CHAPTER 2 Introduction

Conceptual Framework. Part 1: Objectives of Accounting and Financial We have briefly introduced the IASB conceptual framework in the previous
Reporting of Business Entities chapter.

CHAPTER OPENER We have said that accounting is the

Fake news has become a grave concern
in this age of social media and the
Internet, where messages and posts
travel at the speed of light.
The rate by which information reaches
its intended receivers is important, but
if the factual quality is lacking, it
causes more harm than good. Serious
results of false news include health and
lives getting ruined, money lost to
investment scams, and unqualified
people getting elected to leadership positions based on media-cultivated but untrue
images, among others. What is true and what is false?
language of business. As a
language, it has elements like
Filipino, English, Korean, etc. The
grammar of rules of usage acts as
the conceptual framework and the
standards. The lexicon or the
vocabulary is the accounting and
financial reporting terminology as
defined by the conceptual
framework and standards. The
syntax or the arrangement of elements to convey meaning is the financial
statements. Finally, the notes to the financial statements explain and contextualize
the financial statements.
Terminologies in Conceptual Framework

Truthfulness and falsehood are functions of language and other symbols. In
communication, we deal with two realms: the non-symbolic and the symbolic (see
the graph above). The symbolic realm is the source by which statements and
assertions are formed to express anything about objective reality. When the
symbols that are used to express claims are in agreement with the realities being
asserted, there is truthfulness. Otherwise, falsehood occurs, unless fiction is clearly
the intent of the message, as in stories of fantasy and adventure.
Throughout the conceptual framework, the terms financial reporting, financial
reports, and financial statements refer to general purpose financial reporting.
general purpose financial reports, and general purpose financial statements,
respectively, unless specifically indicated otherwise. Also, the term entity refers to
the reporting entity unless specifically indicated otherwise. The term management
refers to the management and the governing board of an entity unless specifically
indicated otherwise in the framework.

The business world is not an exception in the need to have truthful statements.
Financial accounting and reporting is not an isolated field of study that is reserved
for professionals and business people. The underlying principles and concepts of
the discipline are consistent with God- ordained, deeply held values since the dawn
of history: transparency, accountability, growth, fairness, and understanding
between initiators and receivers of the message. We need factual information more
than ever to navigate our businesses and personal lives, not only to survive but also
to flourish in a world full of opportunities but fraught with challenges.
Stephen Covey in his influential book, The Seven Habits of Highly Effective
Persons, listed "Begin with the end in mind" as the second habit. Financial
statements a look at the objectives of financial reporting and the fundamental and
enhancing are the "end product," the output of the accounting process. In this
chapter, we take qualitative characteristics that make the financial statements of
business entities useful.
Throughout the conceptual framework, the terms primary users and users refer to
existing and potential investors, lenders, and other creditors who use general
purpose financial reports. Many of these individuals or entities cannot require
reporting entities to provide information directly to them and must rely on general
purpose financial reports for much of the financial information they need.
Consequently, they are the primary users to whom general purpose financial
reports are directed. All users of financial information-be they be primary or
otherwise- can be classified as either internal or external users. These are
stakeholders who, like primary users, are interested in the financial performance,
position, and stewardship of management of business resources and the political,
legal, and social environment where the entity operates.

Chapter Learning Objectives

LESSON 2.1:
At the end of the chapter, the learner shall:
General Purpose Financial Reporting: Objectives, Usefulness, and
1. articulate the objective of financial reporting, PFRS Standards, and the Limitations
conceptual framework; 2. identify the users of financial information and reports
and differentiate ther respective needs for information; Categories of Users of Financial Information

3. describe the decision process undertaken by primary users of financial External users - include the
information in relation to their need for general purpose financial statements, primary users as well as the
following users and their
4. enumerate and explain the limitations of general purpose financial reports; particular usage of financial
information:
5. explain how the components of financial reports are designed to assist users in
their decision-making process; Customers - Present and
prospective clients are interested
6. define accrual accounting: in the entity's ability to provide
goods and services in the long
7. articulate the fundamental and enhancing qualitative characteristics of useful term.
financial information; and
Tax Authorities - Financial reports are the bases of income and other taxes levied
8. define which aspects of accounting are similar to the elements of language- by the government.
grammar, lexicon, syntax, and context.
Government- Aside from tax matters, the government has an interest in the
financial information of business particularly in the laltters obligation to investors.
(embodied in the SEC requirements).
Auditors-External, third-party auditors are tasked to examine financial reports to
determine if these are prepared in accordance with accounting standards.
Public- Public interest groups like consumer and environmental protection and
corporate responsibility advocate groups are interested in whether entities fulfill
their duties as good corporate citizens beyond attaining their profit goals.
Internal users- are stakeholders within the reporting entity whose proximity to the
financial reporting process gives them the opportunity to avail of information
provided by general purpose and other financial reports. However, the principles
and standards (e.g., accrual, fundamental, and enhancing qualitative
characteristics, recognition, and measurement) governing general purpose reports
also underlie special purpose ones.
Owners and Management - The governing body of the entity is responsible for
the stewardship of resources-financial and others. It needs timely and reliable
information as a car driver needs readings to aptly guide him/her to the use of his/
her vehicle and navigate the road to his/her desired destination.
Employees- The most important resources of the entity need financial information
for matters concerning their service to the entity-short-term and long- term
prospects of employment and benefits.
Objective of General Purpose Financial Reporting
Businesses are organized when money and property are invested therein. The
owners are the main providers of financing. Creditors provide loans and other
lenders extend credit that allow entities to postpone immediate payment of claims.
Prospective financers-whether as equity investors (i.e., owners) or lenders of
money and property-are constantly on the lookout for investing opportunities.
These financing groups have criteria and requirements on returns to consider in
providing, maintaining, or increasing the amounts of money and property they put
into businesses. They also need to decide the level of influence to exercise on
running the business. If those requirements are not met to the satisfaction of
financers, they may decrease or remove their investments from or intervene in the
operations of the business in which they placed their funds for other opportunities
that will provide more satisfactory returns.
THE USE OF GENERAL PURPOSE FINANCIAL REPORTS
The primary users-existing and potential investors, lenders, and other creditors-of
financial information then are the main parties to which the information is geared.
They are the main readers, audience, and customers of the message and content of
financial information. Their needs are the main consideration on what and how
economic events are to be recognized and measured and how these are presented
and disclosed.
As stated earlier, the objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to primary users in
making decisions relating to providing resources to the entity. This is the mission
of general purpose financial reporting. These involve decisions about investments
and divestment in equity or debt holdings, granting loans and credit, or voting or
influencing management's actions pertinent to the use of the entity's assets.
These decisions depend on the returns that primary users expect, for example,
dividends, principal and interest payments, or market price increases. These
expectations about returns depend on their assessment of the amount, timing, and
their assessment of management's stewardship of the entity's economic and
uncertainty of the (prospects for) future net cash inflows to the entity resources.
Users need information pertinent to the business to help them make those
assessments. Such information is embodied in the financial reports of the entity
conducting the business under scrutiny. Such an entity is called the reporting
entity.
To make the assessments described, users need information about: the economic
resources of the entity, claims against the entity, and changes in
a. those resources and claims and
b. how efficiently and effectively the entity's management and governing board
have discharged their responsibilities to use the entity's economic resources.
Limitations of Financial Reporting
General purpose financial reports and financial statements are useful to a variety of
users, especially to the primary users. However, such reports are subject to
limitations.
Scope Limitation - General purpose financial reports do not and cannot provide all
information that the primary users need. Those users need to consider pertinent
information from other sources. Some examples are general economic conditions
and expectations, political events and political climate, and industry and company
outlooks.
Valuation of the Entity - General purpose financial reports are not designed to
show the value of a reporting entity, but they provide information to help primary
users estimate the value of the reporting entity.
Estimates and Judgments - To a large extent, financial reports are based on
estimates, judgments, and models rather than exact depictions. The conceptual
framework establishes the concepts that underlie those estimates, judgments, and
models. The concepts are the goal toward which the board and preparers of
financial reports strive.
Conflicting Information Needs of Users - Individual primary users have different
and possibly conflicting information needs and desires. The IASB Board, in
developing the standards, will seek to provide information that will meet the needs
of the maximum number of primary users. However, focusing on common
information needs does not prevent the reporting entity from including additional
information that is most useful to a particular subset of primary users.
Management - The management of a reporting entity is also interested in financial
information about the entity. However, the management need not rely on general
purpose financial reports because it is able to obtain internally the financial
information it needs.
Regulators and Members of the Public - Other parties, such as regulators and
members of the public other than investors, lenders, and other creditors, may also
find general purpose financial reports useful. However, the reports are not
primarily directed to these other groups.
LESSON 2.2:
Information Provided by General Purpose Financial Reports transactions and other events that change a reporting entity's economic resources
and claims. This information provides useful input for decisions relating to
The Design and Components of General-Purpose Financial providing resources to the entity.

Reports in fulfilling the primary users' need in undertaking the process of assessing
the Financial reports are designed to provide information that is instrumental
reporting entity's future net cash flow-the nature, timing, and uncertainty-and
management's stewardship of the entity. The conceptual framework describes the
contents and structures of financial reports that facilitate the objective of financial
reporting in mind.
Accrual Accounting
Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting 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.

Accrual accounting and reporting capture the anticipation of future cash receipts
and future cash payments. Accrual accounting, as we have learned from
accounting fundamentals, is characterized by the use of receivables, payables, and
adjustments to update revenues earned and expenses incurred.

Management's Use of the Entity's Economic Resources

Information about how efficiently and effectively the reporting entity's

Financial Information about the Reporting Entity management has discharged its responsibilities to use the entity's economic
resources helps users assess the management's stewardship of those resources.

Such information is also useful for predicting how efficiently and effectively
management will use the entity's economic resources in future periods. Hence, it
can be useful for assessing the entity's prospects for future net cash inflows.

Protection and Compliance

Examples of management's responsibilities to use the entity's economic resources

include protecting those resources from unfavorable effects of economic factors,
such as price and technological changes, and ensuring that the entity complies with
applicable laws, regulations, and contractual provisions.

This can be facilitated by an additional report that expounds on pertinent

information beyond what numbers can convey, hence the need for explanatory
notes in the financial reports.

The reporting entity is the subject of financial information that is formalized and
presented in financial reports. The financial information can be categorized as the
entity's:

1. economic resources and claims (presented in the statement of financial position

or balance sheet);

2. changes in economic resources and claims:

a. pertaining to financial performance:

I. reflected by accrual accounting (presented in the statement of

comprehensive income or statement of profit or loss if no
comprehensive income) and

ii. reflected by past cash flows (presented in the statement of cash flow
in the operating activities section); and

b. not pertaining to financial performance (presented in the statement of changes in

owners' equity); and

3. use of economic resources.

Financial reports provide information about the financial position of the entity. the
economic resources and claims against the entity, based on the basic accounting
model, and the accounting equation Assets (A) = L (Liabilities)+ Equity (E),
which, in extended form, is Assets (A) = L (Liabilities)+ Equity (E) + Income (1) -
Expenses (Ex). Financial reports provide information about the effects of

LESSON 2.3:
Fundamental Qualitative Characteristics of Useful Financial Information
Introduction to the Qualitative Characteristics
The qualitative characteristics of useful financial information identify the types of
information that are likely to be most useful to the primary users for making
decisions about the reporting entity based on the information in its financial report.
As discussed in the previous lesson, financial reports provide information about
the reporting entity's economic resources, claims against the reporting entity, and
effects of transactions and other events and conditions that change those resources
and claims. Some financial reports also include explanatory material about the
management's expectations and strategies for the reporting entity and other types
of forward-looking information.
If the objective of general purpose financial reporting is the mission, the qualitative
characteristics, both fundamental and enhancing, are the values that users are
expecting from the financial reports.
The qualitative characteristics of useful financial information apply to financial
information provided in financial statements-general purpose financial statements
prepared in accordance with the PFRS Standards, a type of financial report-as well
as financial information provided in other ways. The cost, which is a pervasive
constraint on the reporting entity's to provide useful financial information, applies
similarly. However, the considerations in applying the qualitative characteristics
and the cost constraint may be different for different types of information, e.g.,
applying them to forward-looking information may be different from applying
them to information about existing economic resources and claims and to changes
in those resources and claims.
There are assumptions that underlie the preparation of financial statements.These
factors serve as the scope and boundariesof how financial information is prepared
and reported.
The application of financial reporting standards may be modified due to certain
constraints.
First, we focus on the fundamental qualitative characteristics in this lesson,
Financial information is useful when it is relevant and is a faithful representation
(ie., reliable) of what it purports to represent. The usefulness of financial
information is enhanced if it is comparable, verifiable, timely, and understandable.
These are the values that are expected from financial information that make it
useful. Fundamental characteristics are covered in this lesson, while the enhancing
characteristics are discussed in Lesson 2.4.
Relevance
Relevant financial information is capable of making a difference in the decisions
made by users. (Go back the diagram on p. 38 titled "The Use of General Purpose
Financial The relevance of financial information serves as the linkage between the
information and the decision being made (e.g., returns and buy-sell- hold
ownership). The information may be capable of making a difference in a decision
even if some users choose not to take advantage of it or are already aware of it
from other sources.
Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value, or both.
Financial information has predictive value if it can be used as an input to processes
employed by users to predict future outcomes. Financial information need not be a
prediction or forecast to have predictive value.
Financial information with predictive value is employed by users in making their
own predictions.
Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations.
The predictive value and confirmatory value of financial information are
interrelated. Information that has predictive often also has confirmatory value. For
example, revenue information for the current year, which can be used as a basis for
predicting revenues in future years, can also be compared with revenue predictions
that were made in past years.
The results of those comparisons can help users to correct and improve the
processes that were used to make those previous predictions.
Materiality
A concept closely linked to relevance is materiality. Information is material if
omitting, misstating, or obscuring it could reasonably be expected to influence the
decisions that the primary users of general purpose financial reports make on the
basis of those reports, which provide financial information about the reporting
entity (CF 1.15). In other words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude, or both, of the items to which the
information relates in the context of an individual entity's financial report.
Consequently, the conceptual framework does not specify a uniform quantitative
threshold for materiality or predetermine what could be material in a particular
situation.
Faithful Representation (Reliability)
Financial reports represent economic events in words and numbers. They should
possess the quality of being reliable, be something sturdy and dependable that
users can stand on for decisions. To be useful, financial information must not only
represent relevant events, but it must also faithfully represent the substance of the
event that it to represent (e.g., long-term leases normally do not transfer legal
ownership to the lessee, but the property is included in the entity's roster of
resources in its financial reports because of the economic effects of operating the
property). In many circumstances, the substance of an economic phenomenon and
its legal formare the same. If they are not the same, providing information only
about the legal form would not faithfully represent the economic event (CF 4.59-
62).
To be a perfectly faithful representation, a depiction should have three
characteristics. It should be complete, neutral, and free from error. Of course
perfection is seldom, if ever, achievable. The reporting objective is to maximize
those qualities to the extent possible.
Completeness- A complete
depiction includes all information
necessary for a user to understand
the event being depicted, including
all necessary descriptions and
explanations. For example, a
complete depiction of a group of
assets would include, at a
minimum, a description of the
nature of the assets in the group, a
numerical depiction of all of the assets in the group, and a description of what the
numerical depiction represents (for example, historical cost or fair value). For
some items, a complete depiction may also entail explanations of significant facts
about the quality and nature of the items, factors, circumstances that might affect
their quality and nature, and the process used to determine the numerical depiction.
Neutrality - A neutral depiction is without PAS in the selection or presentation of
financial information. A neutral depiction is not slanted, weighted, emphasized.
De-emphasized, or otherwise manipulated to increase the probability that the
financial information will be received favorably or unfavorably by users.
Neutral information does not mean information with no purpose or no influence on
behavior. On the contrary, relevant financial information is, by definition, capable
of making a difference in users' decisions.
Neutrality is supported by the exercise of prudence. Prudence is the exercise of
caution when making judgments under conditions of uncertainty. The exercise of
prudence means that assets and income are not overstated, and liabilities and
expenses are not understated. Equally, the exercise of prudence does not allow for
the understatement of assets or income or the overstatement of liabilities of
expenses. Such misstatements can lead to the overstatement or understatement of
income or expenses in future periods.
The exercise of prudence does not imply a need for asymmetry, for example, a
systematic need for more persuasive evidence to support the recognition of assets
or income than the recognition of liabilities or expenses. Such asymmetry is not a
characteristic of useful financial information.
Nevertheless, particular standards may contain asymmetric requirements if this is a
consequence of decisions intended to select the most relevant information that
faithfully represents what it purports to represent.
Free from Error Faithful representation does not mean accurate in all - respects.
Free from error means there are no errors or omissions in the description of the
event, and the process used to produce the reported information has been selected
and applied with no errors in the process. In this context, free from error does not
mean perfectly accurate in all respects. For example, an estimate of an
unobservable price or value cannot be determined to be accurate or inaccurate.
However, a representation of that estimate can be faithful if the amount is
described clearly and accurately as being an estimate, the nature and limitations of
the estimating process are explained, and no errors have been made in selecting
and applying an appropriate process for developing the estimate.
When monetary amounts in financial reports cannot be observed directly and must
instead be estimated, measurement uncertainty arises. The use of reasonable
estimates is an essential part of the preparation of financial information and does
not undermine the usefulness of the information if the estimates are clearly and
accurately described and explained. Even a high level of measurement uncertainty
does not necessarily prevent such an estimate from providing useful information
(CF 2.22).
Applying the Fundamental Qualitative Characteristics
Information must both be relevant and provide a faithful representation of what it
claims to represent if it is to be useful. Neither a faithful representation of an
irrelevant phenomenon nor an unfaithful representation of a relevant phenomenon
helps make good decisions.
What economic events to be included and how in the financial reports of an entity
are rather straightforward in practice. There are common events pertinent to the
business transaction groups of the industry where an entity operates, as well as in
all businesses in general (e.g., sales revenues, depreciation estimates of property).
The involvement of cash-outright (e.g., cash sales, payments to employees) or
eventually (e.g., collections of accounts receivable, payments of accounts payable)
will trigger recording in the journal (recognition). less common phenomena (e.g..
lawsuits, economic downturn, technological obsolescence), the question is whether
such occurrences will eventually involve cash inflow or outflow, the probability of
their occurrence, and the availability of a reliable measurement Furthermore, if
such occurrences need to be reported and how to shed light on management's
proper stewardship of such matters.
The conceptual framework put forward as "the most efficient and effective process
for applying the fundamental qualitative characteristics would usually be as
follows: [subject to the effects of enhancing characteristics and the cost constraint
(which is discussed in the next lesson) and which are not considered in this
example]: First, identify an economic event and information about it that is capable
of being useful to users of the reporting entity's financial information. Second,
identify the type of information about that phenomenon that would be most
relevant. Finally, determine whether that information is available and whether it
can provide a faithful representation of the economic phenomenon. If so, the
process of satisfying the fundamental qualitative characteristics ends at that point.
If not, the process is repeated with the next most relevant type of information.
Trade-offs between Fundamental Characteristics
In some cases, a trade-off between relevance and faithful representation may need
to be made to provide useful information about an economic event.
The framework lists the following examples:
The most relevant information about an event may be a highly uncertain estimate.
In some cases, the level of measurement uncertainty involved in making that
estimate may be so high that it may be questionable whether the estimate would
provide a sufficiently faithful representation of that phenomenon.
In some such cases, the most useful information may be the highly uncertain
estimate, accompanied by a description of the estimate and an explanation of the
uncertainties that affect it. In other such cases, it that information would not
provide a sufficiently faithful representation of that phenomenon, the most useful
information may include an estimate of another type that is slightly less relevant
but is subject to lower measurement uncertainty.
In limited circumstances, there may be no estimate that provides useful
information. In those limited circumstances, it may be necessary to provide
information that does not rely on an estimate. Measurement, estimates, and
uncertainties are elaborated on in Chapter V.
LESSON 2.4:
Enhancing Qualitative Characteristics and the Cost Constraints
Comparability, verifiability, timeliness, and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented. These qualities are easily seen in the way financial
information is presented and disclosed and are more apparent to users. They are
the spices that intensify the flavor of relevance and faithful representation that
make the information attained more useful.
Comparability
The users' decisions involve choosing between alternatives (e.g.. selling or holding
an investment or investing in one reporting entity or another).Thus, 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 enables users to identify and
understand similarities in and differences among items to provide insights on
returns (profitability), liquidity, and solvency of the entity relative to other entities
and with the same entity of the previous period.
Information about a reporting entity is more useful if it can be compared with
similar information about other entities, within the same industry rather than
outside, hence the saying. "Compare apples to apples, not apples to oranges."
Unlike the other qualitative characteristics, comparability does not relate to a
single item. A comparison requires at least two items.
Related Concepts
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. While comparability
is the goal, consistency helps achieve that goal. Also, comparability is not
uniformity. For the information to be comparable, like things must look alike and
unlike things must look different. Comparability of financial information is not
enhanced by making unlike things look alike any more than they are enhanced by
making like things look different.
A degree of comparability is likely achieved through a faithful representation of a
relevant economic phenomenon. This should naturally possess some degree of
comparability with a faithful representation of a similar relevant economic
phenomenon by another reporting entity.
Although a single economic phenomenon can be faithfully represented in multiple
ways, permitting alternative accounting methods for the same economic
phenomenon diminishes comparability.
Verifiability
Verifiability helps assure users that the information faithfully represents the
economic phenomena it professes to represent. Verifiability means that different
knowledgeable and independent observers could reach a consensus, though not
necessarily complete agreement, that a particular depiction is a faithful
representation. Verifiability is primarily achieved by the existence of documents
and other evidence that support the contents of the financial reports. For items that
undergo significant estimates and judgments (e.g. provisions, contingencies), a
well-documented process performed by preparers in accordance with standards is
necessary to attain verifiability.
Range of Possible Amounts -Quantified information need not be a single-point
estimate to be verifiable. A range of possible amounts and the related probabilities
can also be verified.
Direct or Indirect - Verification can be direct or indirect. Direct verification
means verifying an amount or other representation through direct observation (e.g.
cash count). Indirect verification means checking the inputs to a model, formula, or
other technique and recalculating the outputs using the same methodology (e.g..
checking the inputs [quantities and costs] of the carrying amount of inventory and
recalculating the ending inventory using the same cost flow assumption [e.g., Fl.
FOI).
Explanations and Forward-looking Information - It may not be possible to
verify some explanations and forward-looking financial information until a future
period, if at all. To help users decide whether they want to use that information, it
would normally be necessary to disclose the underlying assumptions, the methods
of compiling the information, and other factors and circumstances that support the
information.
Timeliness
Timeliness means that the information is available to decision-makers in time to be
capable of influencing their decisions. Generally, the older the information is, the
less useful it is. However, some information may continue to be timely long after
the end of a reporting period (e.g., identifying and assessing trends).
Timeliness is primarily achieved by dividing the life of the reporting entity into
uniform periods of time (ie., the concept of periodicity) and providing financial
reports at a reasonable interval of time after the end of the reporting period. That is
why there are deadlines set for financial reports imposed within (by management)
and outside the entity (government regulators, e.g., SEC, BIR).
Understandability
Classifying, characterizing, 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 prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the diligently.
However, at times, even well-informed and diligent users may need to seek the aid
of an adviser to understand information about complex economic phenomena.
Understanding the language of business (i.e., accounting) is imperative for
businesspeople as well as other members of society if they are to participate well
in the economy. Accounting has its own grammar, lexicon, syntax, and context, as
discussed in the Introduction. Financial literacy begins with understanding basic
accounting and financial reporting concepts and terminologies.

An important aspect of understandability is the use of language, specifically

English, the business language in many jurisdictions. The application of common
but important qualities of clarity, unity, and coherence in written communication is
also part of promoting the understandability of financial information.

Applying the Enhancing Qualitative Characteristics

Enhancing qualitative characteristics should be maximized to the extent necessary.

However, enhancing qualitative characteristics (either individually or collectively)
cannot render information useful if that information is irrelevant or not represented VISUAL CHAPTER SUMMARY
faithfully.

Applying the enhancement of qualitative characteristics is an iterative process that

does not follow a prescribed order. Sometimes, one enhancing qualitativ
characteristic may have to be diminished to maximize another qualitativ
characteristic. For example, a temporary reduction in comparability as a result of
prospectively applying a new standard may be worthwhile to improve the
relevance or faithful representation in the longer term. Appropriate disclosures
may partially compensate for noncomparability.

The Cost Constraint on Useful Financial Reporting

Cost is a pervasive constraint on the information that can be provided by financial

reporting. Reporting financial information imposes costs, and it is important that
those costs are justified by the benefits of reporting that information. There are
several types of costs and benefits to consider.

Users Bear the Cost

Providers of financial information expend most of their effort in collecting

processing, verifying, and disseminating financial information, but users ultimately
bear those costs in the form of reduced returns. Users of financial information also
incur costs in analyzing and interpreting the information provided. If needed
information is not provided, users incur additional costs to obtain that information
elsewhere or to estimate it.

Reporting financial information that is relevant and faithfully represents what it

claims to represent helps users make decisions with more confidence. This results
in more efficient capital markets and a lower cost of capital for the economy as a
whole. An individual investor, lender, or creditor also receives benefits by making
more informed decisions. However, it is not possible for general purpose financial
reports to provide all the information that every user finds relevant. (See Lesson
2.1 on Limitations.)
CHAPTER III - CONCEPTUAL FRAMEWORK, PART 2: REPORTING
Assessing Cost and Benefit Based on Quantitative and Qualitative Information ENTITIES, FINANCIAL STATEMENTS, AND THEIR ELEMENTS

In applying the cost constraint, the IASB assesses whether the benefits of reporting EVALUATION
a particular piece of information are likely to justify the costs incurred to provide
and use that information. When applying the cost constraint in developing a Identification
proposed standard, the IASB seeks information from providers of financial
information, users, auditors, academics, and others about the expected nature and 1. A ____ is a continuous process of giving and receiving something of value-
quantity of the benefits and costs of that standard. In most situations, assessments physical good or a service for money or am consideration to increase the value of
are based on a combination of quantitative and qualitative information. the entity over the long term

Cost and Benefit in Relation to Financial Reporting in General
Because of the inherent subjectivity, different individuals' assessments of the costs
and benefits of reporting particular items of financial information will vary.
Therefore, the IASB seeks to consider costs and benefits in relation to financial
reporting generally and not just in relation to individual reporting entities. That
does not mean that assessments of costs and benefits always justify the same
reporting requirements for all entities. Differences may be appropriate because of
different sizes of entities, different ways of raising capital (publicly or privately),
different users' needs, or other factors.
2. Information technology and the____ largely caused these changes in the
business environment and will continue to do so in the foreseeable future.
3. A good conceptual framework is founded on a well-defined set of objectives and
purposes that are time-tested and based on ______
4. ____ is a quality which means that the conceptual framework assists the IASB
to develop PFRS Standards that are based on consistent concepts.
5. If the IASB departs from the conceptual framework, it will explain the
departure in the ____

6. Amending a standard would require the IASB to go through its ____.

7. Conceptual Framework for Financial Reporting was revised in_____.
8. The term "management" refers to management and the______ of an entity
unless specifically indicated otherwise in the framework.
decisions about the reporting entity on the basis of information in its financial
report.
26. ____ is a pervasive constraint on the reporting entity's ability to provide useful
financial information.

27. There are that underlie the preparation of financial

9. Throughout the IFRS Conceptual Framework, the terms_______ and "users" statements. These factors serve as the scope and boundaries of how financial
refer to existing and potential investors, lenders, and other creditors who must rely information is prepared and reported.
on general purpose financial reports for much of the financial information they
need. 28. financial information is capable of making a difference in
the decisions made by users.
10. ____ are the main readers, audience, and customers of the message and content
of financial reports. 29. Financial information has if it can be used as an input to
processes employed by users to predict future outcomes.
11. To make the assessments, users need information about the economic
resources, claims against and changes in those resources, claims of the entity, and 30. Financial information has about previous evaluations. if it
how ____ the entity's management and governing board have discharged their provides feedback
responsibilities in using the resources.
31. Information is if omitting, misstating, or obscuring it
12. Users need to consider pertinent information from____ Some examples are could reasonably be expected to influence the decisions that the primary users of
general economic conditions and expectations, political events and political general purpose financial reports make on the basis of those reports.
climate, and industry and outlooks.
32. Financial reports have a quality of being synonymous to being
13. Focusing on common information needs does not ____ the reporting entity sturdy and dependable that users can stand on for decisions.
from including additional information that is most useful to a particular subset of
primary users. 33. To be a perfectly faithful representation, a depiction would have three
characteristics: , and
14. Management need not rely on general purpose financial reports because it is
able to obtain _____ the financial information it needs.

15. To a large extent, financial reports are based on______ , _______ and models 34. means depiction includes all information
rather than exact depictions. necessary for users to understand the event being depicted, including all necessary
descriptions and explanations.
16. The_____is the subject of financial reports:
35. is without bias in the selection or presentation of
17. Information about the nature and amounts of a reporting entity's economic financial information.
resources and claims can help users identify the reporting entity's financial ______.
36. Neutrality is supported by the exercise of
18. Information can help users assess the reporting entity's _____ and solvency.
37. means there are no errors or omissions in the
19. Changes in a reporting entity's economic resources and claims result from that description of the event, and the process used to produce the reported information
entity's operations and financial performance (i.e., profitability) and from other has been selected and applied with no errors in the process.
events or transactions, such as issuing _____.
38. means similar information about the same entity
20. _____ depicts the effects of transactions and other events and circumstances on for another period or another date should also be available..
a reporting 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 39. means that different knowledgeable and
period. independent observers could reach a consensus, though not necessarily complete
agreement, that a particular depiction is a faithful representation.
21. This information about the reporting entity's _____ indicates the extent to
which the reporting entity has increased its available economic resources and its 40. means that information is available to decision-
capacity for generating net cash inflows through its operations rather than by makers in time to be
obtaining additional resources from investors and creditors.
41. classifying, characterizing, and presenting
22. A reporting entity's economic resources and claims may also change for information clearly and concisely makes it understandable.
reasons other than financial performance, such as issuing ___ instrument

23. The accrual method for financial performance is valuable, but the information
about _____during a period also helps users assess the entity's ability to generate
future net cash inflows and assess the stewardship of the entity's economic
resources.

24. The management's responsibilities to use the entity's economic resources

include protecting those resources from unfavorable effects, ensuring compliance
with applicable laws, regulations, and contractual provisions, and reporting the
in the financial reports.

25. The of useful financial information identify the types

of information that are likely to be most useful to the primary users for making