CONCEPTUAL FRAMEWORK

Purpose and Status: To guide the IASB when it develops IFRS

Preparers: Assist them to develop consistent accounting policies when no IFRS Standard applies to
a particular transaction.
Auditors: Assist them in forming an opinion
Users of FS: Assist them in interpreting the information.
IASB: Assist them in promoting the harmonization of regulations.
Others: Provide those who are interested in the work of IASB.

● Conceptual Framework is the foundation of IFRS Standards.

● It does not have the same authority as an IFRS Standard and does not override the Standard.
● When there is a conflict, IFRS will always prevail over the Conceptual Framework
● It will be revised from time to time based on the Board’s experience of working with it.
Scope

● Objective of GPFR
● Qualitative characteristics of useful financial information
● Definition, recognition, and measurement of the elements.
● Concepts of capital and capital maintenance
General Purpose Financial Reporting: to provide information about the reporting entity that is useful
to existing and potential investors, lenders, and creditors in making decisions.
Usefulness
Primary users: the parties to whom general purpose financial reports are directed.

● Investors
● Lenders
● Shareholders
● Creditors
Other users: parties that may find GPFR useful but not directed to them primarily.

● Employees
● Suppliers
● Government Agencies
● Public
Limitation: GPFR does not provide all the information needed by the primary users.
Financial Position: information about the entity’s economic resources and the claims against the
reporting entity.
Financial Performance: understand the return that the entity has produces, how well the
management has discharged its stewardship responsibilities.
Qualitative Characteristics of useful Financial Information
Fundamental Qualitative Characteristics

● For the financial information to be useful, it requires to be both relevant and faithfully
represented.
Relevance: The capacity of information to influence decision.

● Predictive Value: if it can be used as an input to predict future outcomes.

● Confirmatory Value: if it provides feedback about the previous evaluations
Materiality: If omitting it or misstating it could be influence decisions and is an entity specific of
relevance base on the nature or magnitude.
Faithful Representation: Means that financial reports represent economic phenomena or
transactions in words and numbers.

● To be perfectly faithful representation, a depiction would have three characteristics.

Completeness: Includes all information
Neutral: The depiction is without bias
Free from Error: no errors or omissions in the description of the phenomenon.
Enhancing Qualitative Characteristics

● Enhance the usefulness of information

Comparability: ability to bring together for the purpose of noting the points and likeness and
difference.

● Consistency: the use of the same methods for the same items
Verifiability: different knowledgeable and independent observers could reach consensus.

● Direct Verification: verifying thru direct observation

● Indirect Verification: checking the inputs using technical methods and recalculating the
outputs using the same methodology.
Timeliness: Available to decision-makers in time to be capable of influencing their decisions.
Understandability: the information is clear and concise.
--------------
Prudence: the exercise of care and caution when dealing with uncertainties.
Conservatism: when alternative exist, the alternative which has least effect on equity should be
chosen.
Substance over form: transactions and events are accounted in accordance with their substance
and not merely their legal form.
Cost: is a pervasive constraint
Elements of Financial Statements
Financial Statements: These portray the financial effects of transactions and other events by
grouping them into broad classes.
Underlying Assumption of the Conceptual Framework
Going Concern: as if the business will live forever or continue the operation for the foreseeable
future.
Elements of Financial Statements
Financial Position: directly related to the measurement of assets, liabilities, and equity.

● Asset: present economic resource controlled by the entity.

● Liabilities: present obligation of the entity to transfer an economic resource as a result of
past events.
● Constructive Obligation: entity has no practical ability to act in a manner inconsistent with
those practices, polices or statements.
● Obligation: Duty or responsibility to act in a certain way.
● Equity: a residual interest in the assets of the entity after deducting all its liabilities.
Financial Performance: directly related to the measurement profit of income and expenses.

● Expense: decrease om economic benefits

● Income: increase in economic benefits
Recognition of the Elements of Financial Statements
Recognition: process of incorporating in the FS.
a. It is probable that any future economic benefits will flow to or from entity.
b. The item has a cost or value that can be measured with reliability.
Different Recognition Bases for Expenses
Direct association between cost incurred and income earned: Referred to as the matching of costs
with revenues that involves the simultaneous or combined recognition of revenues and expenses.
Systematically and rational allocation: Expenses are recognized when economic benefits are
expected to arise over several accounting periods.
Immediate recognition: An expense is recognized immediately in the income statement when an
expenditure produces no future economic benefits.
Reliability Measurement
Elements Reliability Measurement
Assets has a cost or value that can be measured
reliably.

Liability the amount at which the

settlement will take place can be measured

reliably

Income can be measured reliably.

 Expenses can be measured reliably.

Derecognition of the Elements of Financial Statements

*Derecognition occurs when the item no longer meets the definition of an asset or liability.

● An asset is derecognized when the entity loses control of all or part of the recognized asset.
● A liability is derecognized when the entity no longer has a present obligation
Measurement of the Elements of Financial Statements
Measurement: the process of determining the monetary amounts.
Different Measurement Bases for Assets and Liabilities
Bases Asset Liabilities
Historical At the time of their Proceeds received in
Cost acquisition exchange for the
obligation

Current Acquired currently Undiscounted amount

Cost that requires to settle
the obligation currently

Realizable Currently obtained undiscounted amounts

(settlement) by selling the asset expected to be paid to
value in an orderly satisfy the liabilities in
disposal normal course

Present Present discounted Present discounted

Value value that items is value that expected to
expected to require to settle the
generate in normal liabilities in normal
course course

Presentation: effective communication of FS makes the information more relevant and contributes
to a faithful representation.
Concepts of Capital and Capital Maintenance
Concepts of Capital
Financial Concept: capital is synonymous with the net assets or equity of the entity, maintenance of
nominal invested capital.
Physical Concept: a productive capacity, primarily concerned with the operating capability of the
entity.
Concepts of Capital and Determination of Profit

● Concerned with how an entity defines the capital that it seeks to maintain
Financial Capital Maintenance: Profit is earned only if the financial amount of the net assets at the
end of the period exceeds the financial amount of net assets at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period
Physical Capital Maintenance: Profit is earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the beginning of the period, it requires the
adoption of the current cost basis measurement.