The conceptual framework

1. Conceptual Framework

A conceptual framework is a statement of generally accepted

theoretical principles which form the frame of reference for
financial reporting.

The conceptual framework will form the theoretical basis for

determining which events should be accounted for, how they
should be measured and how they should be communicated
to the user
 1.1 Advantages and disadvantages

1.1.1 Advantages
• A consistent conceptual base should lead to standardized
consistent accounting practices.
• The development of standards is less subject to political pressure.
• Avoids a haphazard and fire-fighting approach to setting
standards.
• Some standards may concentrate on profit or loss whereas some
may concentrate on the valuation of net assets (statement of
financial position).
 1.1 Advantages and disadvantages

1.1.2 Disadvantages
• Different users have different needs. The needs of all users cannot
be considered.
• Different purposes or uses may require different conceptual bases.
• It is not clear that a conceptual framework makes the task of
preparing and then implementing standards any easier than without
a framework.
 2. The IASB's Conceptual Framework

Ch1 The objective of general purpose of financial reporting

Ch2 Qualitative characteristics of useful financial information
Ch3 Financial statements and the reporting entity
Ch4 The element of financial statements
Ch5 Recognition and derecognition
Ch6 Measurement
Ch7 Presentation and disclosure
Ch8 Concepts of capital and capital maintenance (考纲已经删掉)
 2. The IASB's Conceptual Framework
2.1 The objective of general purpose financial reporting

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 decisions about providing resources to the entity.
2. The IASB's Conceptual Framework

2.2 Qualitative characteristics

2.2.1 Fundamental qualitative characteristics: (useful or not)

• Relevance
Relevant information is capable of making a difference in the
decisions made by users. It is capable of making a difference in
decisions if it has predictive value, confirmatory value or both. The
relevance of information is affected by its nature and its materiality.

 Materiality -- Information is material if omitting it or misstating

it could influence decisions that users make on the basis of
financial information about a specific reporting entity.
 2. The IASB's Conceptual Framework
2.2 Qualitative characteristics
2.2.1 Fundamental qualitative characteristics: (useful or not)

• Faithful representation
 Completeness -- A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary descriptions and
explanations.

 Neutrality -- A neutral depiction is without bias in the selection or presentation of

financial information. Neutrality is supported by the exercise of prudence.

 Free from error -- Free from error means there are no errors or omissions in the
description of the phenomenon and no errors made in the process. It does not mean that
no inaccuracies can arise, particularly where estimates have to be made.
 2. The IASB's Conceptual Framework
2.2 Qualitative characteristics
2.2.1 Fundamental qualitative characteristics: (useful or not)

• Faithful representation

* Substance over form

This is not a separate qualitative characteristic under the Conceptual Framework. It is
implied in faithful representation. In many circumstances, the substance of an economic
phenomenon and its legal form are the same. If they are not the same, providing information
only about the legal form would not faithfully represent the economic phenomenon.
2. The IASB's Conceptual Framework
2.2 Qualitative characteristics
2.2.2 Enhancing qualitative characteristics:

• Comparability (常考 - IAS8; disclosure)

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. Comparability is not uniformity.

 Consistency -- although related to comparability, is not the same.

Consistency refers 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.
2. The IASB's Conceptual Framework
2.2 Qualitative characteristics
2.2.2 Enhancing qualitative characteristics:

• Verifiability
Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.

• 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.
2. The IASB's Conceptual Framework
2.2 Qualitative characteristics
2.2.2 Enhancing qualitative characteristics:

• Understandability
Classifying, characterizing and presenting information clearly and
concisely make it understandable. Understandability does not mean
excluding information about inherently complex phenomena.
 2. The IASB's Conceptual Framework
2.3 Accounting concepts and assumptions
(1) Underlying assumption – Going concern

The entity is normally viewed as a going concern, that is, as continuing

in operation for the foreseeable future. It is assumed that the entity has
neither the intention nor the necessity of liquidation or of curtailing
materially the scale of its operations

Break up basis
 2. The IASB's Conceptual Framework
2.3 Accounting concepts and assumptions
(2) Accruals basis

The effects of transactions and other events are recognised when

they occur (and not as cash or its equivalent is received or paid)
and they are recorded in the accounting records and reported in
the financial statements

Cash basis
 2. The IASB's Conceptual Framework
2.4 The elements of financial statements
Asset
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.

Liability
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.

Equity
The residual interest in the assets of the entity after deducting all its
liabilities.
 2. The IASB's Conceptual Framework
2.4 The elements of financial statements

Income
Increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those
relating to contributions from equity participants.

Expenses
Decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
 2. The IASB's Conceptual Framework
2.4 The elements of financial statements

Revenue
(IFRS 15重难点)

Other income
Income (interest income/dividend income/
gain or loss on disposal)

Other comprehensive income

(gain on revaluation)
 2. The IASB's Conceptual Framework

 Conceptual framework - Ch3 Financial statements and the reporting entity

• Statement of Financial Position as at 31 December 2021
• Statement of Profit or Loss for the period ended at 31 December 2021
• 资产负债表和利润表的勾稽关系
2. The IASB's Conceptual Framework
2.5 Recognition of the elements of financial statements

• It is probable that any future economic benefit associated

with the item will flow to or from the entity; and

• The item has a cost or value that can be measured with

reliability.

• relevant information about the asset or liability and about

any resulting income, expenses or changes in equity; and

• a faithful representation of the asset or liability and of any

resulting income, expenses or changes in equity.
 2. The IASB's Conceptual Framework

2.6 Measurement of the elements of financial statements

 2.6.1 Historical cost bases

The historical cost of an asset when it is acquired or created is the

value of the costs incurred in acquiring or creating the asset,
comprising the consideration paid to acquire or create the asset plus
transaction costs. The historical cost of a liability when it is
incurred or taken on is the value of the consideration received to
incur or take on the liability minus transaction costs.
 2. The IASB's Conceptual Framework

2.6 Measurement of the elements of financial statements

 2.6.2 Current value bases
Provides information updated to reflect conditions at the measurement date.

Current value measurement bases include:

(1) Current cost (replacement cost)
- paid to acquire an equivalent asset
- received to take on an equivalent liability

(2) Value in use (for assets) & Fulfilment value (for liabilities)
Value in use is the present value of the cash flows, or other economic benefits that
an entity expects to derive from the use of an asset and from its ultimate disposal.
Fulfilment value is the present value of the cash, or other economic resources, that
an entity expects to be obliged to transfer as it fulfils a liability.
 2. The IASB's Conceptual Framework

2.6 Measurement of the elements of financial statements

 Current value - provides information updated to reflect conditions
at the measurement date.

Current value measurement bases include:

(3) Fair value
The price that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at the
measurement date.
 2014/12 Q3
Although most items in financial statements are shown at their historical cost, increasingly the IASB is
requiring or allowing current cost to be used in many areas of financial reporting.
Drexler acquired an item of plant on 1 October 2012 at a cost of $500,000. It has an expected life of five
years (straight-line depreciation) and an estimated residual value of 10% of its historical cost or current
cost as appropriate.
As at 30 September 2014, the manufacturer of the plant still makes the same item of plant and its current
price is $600,000.
What is the correct carrying amount to be shown in the statement of financial position of Drexler as
at 30 September 2014 under historical cost and current cost?
historical cost current cost
$ $
A. 320,000 600,000
B. 320,000 384,000
C. 300,000 600,000
D. 300,000 384,000
 2014/12 Q3
Although most items in financial statements are shown at their historical cost, increasingly the IASB is
requiring or allowing current cost to be used in many areas of financial reporting.
Drexler acquired an item of plant on 1 October 2012 at a cost of $500,000. It has an expected life of five
years (straight-line depreciation) and an estimated residual value of 10% of its historical cost or current
cost as appropriate.
As at 30 September 2014, the manufacturer of the plant still makes the same item of plant and its current
price is $600,000.
What is the correct carrying amount to be shown in the statement of financial position of Drexler as
at 30 September 2014 under historical cost and current cost?

historical cost current cost

$ $ 历史成本法：两年的累计折旧：
500000*90%/5yrs*2yrs=180000
A. 320,000 600,000 NBV=500000-180000=320000
B. 320,000 384,000 重置成本：两年的累计折旧：
C. 300,000 600,000 600000*90%/5yrs*2yrs=216000
D. 300,000 384,000 NBV=600000-216000=384000
 2. The IASB's Conceptual Framework
2.6 Measurement of the elements of financial statements

 Advantage and disadvantage of historical cost accounting

Advantages
 Historical cost accounting is objective, as it is more difficult to
manipulate cost-based figures.
 As a result, the figures in the financial statements are considered
more reliable.
 The statement of financial position and statement of cash flows
figures are consistent with each other.
 There is less possibility for manipulation by using 'creative
accounting' in asset valuation.
 Cost is a measure which is readily understood.
 2. The IASB's Conceptual Framework
2.6 Measurement of the elements of financial statements
 Advantage and disadvantage of historical cost accounting

Disadvantages
 Overstatement of profit – it shows current revenues less out-of-date costs
 Out-of-date asset values – based on their historical values.
 Return on assets/capital employed is distorted by both overstatement of profit and out-of-date asset
values.
 Holding gains/losses (i.e. the fact that something is worth more or costs more over time simply due
to price rises) are not measured separately from operating results.
 HCA does not measure any gain/loss on monetary items arising from the impact of inflation (i.e.
the fact that savers lose because the purchasing power of their savings is eroded, while borrowers
gain because they still owe the same nominal amount while earnings have risen due to inflation).
 HCA gives a misleading trend of results since comparative figures are not restated for the effects
of inflation.
 2. The IASB's Conceptual Framework
2.6 Measurement of the elements of financial statements

 Advantage and disadvantage of current cost accounting

Advantages
 Assets are valued after management has considered the expected benefits from their
future use. Value in use is therefore a useful guide for management in deciding whether to
hold or sell assets.
 It is relevant to the needs of information users in:
(1) Assessing the stability of the business entity
(2) Assessing the vulnerability of the business (e.g. to a takeover), or the liquidity
of the business
(3) Evaluating the performance of management in maintaining and increasing the
business substance
(4) Judging future prospects
 2. The IASB's Conceptual Framework
2.6 Measurement of the elements of financial statements
 Advantage and disadvantage of current cost accounting

Disadvantages
 The discount factor used to calculate the present value of future cash flows requires
subjective judgements by management. Also, the expected benefits from cash flows
from the asset will be upon management's best estimates and judgements.
 There may be problems in deciding how to provide an estimate of current costs for non-
current assets which can only be purchased new, such as a bespoke or specialist piece of
machinery.
 As the Conceptual Framework allows different groups of assets and liabilities to be
valued on different bases (which are the most useful to users of the financial statements),
this can mean that some assets will be valued at current cost, but others will be valued at
value in use or fair value
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