INTRODUCTION TO CONCEPTUAL

FRAMEWORK FOR FINANCIAL

REPORTING
BY A K M A H I D AY U A B D U L WA H I D
 LEARNING OUTCOMES
AT T H E E N D O F T H I S TO P I C , S T U D E N T S
SHOULD BE ABLE TO EXPLAIN:
1. Fundamental qualitative characteristics

2. Enhancing qualitative characteristics

3. Accounting assumptions and concepts

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CONCEPTUAL FRAMEWORK
S E T O U T C O N C E P T T H A T U N D E R L I E T H E P R E P A R A T I O N A N D
P R E S E N T A T I O N O F G E N E R A L P U R P O S E O F F I N A N C I A L S T A T E M E N T S

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING DESCRIBES THE OBJECTIVE OF AND THE CONCEPTS FOR,
GENERAL PURPOSE FINANCIAL REPORTING.PURPOSE OF CONCEPTUAL FRAMEWORKIS TO:

• Assist the MASB to develop MFRS Standards (Standards) that are based on consistent
concepts.

• Assist preparers to develop consistent accounting policies when no Standard applies to

a particular transaction or other event, or when a Standard allows a choice of accounting
policy.

• Assist all parties to understand and interpret the Standards.

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FUNDAMENTAL QUALITATIVE CHARACTERISTICS

Predictive Confirmatory
value value
financial information
RELEVANCE is capable of
Materiality
making a difference
in the decisions
made by users

Completeness Neutrality
FAITHFUL faithfully represent the
REPRESENTATION substance of the
Free From
phenomena that it
purports to represent. error
FUNDAMENTAL :Qualitative Characteristics
of Accounting Information
• It can be used as an input to processes employed by
Predictive users to predict future outcomes. Financial information
value with predictive value is employed by users in making
their own predictions.

RELEVANCE Confirmatory
ASPIRATION • It provides feedback about (confirms or changes)
value previous evaluations.

• Information is material if omitting it or misstating it

Materiality could influence decisions that the primary users of
general purpose financial reports .
FUNDAMENTAL :Qualitative Characteristics
of Accounting Information
• It must include all information necessary for a
Completeness user to understand it.

FAITHFUL •
•
Fairness and freedom from bias.
Neutrality is supported by the exercise of prudence.
REPRESENTATION Neutrality • Prudence is the exercise of caution when making
judgements under conditions of uncertainty.
• Does not allow misstatements

Free From • There are no errors or omissions in the description

of the phenomenon
error
• The process used to produce the reported
information has been selected and applied with no
errors in the process.
ENHANCING QUALITATIVE CHARACTERISTICS
COMPARABILITY

VERIFIABILITY

TIMELINESS

UNDERSTANDABILITY
 COMPARABILITY
COMPARABILITY

• Comparable information enables comparisons within the entity and across entities.

• Information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for
another period or another date.
CONSISTENCY

• Closely related to comparability is the notion that consistency of accounting practices over time
permits valid comparisons between different periods.
• Consistencyrefers to the use of the same methods for the same items, either from period to period within
a reporting entity or in a single period across entities. Comparability is the goal; consistency helps to
achieve that goal.

• Comparability is not uniformity

• Comparability is achieved when like things are accounted for in the same way.
• Comparability is not achieve when accounting rules require unlike things be accounted for in the
same way
 VERIFIABILITY

• When information can be verified, it gives assurance that the information faithfully represents
the economic phenomena being represented.

• For information to be verifiable, it means that different knowledgeable and independent parties
could reach consensus (although not necessarily complete agreement) that a particular
depiction is a faithful representation.

• Verification can be direct or indirect.

• Direct verification means verifying an amount or other representation through direct
observation, for example, by counting cash.
• Indirect verification means checking the inputs to a model, formula or other technique and
recalculating the outputs using the same methodology.
• An example is verifying the carrying amount of inventory by checking the inputs
(quantities and costs) and recalculating the ending inventory using the same cost
flow assumption (for example, using the first- in, first-out method).
 TIMELINESS

• Timeliness means having information available to decision-makers in

time to be capable of influencing their decisions.

• Generally, the older the information is the less useful it is. The sooner
information is available, the more useful it is.

• However, some information may continue to be timely long after the

end of a reporting period because, for example, some users may need
information to identify and assess trends.
 UNDERSTANDABILITY

• Classifying, characterising and presenting information clearly and concisely makes it

understandable.

• Some phenomena are inherently complex and cannot be made easy to understand.
Excluding information about those phenomena from financial reports might make the
information in those financial reports easier to understand. However, those reports
would be incomplete and therefore possibly misleading.

• Financial reports are intended for use by users with a reasonable knowledge and the
Conceptual Framework accepts that even knowledgeable users may need to seek
advice to aid their understanding of more complex issues.
 Accounting
assumptions and
concepts

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Assumptions and other concepts
.

GC Going Concern - Company to last long enough to fulfill objectives

01 and commitments.

HC The Historical Cost - Indicates that assets and liabilities

02 be recorded at their equivalent cost.

EE Economic Entity –Company keeps its activity separate

03
from its owners and other businesses

MM
04 Money measurement- Money is the common denominator.

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01
GOING CONCERN
Assumes a business will continue to trade for foreseeable future
Hence, it is assumed that the entity has neither the intention nor the need to enter
liquidation or to cease trading.
Important assumption of accounting as it provide a basis of showing the value of assets
and liabilities in the statement of financial position.
◦ Allows fixed assets to be written off proportionally over their useful life
◦ Provides a more realistic value of business assets
If the continuity of an entity is in doubt, a liquidation approach is taken, the assets and
liabilities are valued as if the entity were to be liquidated in the near future
The financial statements may have to be prepared on a different basis. If so, the financial
statements describe the basis used.
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HISTORICAL COST
Historical cost is the original cost of an asset, as recorded in an entity's accounting
records.
This concept is clarified by the cost principle, which states that you should only record an
asset, liability, or equity investment at its original acquisition cost.
A historical cost can be easily proven by accessing the source purchase or trade
documents.
However, historical cost has the disadvantage of not necessarily representing the actual
fair value of an asset, which is likely to diverge from its purchase cost over time. For
example, the historical cost of an office building was RM10 million when it was purchased
20 years ago, but its current market value is higher that the figure.
If it is not a going concern, the historical cost basis cannot be used.
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ECONOMIC ENTITY CONCEPT

An economic entity is a unit separate from all other entities —

whether individual or a business
Recorded activities of a business entity should be kept separate
from the recorded activities of its owner(s)
Regardless whether a business is a sole proprietorship,
partnership or as a company.
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MONEY MEASUREMENT CONCEPT

◦ A business should only record an accounting transaction if it can be

expressed in terms of money.
◦ The use of monetary terms, assuming it is stable
◦ Money is the common denominator
◦ Appropriate basis for accounting measurement and analysis
◦ Most effective means of epressing to interested parties changes in capital and
exchanges of goods and service
Thank You

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