Conceptual Framework for
Financial Accounting
Conceptual Framework
o The Conceptual Framework for Financial Reporting
is a complete, comprehensive, and single document
promulgated International Accounting Standards
Board (IASB)
o is a summary of the terms and concepts that underlie
the preparation and presentation of financial
statements for external users.
- Financial statement is intended for
external users.
- Accounting process
 Identifying
 Measuring
 Communicating
o Is an attempt to provide an overall theoretical
foundation for accounting.
- The difference between Current Assets and
Non-Current Assets are
 Current Assets – can be used up or
converted to cash within one year
or one operating cycle
 Non-Current Assets – long-term
assets that a company expects to
use for more than a year or
operating cycle.
o Is the underlying theory for the development of
accounting standards and revision of previously
issued accounting standards.
o It will be used in future standard-setting decisions but
no changes are made to the current International
Financial Reporting Standard (IFRS)
Conceptual Framework provides the
foundation for Standards that:
a. Contribute to transparency by enhancing
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 risks across the
world.
Purpose of Revised Conceptual
Framework
a. To assist the International Accounting Standards
Board to develop IFRS Standard based on consistent
concepts.
The financial statement is also to provide
financial information about resources and
obligation at a point in time (financial
position) and changes in these resources and
obligation during a period of time.
(Statement of Comprehensive of Income
Statement)
b. To assist prepares of financial statements to develop
consistent accounting policy when no standard
applies to a particular transaction.
c. To assist prepares of financial statements to develop
accounting policy when Standard allows a choice of
an accounting policy. (it depends of the types of ways of
business)
d. To assist all parties to understand and interpret the
IFRS standards.
Status of the Conceptual Framework
The Conceptual Framework is not a standard. If
there’s a conflict between a Standard and the Conceptual
Framework, the requirements of the Standard will prevail.
In the absence of a standard or an interpretation that
specifically applies to a transaction, management shall
consider the applicability of the Conceptual Framework in
developing and applying an accounting an accounting policy
that result in information that is relevant and reliable.
However, it is to be stated that the Conceptual
Framework is not an International Financial Reporting
Standard.
Users of Financial Information
Primary users – parties to whom general purpose
financial reports are primarily directed. They are mostly
existing and potential investors, lenders and creditors.
Other users – are users of financial information
other than the primary users. They are parties that may find the
general purpose financial reports useful but the reports are not
directed to them primarily.
Example:
Employees, customers, government and the
public.
Scope of Revised Conceptual Framework
1. Objectives of financial reporting
2. Qualitative characteristics of useful financial
information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital expenditures
Objectives of Financial Reporting
The overall objective of financial reporting is to
provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the
entity.
The objectives of financial reporting are the why,
goal or purpose of accounting.
 Financial reporting is the provision of the financial
information about an entity to external users that is useful to
them in making economic decisions and for assessing
effectiveness of entity’s management.
Financial reporting encompasses not only financial
statements but also other information such as financial
highlights, summary of important financial figures, analysis of
financial statements and significant ratios.
Financial reports also include nonfinancial
information such as description of major products and a listing
of corporate officers and directors.
Specific Objective of Financial Reporting
1. To provide information useful in making decisions
about providing resources to the entity. (applicable to
creditors renders)
2. To provide information useful in assessing the cash
flow prospects of the entity. (provide future cash
flows)
3. To provide information about entity resources,
claims, (income statement) and changes in resources
and claims. (statement of cash flows *indirect)
Qualitative Characteristics
Qualitative characteristics are the qualities or
attributes that make financial accounting information useful to
the users.
Qualitative characteristics are classified into:
a. Fundamental qualitative characteristics
b. Enhancing qualitative characteristics
Fundamental Qualitative Characteristics
The fundamental qualitative characteristics relate to
the content or substance of financial information.
Relevance and Faithful Representation are the
fundamental qualitative characteristics of financial
information.
Information must both be relevant and faithfully
represented to be useful.
Application of Fundamental Qualitative
Characteristics
1st – Identify an economic phenomenon or transaction
that has potential to be useful.
2nd – Identify the type of information about the
phenomenon or transaction that would be most relevant and
can be faithfully represented.
3rd – Determine whether the information is available.
Relevance
Relevance – is the capacity of the information to
influence a decision.
To be relevant, the financial information must be
capable of making a difference in the decisions made by users.
Predictive Value and Confirmatory Value
(PC)
o Predictive Value – means that financial
information can be used as an input to processes
employed by users to predict future outcome.
o Confirmatory Value – means that the financial
information provides feedback about previous
evaluations. This enables users confirm or correct
earlier expectations. (confirming their previous
predictions)
Materiality
Materiality – is a practical concept in accounting
which dictates that strict adherence to GAAP is not required
when the items are not significant enough to evaluation,
decision and fairness of financial statements.
Materiality is also known as the doctrine of
convenience. The relevance of information is affected by its
nature and materiality.
Materiality is a relativity
Materiality of an item depends on relative size rather
than absolute size. What is material for one entity may be
immaterial for another.
As a general rule an item is material if knowledge of
it could be reasonably affect or influence the economic
decisions of the primary users of the financial statement.
IASB Definition of Materiality
Information is material if omitting, misstating or
obscuring it could be reasonably be expected to influence the
economic decisions that primary users of general purpose of
financial statements make on the basis of those statements
which provides financial information about a specific
reporting entity.
Three important aspects in the definition:
- Could reasonably expected influence
- Obscuring information
- Primary users
Faithful Representation
Faithful Representation means that financial
reports represent economic phenomena or transactions in
works or in numbers. (means the information provides true,
correct, and complete)
Faithful representation means that the actual effects
of the transactions shall be properly accounted for and
reported in the financial statement.
It relates to substance and content.
Completeness
o Completeness – requires that relevant information
be presented in a way that facilitates understating and
avoids erroneous implications. The PFRS requires
that the financial statements shall be accompanied by
notes to financial statements. The notes provide the
necessary disclosures required.
The standard of adequate disclosure means
all significant and relevant information
leading to the preparation of the financial
statements shall be clearly reported.
 Comparability
Neutrality
o Neutrality – is synonymous with the all-
encompassing principle of fairness. A neutral
depiction is without bias in the preparation or
presentation of financial information. To be neutral is
to be fair.
Prudence – the exercise of care and caution
when dealing with the uncertainties of the
measurement process such that assets or
income are not overstated and liabilities and
expenses are not understated.
Conservatism – this means that when
alternatives exist, the alternative which has
the least effect on equity is chosen.
“Anticipate no profit and provide for
probable and measurable loss.”
Free from Error
o Free from error – means that there are no errors or
omissions in the description of the phenomenon or
transactions.
- Measurement uncertainty arises when
monetary amounts in financial reports
cannot be observed directly and must instead
be estimated.
- Substance over form is not considered a
separate component of faithful
representation because it would be
redundant.
Enhancing Qualitative Characteristics
The enhancing qualitative characteristics relate to the
presentation or form of financial information. This is intended
to increase the usefulness of the financial information that is
relevant and faithfully represented.
The four characteristics of an enhancing qualitative
are comparability, verifiability, understandability and
timeliness.
Comparability
o Verifiability – means that different knowledgeable
and independent observers could reach a consensus,
although not necessarily complete agreement, that a
particular depiction is a faithful representation. In
other words, verifiability implies consensus.
Direct Verification – means verifying an
amount or other representation through
direct observation.
Example:
By counting cash
Indirect Verification – means checking the
inputs to a model, formula, or other
technique and recalculating the inputs using
the same methodology.
Example:
Verifying the carrying
amount of inventory by checking
the inputs in quantities and costs.