CFAS – Notes – Chapter 2
entrusted their money
(Valix-Peralta, 2022 Edition)
CONCEPTUAL FRAMEWORK
Objective of financial reporting
CONCEPTUAL FRAMEWORK
⮚ Conceptual Framework for Financial
Reporting – complete, comprehensive
and single document promulgated by the
IASB.
⮚ Conceptual Framework
- summary of the terms and concepts
that underlie the preparation and
presentation of financial statements
for external users.
- describes the concepts for general
purpose financial reporting
- an attempt to provide an overall
theoretical foundation for
accounting.
- intended to guide standard setters,
preparers and users of financial
information in the preparation and
presentation of statements
- underlying theory for the
development of accounting standards
and revision of previously issued
accounting standards
- will be used in future standard
setting decision but no changes are
made to the current IFRS.
The Conceptual Framework provides
foundation for standards that:
a. Contribute to transparency
enhancing international comparability
and quality of financial information.
b. Strengthen accountability by reducing
information gap between the providers of
capital and the people to whom they have
c. Contribute to economic efficiency by
helping investors identify opportunities
and risks across the world.
Purposes of Revised Conceptual Framework
a. To assist the IASB to develop IFRS
Standards based on consistent concepts.
b. 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.
c. To assist preparers of financial statements
to develop accounting policy when a
Standard allows a choice of an accounting
policy
d. To assist all parties to understand and
interpret the IFRS Standards
Authoritative status of Conceptual
Framework
⮚ Standard or interpretation overrides the
Conceptual Framework.
⮚ 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 policy that results in
information that is relevant and
the reliable.
⮚ Conceptual Framework is not an IFRS.
⮚ Nothing in the Conceptual Framework
by
overrides any specific IFRS.
⮚ In case of conflict, IFRS shall prevail over
the Conceptual Framework.
Users of financial information
a. Primary users – existing and potential
investors, lenders and other creditors
b. Other users – employees, customers,
governments and their agencies, and the
public
Primary users
⮚ Parties whom general purpose financial
reports are primarily directed.
⮚ They cannot require reporting entities to
provide information directly to them and
therefore must rely on general purpose
financial reports for how much of
financial information is needed.
1. Existing and potential investors
⮚ Concerned with the risk inherent in
and return provided by their
investments
2. Lenders and other creditors
⮚ Are interested in information which
enables them to determine whether
their loans, interest thereon and other
amounts owing to them will be paid
when due
Other Users
⮚ Users of financial information other
than the existing and potential
investors, lenders and other creditors
⮚ Parties that may find the general
purpose financial reports useful but
the reports are not directed to them
primarily
1. Employees
⮚ Interested in information about the
stability and profitability of the entity.
⮚ Interested in information which enables
them to assess the ability of the entity to
provide remuneration, retirement
benefits and employment opportunities
2. Customers
⮚ Have an interest in information about the
continuance of an entity especially when
they have a long-term involvement with
or are dependent on the entity
3. Governments and their agencies
⮚ Interested in the allocation of resources
and therefore the activities of the entity.
⮚ Require information to regulate the
activities of the entity, determine taxation
policies and as a basis for national income
and similar statistics
4. Public
⮚ Entities affect members of the public in a
variety of ways.
⮚ Financial statements may assist the public
by providing information about the trend
and the range of its activities
Scope of Revised Conceptual Framework
1. Objective 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 maintenance
OBJECTIVE 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 “why”, purpose or goal of accounting
⮚ Financial reporting is the provision of
financial information about an entity
to external users that is useful to them
in making economic decisions and for
assessing the effectiveness of the
entity’s management.
⮚ Annual financial statements – principal
way of providing financial information to
external users
⮚ Financial reporting also encompasses
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
Target users
⮚ Financial reporting is directed primarily
to the primary user group.
⮚ Primary users have the most critical and
immediate need for information in
financial reports.
⮚ Primary users provide resources to the
entity.
⮚ Information that meets the needs of
the specified primary users is likely to
meet the needs of other users
⮚ Management need not rely on general
purpose financial reports because it is
able to obtain or access additional
financial information internally.
Specific objectives of financial reporting
⮚ Overall objective: provide information
useful for decision making.
Specific objectives of financial reporting:
a. To provide information useful in making
decisions about providing resources to the
entity.
b. To provide information useful in assessing
the cash flow prospects of the entity.
c. To provide information about entity
resources, claims and changes in
resources and claims.
Economic decisions
⮚ Existing and potential investors need
general purpose financial reports in order
to enable them in making decisions
whether to buy, sell or hold equity
investments.
⮚ Existing and potential lenders and
other creditors need general purpose
financial reports in order to enable them
in making decisions whether to provide
or settle loans and other forms of credit.
Assessing cash flow prospects
⮚ Decisions by existing and potential
investors about buying, selling or holding
equity instruments depend on the
 returns that they expect from an
investment for example, dividends.
⮚ Decisions by existing and potential
lenders and other creditors about
Changes in economic resources and claims
providing or settling loans and other
forms of credit depend on the principal
and interest payments or other returns
that they expect.
⮚ Financial reporting – should provide
information useful in assessing the
amount, timing and uncertainty of
prospects for future net cash inflows to
the entity.
Economic resources and claims
⮚ General purpose financial reports provide
information about the financial position
of a reporting entity.
⮚ Financial position – information about
the entity’s economic resources and the
claims against the reporting entity.
⮚ Financial position comprises the assets,
liabilities and equity of an entity at a
Usefulness of financial performance
particular moment in time.
⮚ Information about the nature and
amounts of an entity’s economic
resources and claims can help users
identify the entity’s financial strength and
weakness.
⮚ Information about financial position can
help users to assess the entity’s liquidity,
solvency and the need for additional
financing.
⮚ Liquidity is the availability of cash in
the near future to cover currently
maturing obligations.
⮚ Solvency is the availability of cash over
a long term to meet financial
commitments when they fall due.
⮚ Information about priorities and payment
requirements of existing claims can help
users to predict how future cash flows
will be distributed among those with a
claim against the reporting entity.
⮚ General purpose financial reports provide
information about the effects of
transactions and other events that change
the economic resources and claims.
⮚ Result from financial performance and
from other events or transactions, such as
issuing debt or equity instruments.
⮚ The financial performance of an entity
comprises revenue, expenses and net
income or loss for a period of time.
⮚ Financial performance is the level of
income earned by the entity through the
efficient and effective use of its resources.
⮚ Financial performance is the results of
operations and is portrayed in the
income statement and statement of
comprehensive income.
⮚ Information about financial performance
helps users to understand the return that
the entity has produced on the economic
resources.
⮚ Information about the return provides an
indication of how well management has
discharged its responsibilities to make
efficient and effective use of the entity’s
economic resources.
⮚ Information about past financial
performance is usually helpful in
predicting the future returns on the
entity’s economic resources.
⮚ Information about financial performance
during a period is useful in assessing the
entity’s ability to generate future cash
inflows from operations.
 Accrual accounting
⮚ An entity’s financial performance must be
measured using the accrual basis of
accounting.
⮚ Depicts the effects of transactions and
Management stewardship
other events and circumstances on an
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.
⮚ Effects of transactions and other events
are recognized when they occur and not
as cash is received or paid.
⮚ Income is recognized when earned
regardless of when received and
expense is recognized when incurred
regardless of when paid.
⮚ Provides a better basis for assessing past
and future performance than information
solely about cash receipts and payments
during a period.
d. To a large extent, general purpose financial
reports are based on estimate and judgment
rather than exact depiction.
⮚ Information about how efficiently and
effectively management has discharged
its responsibility to use the entity’s
economic resources helps users to assess
management stewardship of those
resources.
⮚ Information is useful for predicting how
management will use the entity’s
economic resources in future periods.
⮚ Information can be useful for assessing
the entity’s prospects for future net cash
flows.
For example, management can decide not to
dispose or sell investments when prices are
declining in order to avoid realized losses.

Limitations of financial reporting

a. General purpose financial reports do not and
cannot provide all of the information that
primary users need.
Primary users need to consider pertinent
information from other resources, for example,
general economic conditions, political events and
industry outlook.
b. General purpose financial reports 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. General purpose financial reports are
intended to provide common information to
users and cannot accommodate every request
for information.