CONCEPTUAL FRAMEWORK BFACCR3: Financial Accounting

and Reporting Part-3

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
It set out the concepts that underlie the preparation
and presentation of financial statements.
Its main objective is to narrow the differences in
financial reporting of different entities by harmonizing
regulations, accounting standards and procedures
relating to the preparation of financial statements.
PURPOSES OF THE CONCEPTUAL FRAMEWORK
1. Assist the IASB in the development of future IFRSs
and in its review of existing IFRSs.
2. Assist the IASB in promoting harmonization of
regulations, accounting standards and procedures
relating to the presentation of financial statements by
providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs.
PURPOSES OF THE CONCEPTUAL FRAMEWORK
3. Assist national standard-setting bodies in
developing national standards.
4. Assist preparers of financial statements in
applying IFRS and in dealing with topics that have
yet to form the subject of an IFRS.
5. Assist auditors in forming an opinion as to
whether financial statements comply with IFRSs.
PURPOSES OF THE CONCEPTUAL FRAMEWORK
6. Assist users of financial statements in interpreting
the information contained in financial statements
prepared in compliance with IFRSs.
7. Provide those who are interested in the work of
the IASB with information about its approach in the
formation of IFRSs.
 OTHER RELATED FACTS
In the absence of a Standard or an Interpretation that
specifically applies to a transaction, management must use its
judgement in developing and applying an accounting policy
that results in information that is relevant and reliable.
The Framework is not a Standard and does not override any
specific IFRS.
If the IASB decides to issue a new or revised pronouncement
that is in conflict with the Framework, the IASB must highlight the
fact and explain the reasons for the departure in the basis for
conclusions.
 SCOPE
The Conceptual Framework addresses:
1. the Objective of financial reporting
2. the Reporting entity
3. The Qualitative characteristics of useful financial
information
4. the definition, recognition and measurement of the
Elements from which the financial statements are constructed
5. concepts of Capital and capital maintenance
CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
It aims to provide financial information about an
entity that is useful to existing and potential
investors, lenders and other creditors in making
decisions about providing resources to the entity.

Primary Users of
General Purpose
Financial
Reporting
OTHER USERS OF FINANCIAL STATEMENTS

Employees
Government and its agencies
Public
WHAT ARE THE USERS’ NEEDS
Information on Financial Position
Information on Financial Performance
Information on Cash Flows
Information on Changes in Equity
Other Supplementary Information
ACCRUAL BASIS OF ACCOUNTING
 This states that revenues are recognized when it is
earned (means services have been performed or
the goods have been delivered) regardless when
the cash is received; and expenses a re recognized
when it is incurred (means used or expired)
regardless when the cash is paid.
CHAPTER 2: REPORTING ENTITY
Reporting entity is an entity for which there
are users who rely on the financial statements
as their major source of financial information
about the entity.
***Not yet completed as of the 2010 Conceptual Framework but is
already deleted for the 2018 Conceptual Framework.
CHAPTER 2: QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
Fundamental qualitative characteristics
Relevance
Faithful representation
Enhancing qualitative characteristics
Verifiability
Comparability
Understandability
Timeliness
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
Relevance. Relevant financial information is
capable of making a difference in the decisions
made by users. Financial information is capable of
making a difference in decisions if it has predictive
value, confirmatory value, or both.
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
Faithful representation. General purpose financial
reports represent economic phenomena in words
and numbers, to be useful, financial information must
not only be relevant, it must also represent faithfully
the phenomena it purports to represent. This funda-
mental characteristic seeks to maximize the underly-
ing characteristics of completeness, neutrality and
freedom from error.
ENHANCING QUALITATIVE CHARACTERISTICS
Verifiability. It means that different knowledge-
able and independent observers could reach
consensus, although not necessarily complete
agreement, that a particular depiction is a
faithful representation.
*Direct verification
*Indirect verification
ENHANCING QUALITATIVE CHARACTERISTICS
Comparability. Information about a reporting
entity is more useful if it can be compared with
a similar information about other entities and
with similar information about the same entity
for another period or another date. Compara-
bility enables users to identify and understand
similarities in, and differences among, items.
ENHANCING QUALITATIVE CHARACTERISTICS
Understandability. Classifying, characterizing
and presenting information clearly and
concisely makes it understandable.
ENHANCING QUALITATIVE CHARACTERISTICS
Timeliness. Timeliness means that information is
available to decision-makers in time to be
capable of influencing their decisions.
COST CONSTRAINT ON USEFUL FINANCIAL
REPORTING
Cost is a pervasive constraint on the
information that can be provided by general
purpose financial reporting.
CHAPTER 4: THE 1989 FRAMEWORK: THE
REMAINING TEXT
1. The underlying assumption
2. The elements of financial statements
3. Recognition of the elements of financial statements
4. Measurement of the elements of financial statements
5. Concept of capital and capital maintenance
UNDERLYING ASSUMPTION
Going concern means that an entity will continue
in operation indefinitely or, if that presumption is
not valid, disclosure and a different basis of
reporting are required.
ELEMENTS OF FINANCIAL STATEMENTS
The elements directly related to financial position (balance
sheet) are:
 Assets
 Liabilities
 Equity
 The elements directly related to performance (income
statement) are:
 Income
 Expenses
RECOGNITION OF THE ELEMENTS OF FINANCIAL
STATEMENTS
Recognition is the process of incorporating in the
balance sheet or income statement an item that meets
the definition of an element and satisfies the following
criteria for recognition:
It is probable that any future economic benefit
associated with the item will flow to or from the entity;
and
The item's cost or value can be measured with
reliability.
MEASUREMENT OF THE ELEMENTS OF FINANCIAL
STATEMENTS
Measurement involves assigning monetary amounts
at which the elements of the financial statements are
to be recognized and reported.
Historical Cost
Current Cost
Realizable (settlement) value
Present value
CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE
1. Financial concept of capital- capital is
synonymous to the net assets of the entity.
2. Physical concept of capital- capital is
regarded as the productive capacity.
CAPITAL MAINTENANCE AND THE
DETERMINATION OF PROFIT
1. Financial capital maintenance- profit is
earned only if financial amount of the net
assets at the end of the period exceeds the
beginning after excluding distributions to and
contributions from owners during the period. It
can be measured in either nominal monetary
units or units of constant purchasing power.
CAPITAL MAINTENANCE AND THE
DETERMINATION OF PROFIT
2. Physical capital maintenance- profit is earned
only if the physical productive capacity at the
end of the period exceeds the beginning after
excluding distributions to and contributions
from, owners during the period
OTHER TERMINOLOGIES
Substance over form- economic substance of
transactions must be recorded in the financial statements
rather than just their legal form in order to present a
true and fair value of the affairs of the entity.
Prudence/Conservatism- means that revenues and
profits are not anticipated (only realized profits with
reasonable certainty are recognized) and provision is
made for all known expenses and losses whether amount
is know for certain or just an estimation.
THANK YOU!  Noel A. Bergonia, CPA, MBA