CONCEPTUAL

FRAMEWORK
INSTRUCTOR: SARAH M. BALISACAN, CPA
Purpose of the Conceptual
Framework
 The Conceptual Framework prescribes the concepts for general
purpose financial reporting:
 Assists the International Accounting Standards Board (IASB) in
developing Standards that are based on consistent concepts;
 Assist preparers in developing consistent accounting policies when
no Standard applies to a particular transaction or when a Standard
allows a choice of accounting policy; and
 Assist all parties in understanding and interpreting Standards
Status of the Conceptual
Framework
 The Conceptual Framework is not a Standard.
 If there is a conflict between a Standard and the Conceptual
Framework, the requirement of the Standard will prevail.
 Hierarchy of reporting standards
 PFRS
 Management shall consider the following:
 Requirements in other PRFS’s dealing with similar transactions
 Conceptual Framework
 Management may consider the following:
 Pronouncements issued by other standard-setting bodies
 Other accounting literature and industry practices
Scope of the Conceptual
Framework
 The objective of financial reporting
 Qualitative characteristics of useful financial information
 Financial statements and the reporting entity
 The elements of financial statements
 Recognition and derecognition
 Measurement
 Presentation and disclosure
 Concepts of capital and capital maintenance
The Objective of Financial
Reporting
 “The objective of general purpose financial reporting is to
provide financial 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.”
Qualitative Characteristics

 Fundamental qualitative characteristics

 Relevance – Information is relevant if it can make a difference in the
decisions of the users.
 Predictive value and confirmatory value
 Materiality (entity-specific aspect of relevance)
 Faithful representation – Information provides a true, correct and
complete depiction of the economic phenomena that it purports to
present
 Completeness
 Neutrality
 Free from error
Qualitative Characteristics

 Enhancing qualitative characteristics

 Comparability – Information is comparable if it helps users identify
similarities and differences between sets of information.
 Verifiability – Information is verifiable if different users could reach a
general agreement at to what the information purports to present.
 Timeliness – Information is timely if it is available to users in time to
be able to influence their decisions.
 Understandability – Information is presented in a clear and concise
manner.
Financial Statements and the
Reporting Entity
 The objective of general purpose financial statements is to provide
financial information about the reporting entity’s assets, liabilities,
equity, income and expenses that is useful in assessing:
 The entity’s prospects for future net cash inflows; and
 Management’s stewardship over economic resources.
 Financial statements are prepared for a specified period of time
and provide information on assets, liabilities and equity that
existed at the end of the reporting period, or during the reporting
period, and income and expenses for the reporting period.
 A reporting entity is one that is required, or chooses, to prepare
financial statements, and is not necessarily a legal entity. It can be
a single entity or a group or combination of two or more entities.
The Elements of Financial
Statements
 Financial position
 Assets – 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.
 Liabilities – A present obligation of the entity to transfer an economic
resource as a result of past events.
 Equity – The residual interest in the assets of the entity after deducting all its
liabilities.
 Financial performance
 Income – increases in assets, or decreases in liabilities, that result in increase in
equity, other than those relating to contributions from holders of equity claims.
 Expenses – Decreases in assets, or increases in liabilities, that result in equity,
other than those relating to distributions to holders of equity claims.
Recognition and Derecognition
Criteria
 Recognition Criteria
 Recognition is the process of including in the statement of financial position
or the statement(s) of financial performance an item that meets the
definition of one of the financial statement elements.
 Carrying amount is the amount at which an asset, a liability or equity is
recognized in the statement of financial position.
 An item is recognized if:
 It meets the definition of an asset, liability, equity, income or expense; and
 Recognizing it would provide useful information, i.e., relevant and faithfully
represented information
 Existence uncertainty or low probability of an inflow or outflow of economic benefits may
result in, but does not automatically lead to, the non-recognition of an asset or liability.
 The level of measurement uncertainty and other factors affect an item’s faithful
representation.
Measurement Bases

 Measurement involves assigning monetary amounts at which

the elements of the financial statements are to be recognised
and reported.
 Historical Cost
 The historical cost of an asset is the consideration paid to acquire
the asset plus transaction costs.
 The historical cost of a liability is the consideration received to
incur the liability minus transaction costs.
Measurement Bases

 Current Value
 Fair value – The price that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at the measurement
date.
 Fair value is not adjusted for transaction costs.
 Value in use – The present value of the cash flows, or other economic benefits, that
an entity expects to derive from the use of an asset and from its ultimate disposal.
 Fulfillment value – Thee present value of the cash, or other economic resources, that an
entity expects to be obliged to transfer as it fulfils a liability.
 Current Cost – The cost of an equivalent asset at measurement date, comprising
the consideration that would be paid at the measurement date plus transaction costs
that would be incurred on that date.
 Current cost of a liability – The consideration that would be received for an equivalent
liability at the measurement date minus the transaction costs that would be incurred on that
date.
Presentation and Disclosure

 Information about assets, liabilities, equity, income and expenses

is communicated through presentation and disclosure in the
financial statements.
 Effective communication makes information more useful.
Effective communication requires:
 Focusing on presentation and disclosure objectives and
principles rather than on rules.
 Classifying information by grouping similar items and separating
dissimilar items.
 Aggregating information in a manner that it is not obscured either
by excessive detail or by excessive summarization.
Concepts of capital and capital
maintenance
 The Conceptual Framework mentions two concepts of capital,
namely:
 Financial concept of capital - capital is regarded as the invested
money or invested purchasing power. Capital is synonymous with
equity, net assets, or net worth.
 Physical concept of capital - capital is regarded as the entity’s
productive capacity, e.g., units of output per day.
 In this regard, the concepts of capital give rise to the following
concepts of capital maintenance:
 Financial capital maintenance
 Physical capital maintenance