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Conceptual Framework
CF: Introduction
A statement of generally accepted theoretical principles which form the
frame of reference for financial reporting.
Provides the basis for the development of new accounting standards
Provides the basis for the evaluation of existing accounting standards
Determines which events should be accounted for, how they should be
measured and how they should be communicated to the users
CF: Advantages of CF
If no CF, accounting standards tend to be produced in a haphazard and fire-
fighting approach. Standard-setting body should act as an architect or
designer and not fire-fighter
If no CF, fundamental principles are tackled more than once in different
standards thus producing contradictions and inconsistencies in basic
Standardisation of accounting practice

Highly detailed standards have created a financial reporting environment

governed in specific rules rather than general principles
CF can bolster standard setters against political pressure from various
lobby groups and interested parties
Policies deriving from a CF will be less open to criticism
CF: Disadvantages of CF
Single CF cannot be devised to suit different kind of users
Given the diversity of user requirements, there may be a need for a variety
of accounting standards each produced for a different purpose
It is not clear that a conceptual framework makes the task of preparing
and then implementing standards any easier than without a framework
Generally Accepted Accounting Practice
In individual countries rules that govern accounting:
National corporate law
National accounting standards
Local stock exchange requirements

Also includes
International financial reporting standards
Statutory requirements in other countries
The IASB Conceptual Framework:
The IASB Framework for the Preparation and Presentation of Financial
Statements produced in 1989
Replaced to Conceptual Framework for Financial Reporting as a result of an
IASB-FASB joint project and carried out in phases
1st phase comprising Chapters 1 and 3 published in September 2010
Chapter 2 entitled The reporting entity yet to be published
Chapter 4: Remaining text of the 1989 Framework
The IASB Conceptual Framework:
Chapter 1: The objective of general purpose financial reporting
Chapter 2: The reporting entity (to be issued)
Chapter 3: Qualitative characteristics of useful financial information
Chapter 4: Remaining text of the 1989 Framework
Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of the elements of financial statements
Concepts of capital and capital maintenance
CF: Purposes of the Conceptual Framework
To assist the Board in developing future IFRSs and review of existing IFRSs
To assist the Board in promoting harmonization by providing basis for
reducing the number of alternative accounting treatments
To assist national standard-setting bodies in developing national standards
To assist preparers of financial statements in applying IFRSs
To assist auditors in forming opinion
To assist users of financial statements in interpreting in financial
statements prepared
Chapter 1: The objective of general
purpose financial reporting
To provide 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
Users need information about:
Economic resources of the entity
Claims against the entity
Help users to assess liquidity and solvency and its likely needs for additional financing
Changes in the entitys economic resources and claims
Help users to understand the return entity has produced on its econ resources
Indicator how efficient and effective management has used the resources
Help users to predict future returns
Chapter 3: Qualitative characteristics of
useful financial information
Fundamental characteristics
Relevance (capable of making difference in the decision making): has predictive
and confirmatory value, relevance affected by its nature and materiality
Faithful representation (replacing reliability):
Complete: includes all information necessary for a user to understand
Neutral: without bias in the selection or presentation of financial information
Free from error: no errors or omissions in the description of phenomenon and no errors
in the process the information was produced
Substance over form (implied in faithful representation): accounted to its
substance and economic reality
Chapter 3: Qualitative characteristics of
useful financial information
Enhancing characteristics
Comparability: enables users to identify and understand similarities in and
differences among items.
Consistency: The use of the same methods for the same items
Disclosure of accounting policies is important
Disclosure of information for preceding periods is important

Verifiability: different knowledgeable and independent observers could reach

consensus that a particular depiction is a faithful representation
Timeliness: Not useful if there is a delay in reporting
If the information is timely but not all aspects are known not complete or error free
If every detail of a transaction is known but late to publish - irrelevant
Chapter 3: Qualitative characteristics of
useful financial information
Understandability: Matters should not be left out of financial statements simply
due to their difficulty as even well-informed and diligent users may sometimes
need the aid of an adviser to understand
Costs vs. benefits of obtaining and presenting (not a qualitative characteristics):
difficult to apply cost-benefit analysis

Underlying assumption
Going concern
Chapter 2: The reporting entity (Exposure
Intro: This ED was issued in March 2010. There are four sections
The reporting entity concept: general issues relating to the reporting entity
The CF should broadly describe rather than precisely define a reporting entity

When does an entity control another entity?

Control exists when an entity has the power to direct the activities of another entity to
generate benefits or limit losses to itself

Portion of an entity
If the economic activities of he portion can be distinguished objectively from the rest
of the entity and
Financial information about that portion of the entity has the potential to be useful in
making decisions about providing resources to that portion of the entity
Chapter 2: The reporting entity (Exposure
Financial statements other than consolidated financial statements
Parent-only financial statements: may be represented provided they are included
in the same financial report as consolidated financial statements
Combined financial statements: would include information about two or more
commonly controlled entities
Discussion Paper: Review of the CF
Equity vs. liabilities:
equity still defined as residual interest however entities will be required to
provide further info about the claims of different classes of equity to show
dilution effects
The distinction between equity and liabilities is identified on the focus on the
definition of liability
Narrow equity approach: equity is treated as being only the residual class issued, with
changes in measurement of other equity claims recognized in profit or loss
Strict obligation approach: all equity claims classified as equity with obligations to deliver
assets being classified as liabilities, changes in measurement of equity claims shown in
the statement of changes in equity
Discussion Paper: Review of the CF
Profit or loss vs. other comprehensive income
Require a profit or loss being recycled
Limit the use of OCI only to income and expenses resulting from re-
measurements of assets and liabilities
2 approaches to be included in OCI
Narrow approach: OCI includes bridging items and mismatched re-measurements
Bridging items: difference between measurement used in determining profit or loss and re-
measurement used in the statement of financial position.
Mismatched re-measurements: an item of income or expense represents an economic
phenomenon so incompletely that, in the opinion of the IASB, presenting that item of income or
expense in profit or loss would provide information that has little or no relevance for assessing the
entitys financial performance.
Broad approach: transitory re-measurements: re-measurements of long term assets and
liabilities that are likely to reverse or significantly change over time