with: (a) the objective of financial reporting;
(b) the qualitative characteristics of useful financial information; (c) the definition,
recognition and measurement of the elements from which financial statements are
constructed; and (d) concepts of capital and capital maintenance.

C. Objective of Financial reporting

Definition of Financial Reporting

Financial Reporting involves the disclosure of financial information to the various
stakeholders about the financial performance and financial position of the organization
over a specified period of time. These stakeholders include – investors, creditors,
public, debt providers, governments & government agencies. In case of listed
companies the frequency of financial reporting is quarterly & annual.

Objectives of Financial Reporting

According to International Accounting Standard Board (IASB),
the objective of financial reporting is “to provide information about the
financial position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic
decisions.”
The following points sum up the objectives & purposes of financial reporting
–
1. Providing information to the management of an organization which is
used for the purpose of planning, analysis, benchmarking and
decision making.
2. Providing information to investors, promoters, debt provider and
creditors which is used to enable them to male rational and prudent
decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of
listed companies about various aspects of an organization.
4. Providing information about the economic resources of an
organization, claims to those resources (liabilities & owner’s equity)
and how these resources and claims have undergone change over a
period of time.
5. Providing information as to how an organization is procuring & using
various resources.
6. Providing information to various stakeholders regarding performance
management of an organization as to how diligently & ethically they
are discharging their fiduciary duties & responsibilities.
7. Providing information to the statutory auditors which in turn facilitates
audit.
8. Enhancing social welfare by looking into the interest of employees,
trade union & Government.

D. Users of Financial Statements

Financial statements prepared by the Companies are used by
different categories of individuals and corporates in a sense relevant
to them. The most common users of the financial statements are listed
below:

1. Management of the Company

 2. Investors
3. Customers
4. Competitors
5. Government and Government Agencies
6. Employees
7. Investment Analysts
8. Lenders
9. Rating Agency
10. Suppliers

E. Underlying Assumptions
Underlying assumptions
There are two underlying assumptions for the preparation of financial statements, these are

 the accrual basis; and

 going concern

Accrual Basis
Under the accrual basis, the effects of transactions and other events are recognised when they
occur, and not as cash is received or paid. Under the accruals basis, events are recorded in the
accounting records and reported in the financial statements of the periods to which they relate.

Financial statements prepared on the accrual basis inform users not only to past transactions
when cash was paid or received but also of obligations to pay cash in the future and of cash or its
equivalents to be received in the future.

Going Concern Basis

The going concern basis of accounting is the assumption in preparing the financial statements
that an entity will continue in operation for the foreseeable future and does not plan to go into
liquidation, and will not be forced into liquidation or to curtail its operations.
If such an intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed. The going concern assumption is very
important for the valuation of assets, as they may require valuation on a break-up basis if the
company will cease trading.

Qualitative Characteristics
Fundamental Qualitative Characteristics
1. Relevance
Relevant information is capable of making a difference in the decisions made
by users. Relevance requires financial information to be related to an
economic decision. Otherwise, the information is useless.

Financial information is useful if it has predictive value and confirmatory

value. Predictive value helps users in predicting or anticipating future
outcomes. Confirmatory value enables users to check and confirm earlier
predictions or evaluations.

Materiality is an aspect of relevance which is entity-specific. It means that

what is material to one entity may not be material to another. It is relative.
Information is material if it is significant enough to influence the decision of
users. Materiality is affected by the nature and magnitude (or size) of the
item.

2. Faithful Representation
The financial information in the financial reports should represent what it
purports to represent. Meaning, it should reflect what really happened, with
the correct financial values.

There are three characteristics of faithful representation:

1. Completeness (adequate or full disclosure of all necessary information),
2. Neutrality (fairness and freedom from bias), and
3. Free from error (no inaccuracies and omissions).

Enhancing Qualitative Characteristics

1. Comparability
Comparable information enables comparisons within the entity and across
entities. When comparisons are made within the entity, information is
compared from one accounting period to another. For example: income is
compared for the years 2019, 2020, and 2021. Comparability of
information across entities enables analysis of similarities and differences
between different companies.

2. Verifiability
Verifiability helps to assure users that information represents faithfully what it
purports to represent. Financial information is supported by evidence and
independent individuals can check them to see whether such information is
faithfully represented. In other words, information is verifiable if it can be audited.

3. Timeliness
Timeliness means providing information to decision-makers in time to be
capable of influencing their decisions. It shouldn't be significantly delayed or
else it will be of little or no value.

4. Understandability
Understandability requires financial information to be understandable or
comprehensible to users with reasonable knowledge of business and
economic activities. To be understandable, information should be presented
clearly and concisely. However, it is improper to exclude complex items just
to make the reports simple and understandable.