What Is the Conceptual Framework?

The Conceptual Framework (or “Concepts Statements”) is a body of interrelated objectives

and fundamentals. The objectives identify the goals and purposes of financial reporting and
the fundamentals are the underlying concepts that help achieve those objectives. Those
concepts provide guidance in selecting transactions, events and circumstances to be
accounted for, how they should be recognized and measured, and how they should be
summarized and reported.
communicating the information that is most important to users of a reporting organization’s
financial statements.

Primary qualitative characteristics

According to the Conceptual Framework, useful information has the qualitative
characteristics of being relevant, and faithfully represents the underlying event. The
words and numbers on the page (or the screen) communicates the underlying economic
reality.
What is an example of faithful representation?

For example, a business could report that it had a $500,000 loan as of the balance sheet date, but
this would not be considered complete unless additional information about the loan were provided,
such as its maturity date.

Faithful representation means a depiction which is complete, neutral and free from

error.  Faithful representation is a fundamental attribute required.
 Completeness means that all the information that a user needs to understand the
economic phenomena is included;
 Neutrality means that the representation is unbiased, it’s neither overly optimistic
nor overly pessimistic.
 Freedom from error means that there are no errors in the depiction which would
make a difference to the economic decision – the information does not have to be
completely accurate but it has to be good enough for decision-making purposes..

WHAT IS MATERIALITY?

Materiality is an accounting principle which states that all items that are
reasonably likely to impact investors’ decision-making must be recorded or
reported in detail in a business’s financial statements using GAAP standards.

Essentially, materiality is related to the significance of information within a

company’s financial statements. If a transaction or business decision is
significant enough to warrant reporting to investors or other users of the financial
statements, that information is “material” to the business and cannot be omitted

EXAMPLES OF MATERIALITY

Materiality looks slightly different for each organization, but there are certain
scenarios that can be applied to all businesses.

1Losses Compared to Net Income

If a company were to incur a significant loss due to unforeseen circumstances,

whether or not this loss is reported depends on the size of the loss compared to
the company’s net income.

Imagine that a manufacturing company’s warehouse floods and $20,000 in

merchandise is destroyed. If the company’s net income is $50 million a year, then
the $20,000 loss is immaterial and can be left off its income statement. On the
other hand, if the company’s net income is only $40,000, that would be a 50
percent loss. In this case, the loss is material, so it’s crucial that the company
makes the information known to its investors and other financial statement users.

What is Fair Value?

Fair value refers to the actual value of an asset – a product, stock, or security – that
is agreed upon by both the seller and the buyer. Fair value is applicable to a
product that is sold or traded in the market where it belongs or under normal
conditions – and not to one that is being liquidated. It is determined in order to
come up with an amount or value that is fair to the buyer without putting the seller
on the losing end.

Fair Value vs. Market Value

Market value is also different from fair value in the following points:

 Market value fluctuates more than fair value.

  It may be based on the most recent pricing or quotation of an asset. For example, if
during the last three months, the value of a share in Company A was $30 and during
the most recent evaluation, it went down to $20, then its market value is $20.

Full disclosure

definition is when a company or individual is required to reveal the complete truth regarding a
matter necessary for another party to know before entering into a sale or contract. Full disclosure
can apply to many different matters in the world of business.

Example of the full disclosure principle

The pedestrian is likely to win the lawsuit in the following year. Under
the full disclosure principle, Company X should disclose the
anticipated losses from the lawsuit in the footnotes of their financial
statement, even though the loss has not been confirmed or finalised
yet.