COLLEGE OF BUSINESS AND ACCOUNTANCY

Topic: Conceptual Framework for Financial Reporting

Learning Objectives:
 State the basic purpose, authoritative status, and scope of the conceptual framework
 State the objective of financial accounting and reporting.
 Identify the primary users of financial statements.
 Explain briefly the qualitative characteristics of useful information and how they are
applied in financial reporting.
 Define the elements of financial statements and state their recognition criteria.
Introduction (With Core Values Integration):
Standards or Framework provide people and organizations with a basis for mutual understanding, and are
used as tools to facilitate communication, measurement, commerce and manufacturing. Standards are
everywhere and play an important role in the economy, by: facilitating business interaction.

Body:
The Conceptual framework for financial reporting sets is a complete, comprehensive and single
document promulgated by the international accounting standards board.
Conceptual Framework
 It is the summary of the terms and concepts that underlie the preparation and presentation
of financial statements for external users.
 It describes the concepts for general purpose financial reporting. It is an attempt to provide
an over-all theoretical foundation for accounting.
 It is an intended guide standard setters, preparers and users of financial information in the
preparation and presentation of financial statements.
It is noteworthy to mention that the conceptual framework will be used in future standard setting
decision but no changes will be made to the current IFRS.

The Conceptual Framework provides the foundation for standards that:

 Contribute to transparency
 Strengthen Accountability
 Contribute to economic efficiency
Purposes of Revised Conceptual Framework
1. To assist the International Accounting Standards Board to develop IFRS Standards based on
consistent concepts
2. To assist preparers of financial statements to develop consistent accounting policy when no
standard applies to a particular transaction or other event or where an issue is not yet
addressed by an IFRS.
3. To assist preparers of financial statements to develop an accounting policy when a standard
allows a choice of an accounting policy.
4. To assist all parties to understand and interpret the IFRS Standards.
5. To assist auditors in forming opinion as to whether FS conform with the standards.

Authoritative Status of the Conceptual Framework

PFRSs

Judgement
1. The management shall refer to, and consider the applicability of,
the following in descending order:
a. PFRSs dealing with similar or related issues
b. Conceptual Framework
2. The Management may also consider the following:
a. Pronouncements of other standard-setting bodies
b. Accounting literature and accepted industry practices
Scope of Conceptual Framework

1 Objective of Financial Reporting

2 Qualitative Characteristics of useful 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 maintenance

1. CONCEPTUAL FRAMEWORK - Objective of Financial Reporting

The overall objective of financial reporting is to provide information that is useful for
decision making.

The objective of general-purpose 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 decision about providing resources to the entity.

Financial Reporting is the provision of financial information about an entity to external

users that is useful to them to in making economic decisions and for assessing the
effectiveness of the entity’s management.

- The principal way of providing financial information to external users is through

the annual FS.
However, it is important to note that financial reporting encompasses not only financial
statements but also other information such as the following:
- Financial Highlights
- Summary of Important Figures
- Analysis of Financial Statements and significant ratios
 Financial report also includes nonfinancial information such as description of major
products and listing of corporate officers and directors.
Primary users (provides resources to the entity)
a. Existing and potential investors;
b. Lenders and other creditors
Other users
a. Employees
b. Customers
c. Government agencies
d. Public
Specific objectives of financial reporting
The Conceptual Framework places more emphasis on the importance of providing information
needed to assess the management stewardship of the entity’s economic resources.
Management stewardship - information about how effectively and efficiently
management has discharged its responsibilities to use the entity’s economic
resources
1. To provide information useful in making decisions about providing resources to the entity.
2. To provide information useful in assessing the cash flow prospects of the entity.
3. To provide information about entity’s resources, claims and changes in these resources and
claims.
Limitations of Financial Reporting
a. General purpose financial reports (GPFR) do not and cannot provide all the information that
existing and potential investors, lenders and other creditors need.
b. GPFRs are not designed to show the value of an entity but the reports provide information
to help the primary users estimate the value of the entity.
c. GPFRs are intended to provide common information to users and cannot accommodate
every request of information.
d. GPFRs are based on judgement and estimates rather than exact depiction.
2. CONCEPTUAL FRAMEWORK – Qualitative Characteristics

Qualitative Characteristics are the qualities or attributes that make financial accounting
information useful to the users. It applies to the information in the FS as well as to financial
information provided in other ways.

Predictive Value
Relevance
Confirmatory Value
Fundamental Qualitative
Characteristics Completeness

Faithful
Neutrality
Representation
Qualitative
Characteristics
Comparability Free from Error

Verifiability
Enhancing Qualitative
Characteristics
Timeliness

Understandability

3. CONCEPTUAL FRAMEWORK – Financial Statements and reporting entity

Financial Statements
 It provides information about economic resources of the reporting entity, claims against the
entity and changes in the economic resources and claims.
 It provides financial information about an entity’s assets, liabilities, equity, income and
expenses useful to users of financial statements in:
- Assessing future cash flows to the reporting entity
- Assessing management stewardship of the entity’s economic resources.
Types of Financial Statements
1. Consolidated financial statements
These are the financial statements prepared when the reporting entity comprises both the
parent and its subsidiaries.
*Parent – an entity that exercises control over the subsidiaries.

2. Unconsolidated financial statements

These are the financial statements prepared when the reporting entity is the parent alone.

3. Combined financial statements

These are the financial statements when the reporting entity comprises two or more
entities that are not linked by a parent and subsidiary relationship.
What is a reporting entity?
It is an entity that is required or chooses to prepare financial statements.
Accordingly, the following can be considered a reporting entity:
a. Individual corporation
b. The parent alone
c. The parent and its subsidiaries as a single entity
d. Two or more entities without parent and subsidiary relationship as a single reporting
entity
e. Reportable business segment of an entity
What is a reporting period?
It is a period when financial statements are prepared for general purpose financial
reporting.
 Note that FS may be prepared on an interim basis for example, three months, six
months or nine months.
Interim FS are not required. The may entity may decide whether they will prepare and
present an interim FS or not.
Underlying assumptions
1. Going-concern
2. Entity Concept
3. Time Period Concept
 4. Monetary unit

4. CONCEPTUAL FRAMEWORK – Elements of Financial Statements

FS portray the financial effects of transactions and other events by grouping them into broad
classes according to their economic characteristics.
These broad classes are termed as elements of financial statements.

ELEMENTS OF FINANCIAL STATEMENT

The elements of financial statements are the general groupings of line items contained within
the statements. These elements are as follows:

 Assets. A present economic resource controlled by the entity as a result of past

events. An economic resource is a right that has the potential to produce economic
benefits. Examples are accounts receivable, inventory, and fixed assets.

 Liabilities . A present obligation of the entity to transfer an economic resource

as a result of past events. An obligation is a duty or responsibility that the entity
has no practical ability to avoid. Examples are accounts payable, taxes payable,
and wages payable.

 Equity. In layman’s term, this is the amount invested in a business by its owners,
plus any remaining retained earnings. In accounting parlance, it is the residual
interest in the assets of the enterprise after deducting all liabilities.

 Income. This is an increase in assets or decrease in liabilities caused by the

provision of services or products to customers. It is a quantification of the gross
activity generated by a business. Examples are product sales and service sales.

The definition of income encompasses both revenue and gains.

 Expenses. This is the reduction in value of an asset as it is used to generate

revenue. Examples are interest expense, compensation expense, and utilities
expense.
 Statement of Financial Performance

Statement of Financial Position

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5. CONCEPTUAL FRAMEWORK – Recognition and Derecognition

Recognition is the process of capturing for inclusion in the FS an item that meets the definition of
assets, liabilities, equity, income, and expenses.
The amount at which an asset, a liability or equity is recognized in the statement of financial
position is reported at carrying amount.
Derecognition is defined as the removal of all or part of a recognized asset or liability from the
statement of financial position.

6. CONCEPTUAL FRAMEWORK – Measurement

Measurement is defined as quantifying in monetary terms the elements of financial statements.
The revised conceptual framework mentions two categories:
1. Historical Cost
2. Current Value
 Historical cost is the cost incurred in acquiring or creating the asset comprising the
consideration paid plus transaction cost. Note that historical cost of an asset or liability is
updated due to many reasons. Some of these are depreciation and payment of an obligation

Current value
It includes:
a. Fair Value
b. Value in use for asset
c. Fulfillment value for the liability
d. Current cost
Selecting a measurement basis
 In most cases, no single factor will determine which measurement basis should be
selected.
 The IASB did not mandate a single measurement basis because the different
measurement bases could produce useful information under different circumstances.

7. CONCEPTUAL FRAMEWORK – Presentation and disclosure

A reporting entity communicates information about its assets, liabilities, equity, income and
expenses by presenting and disclosing information in the financial statements.

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

8. CONCEPTUAL FRAMEWORK – Concept of Capital Maintenance

The financial performance of an entity is determined using two approaches:
1. Transaction Approach
2. Capital Maintenance Approach
Capital Maintenance
Financial Capital is the monetary amount of the net assets contributed by the shareholders and the
amount of the increase in net assets resulting from earnings retained by the entity.
Net Income under Financial Capital
 Net income occurs “when the nominal amount of the net assets at the end of the
year exceeds the nominal amount at the beginning of the period after excluding
distributions to and contributions by owners during the period.”

Physical Capital
It is the quantitative measure of the physical productive capacity to produce goods
and services. This concept requires that productive assets be measured at current
cost, rather than historical cost.
Physical Capital is equal to the net assets of the entity expressed in terms of
current cost.
Under this concept, the net income occurs “when the physical productive capital of
the entity at the end of the year exceeds the physical productive capital at the
beginning of the period, also after excluding distributions to and contributions from
owners during the period.”

Life Application:
Concepts Statements do not affect practice directly. They do not change existing generally accepted
accounting principles (GAAP). Certain aspects of existing GAAP conflict with the framework. For
example, museum collections meet the Concepts Statements definition of an asset, but existing
GAAP does not require those assets to be recognized in the financial statements. The framework
affects practice over time because of its influence in the development of new accounting standards.

Summary:
The IASB recognizes that financial statements may differ from country to country due to social,
economic, and legal circumstances. In relation to this, the IASB aims to narrow these differences by
seeking a harmonize regulations and accounting standards. That’s why the PFRSs and conceptual
framework came into the picture. Conceptual framework sets out the concepts that underlie the
preparation and preparation of financial statements. Again, it is noteworthy to mention that the
conceptual framework is not a PFRS. Hence, in case of conflict between the two, the PFRS will
always prevail.

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References:
Milan, Z.V. (2020). Conceptual Framework and Accounting Standards. 2020 Ed. Bandolin
Enterprise.
Valix, C.A (2020). Conceptual Framework. 2020 Ed. GIC Enterprises & Co., Inc.
https://www.fasb.org/cs/ContentServer?c=Page&cid=1176168367774&d=&pagename=FASB
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