INTRODUCTION TO CONCEPTUAL

FRAMEWORK FOR FINANCIAL

REPORTING (ACC407)
2018 CONCEPTUAL FRAMEWORK

• Discusses the qualitative characteristics of useful financial information and

identifies the types of information that are likely to be most useful to the user for
making decisions.
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
• Relevance
• Faithful Representation
 RELEVANCE

• Financial information which can influence the decision made by the users is said to be relevant
to the users.

• Financial information can make a difference in decision making if it has:

• Predictive value- if it can be used in making prediction about the eventual outcomes of
past or current events.
• Confirmatory value- it provides feedback about (confirm/changes) previous evaluations.
• To be relevant, the financial information must be material. If material information is omitted, it
could be reasonable be expected to influence the decision made by the users.
FAITHFUL REPRESENTATION

• To be useful, financial information must not only represent relevant information,

but it must also faithfully represent the information that it purports to represent.
• To be perfectly faithful representation, it would have three characteristics
• Complete- all information necessary for a user to understand the event. Thus, financial
information should disclose all relevant information for a given accounting period.
• Neutral- The information should not be bias so that users are free to use it to make
their own judgement and decision
• Free from error- no errors or omission in the description of the event so that the
financial information gives a true and fair view of the reporting entity.
ENHANCING QUALITATIVE CHARACTERISTIC

• Comparability
• Information 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.

• Verifiability
• Verifiability helps assure users that information faithfully represents the events it
purports to represent. It means that different knowledgeable and independent
observers could reach consensus that a particular description is a faithful
representation.
ENHANCING QUALITATIVE CHARACTERISTIC

• Timeliness
• Timeliness means having information available to decision-makers in time to be
capable of influencing their decision. To be useful to users, information must be
released on a timely basis. Older financial information is normally less useful.

• Understandability
• Financial statement prepared must be understood by user who have reasonable
knowledge of business and economic activities and who review and analyze the
information diligently. Therefore, the information must be clear and precise.
ACCOUNTING ASSUMPTIONS AND CONCEPTS

 Going concern

 Historical cost

 Economic entity

• Money measurement
GOING CONCERN

• The business is always assumed to be a going concern, that is to operate for an

indefinite period of time.
• The business is therefore not expected to be closed in a short period of time.
• For example – XYZ acquired a building with an expected useful life of 25 years. Based
on this assumption, every year some of the amount will be shown as expenses and
the balance is shown as an asset. Without this assumption, the cost of the building is
treated as an expenses when the building is purchased.
HISTORICAL COST

• All transactions of a business are recorded at the original cost at the time the
purchase was made.
• The cost is constant in the accounting records and the changes of time will not
influence the original cost.
• For example, XYZ acquired an equipment for RM 5,000 at 1 January 20X0. The
market value of the equipment at 31 December 20X1 was RM 2,500. Based on this
concept, the equipment is shown at 31 December 20X1 at historical cost of RM5,000
after deducting for accumulated depreciation. The market value of RM2,500 is ignored.
ECONOMIC ENTITY

• The business is regarded as an entity or a unit by itself.

• This entity is exists as an entity that is separate from its owner.
• The business can own assets, can have liabilities or enter into transactions.
• The financial statements of XYZ report only the economic activities of the
business and do not included economic activities of Ali, the owner.
• For example – XYZ acquired goods for RM5,000. The goods are the assets of the
business and not of the owner.
MONEY MEASUREMENT

• The accounting information only involved the transactions or facts that can be
measured in a monetary value.
• This is to get a standard measurement to make comparison between the financial
position of the businesses.
• For example – Purchase of goods of RM5,000, wages paid of RM2,000 and sales of
goods worth RM10,000 are expressed in monetary terms.
• However, honesty of staff and a good working environment are not recorded by the
business because these factors cannot be measured in monetary terms even though it
affect the performance of the business.
THE END