Conceptual framework=

A document from the HKICPA which sets out the concepts concerning the preparation and
presentation of financial statements

o Examples of concepts set out in the framework include objectives of financial statement and
qualitative characteristics.

o These concepts provide guideline for reviewing or developing accounting standards

Objectives of financial reporting (as per the framework)

i) Provide useful financial information about an entity ii) to users iii) in making decisions related to
providing resources to such entity

o useful information can be about a firm’s assets and liabilities

o users can be lenders or investors, existing or potential
o decisions can be about whether to finance/ buy equity

Fundamental Qualitative characteristics=

Characteristics of a financial report that are necessary for it to useful to users.

Relevance=

being capable of making a difference to user’s decisions.

o On the basic level, It is thought that a piece of info will be so capable if it has predictive
value or confirmatory value.
o Predictive value means being able to help predict an entity’s income in the future
o Confirmatory value means being able to provide feedback about previous predictions (e.g.
actual sales figures)
o Additionally, it is also thought that a piece of info must be material to be relevant. i.e. if
such info is omitted/ misstated, then the users will be affected

Faithfulness in representation=

There is no disagreement between the statement and the phenomena that the report intends to
represent.

o To be faithful in representation, a financial report will need to be i) complete ii) neutral

and iii) free from error

o Complete: include all information necessary for the user to understand, e.g. all kinds of
assets

o Neutral: accounting standards (such as treatment) do not favour some users over the
others e.g. same model of measurement for entire class of asset
 o Free from material error

Enhancing qualitative characteristics=

Characteristics of a financial report that are not essential to its usefulness, but they can make a
financial report more useful/ user friendly

Understandability=

information is presented in a way that is comprehensible to a user with reasonable knowledge in

accounting.

Comparability=

Accounting treatment (such as recognition policy) and standard in presentation should be

Consistent over time and across entities
o This allows users to compare information
o E.g. Asset always divided between current and non- current assets

Verifiability=

Different independent parties can reach consensus over it

o Consensus in this context does not entail complete agreement

o Objective information is more verifiable than subjective information

Timeliness=

Information is available to user in time so can aid their decisions

o E.g. quarterly financial report

Assumption of going concern=

assumption that the entity will continue to operate in foreseeable future when there is no
information to the contrary.

o This assumption affects how the statements should be prepared. E.g. valuation of assets:
under going concern, book value of assets are determined assuming that they will remain in
use, rather than getting sold

o If the entity intends to close or scale down significantly, then the assumption will not be
suitable, so the statements will have to be prepared on a different basis.

Assumption of economic entity=

Assumption that all economic events can be identified with a particular entity

o So the personal expenses of the owner of a sole pro are not expenses of his business/
Assumptions about monetary unit

First, money is the only reliable measure of economic activities; second, the value of money is stable
and constant over time.

o Therefore, all business transactions should be recorded in a common monetary unit

o However, these assumptions are not always correct. For instance, the value of money can
change due to inflation

Measure an elements=

Determine the value of a recognised element

o Broadly speaking there are 2 approaches

o By historical cost: measure an asset based on price of transaction, subsequent changes to
value not factored in
o By current value: measure an asset based on conditions on date of measurement e.g. fair
value, value in use

Main problem with historical cost approach (using the measure of asset as an example)

- Historical cost cannot reflect current value of an asset to the business. Consequently, a
company’s balance sheet cannot represent a realistic financial position of that company.

Main problem with current value approach:

o fair value may be difficult to assess too b/c there may not be an active market
o estimated future cash flows from the asset and appropriate discount rate may not be
accurate, or objective