CONCEPTUAL

FRAMEWORK AND
ACCOUNTING
STANDARDS
Question

What is conceptual framework? why it is

important?
 Purpose of Conceptual
Framework

Assist the IASB in Assist the preparers in Assist all parties in

developing standards developing consistent understanding and
accounting policies
interpreting standards
Status of Conceptual Framework
 The conceptual framework is not an standard.
 If there is a conflict between the standard and
the conceptual framework standard will prevail.
SCOPE
Objective of financial reporting

Qualitative characteristics
Financial statements and the
reporting entity
Elements of FS

Recognition and Derecognition

Measurement

Presentation and disclosure

Concepts of capital and capital
maintenance
OBJECTIVE OF FINANCIAL
REPORTING
“the objective of general purpose financial
reporting is to provide financial information about
the reporting entity that is useful to its primary
users”
Question

Information about the nature and amounts of an

entity’s economic resources, claims and
performance can help users in assessing?
 Liquidity – Solvency –
ability to pay ability to pay
short term long term
obligation obligation

Management
stewardship –
Needs for how the
additional company
financing utilized is
economic
resources
 QUALITATIVE
CHARACTERISTICS

Fundamental Qualitative Enhancing Qualitative

Characteristics Characteristics
 Fundamental
Qualitative
Characteristics

Faithful
Relevance - make Representation –
a difference true, correct and
complete

Free from error –

Predictive value – Confirmatory Completeness – all
Neutrality – no error from
making value – feedback information is
without bias description and
predictions value provided
process
 Enhancing Qualitative
Characteristic

Verifiability – users can

Comparability – helps reach a general Understandability –
Timeliness – available
user identify similarities agreement as to what presented in clear and
to users in time
and differences the information concise manner
purports to represent
Question

What is materiality?
MATERIALITY
 Information is material if omitting, misstating or
obscuring it could reasonably be expected to
influence decisions of the primary users.
 matter of professional judgment
Reporting Period
 prepared for a specified period of time
 FS provide comparative information for at least 1
preceding reporting period
 FS are designed to provide information about
past events.
 Information about possible future transactions
and other events is included if it relates to past
information
Reporting entity
 is one the is required, chooses or prepare the
financial statement
 controlling entity is called the parent
 controlled entity is called a subsidiary
 consolidated financial statements
 combined financial statements (no parent-
subsidiary relationship)
SCOPE
Objective of financial reporting

Qualitative characteristics
Financial statements and the
reporting entity
Elements of FS

Recognition and Derecognition

Measurement

Presentation and disclosure

Concepts of capital and capital
maintenance
Question

What is an asset?
ASSET
 Is a present economic resource controlled by the entity
as a result of past events. An economic resource is a
right that has the potential to produce economic
benefits. a right he basic purpose of accounting is to
provide information that is useful in making economic
decision.
 it has three aspects right, potential to produce
economic benefits and control
Rights includes:

1. Right that • Right to receive cash, goods and resources

corresponds to an • Right to exchange on favorable terms
obligation of another • Right to benefit from an obligation of
another party
party

2. Rights that do not • Right over physical object

corresponds to an • Right to use intellectual property
obligation of another
party
Question

What are the ways an economic resources can

produce economic benefits for the entity?
Potential to produce economic benefits
 sold, leased, transferred or exchanged for other asset
 used singly or in combination with other asset to
produce goods or service
 use to enhance the value of other assets
 used to promote efficiency and cost savings
 used to settle liabilities
Control
 means the entity has the exclusive right over the
benefits of an asset and the ability to prevent others
from accessing those benefits
 control normally stems from legally enforceable rights
however ownership is not always necessary for control
to exists.
LIABILITY

“According to Conceptual Framework 4.26 a liability is a

present obligation of the entity to transfer economic
resource as a result of pas events”
Obligation

Legal
Obligation An obligation that results from a contract legislation
or other operation of law

Constructive An obligation that results from an entity’s action that

obligation create a valid expectation on others that the entity
will accept and discharge certain responsibilities
Transfer of economic benefits
 pay cash, deliver goods, or render services
 exchange assets with another party on unfavorable
terms
 transfer assets if a specified uncertain future event
occurs
 issue a financial instrument that obliges the entity to
transfer economic resources
Present obligation as a result of past
events
 already obtained economic benefits or taken action
 the entity will or may have to transfer an economic
resource that it would not otherwise have had transfer
Examples
 Entity A intends to acquire goods in the future
 Entity B operates a nuclear power plant. In the current
year, a new law was enacted penalizing the improper
disposal of toxic waste. No similar law existed in prior
years.
 Entity C enters into an irrevocable commitment with
another party to acquire goods in the future on credit
Executory contracts
 is a contract that is equally unperformed neither party
has fulfilled any of its obligations, or both parties have
partially fulfilled their obligations to an equal extent
Equity
 is the residual interest in the assets of the entity after
deducting the liabilities
 reserves may refer to amounts set aside by the entity
as protection for its creditors or stakeholders from
losses.
Income
 increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets
or decreases in liabilities

Question!
 What is the difference between revenue and gains?
Expenses
 decreases in economic benefits during the accounting
period in the form of outflows or depletion of assets or
incurrence of liabilities
 Expenses vs Losses
Recognition

meets the probable

definition future measured
of an economic reliably
elements benefits
Concept of Capital and Capital
Maintenance
 Financial Concept of Capital – capital is regarded as
the invested money or invested purchasing power.
Equity or net assets
 Physical Concept of Capital – capita is regarded as the
entity’s productive capacity
Concept of Capital and Capital
Maintenance
 Financial Capital Maintenance – profit is earned if net
assets at the end of the period exceeds the 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 entity’s productive capacity at the end of the period
exceeds the productive capacity at the beginning of the
period after excluding any distributions to and
contributions from owners during the period.