Conceptual Framework for

Financial Reporting
Chapter 1
• The Objective of General Purpose Financial Reporting
Chapter • Qualitative Characteristics of Useful Financial Information
2

Chapter 3
• Financial Statements and the Reporting Entity
Chapter • The Elements of Financial Statements
4

Chapter • Recognition and Derecognition

5

Chapter • Measurement
6

Chapter • Presentation and Disclosure

7

Chapter • Concepts of Capital and Capital Maintenance

8
Purpose of Conceptual Framework
A practical tool that assists

Board Preparers All

• to develop Standards • to develop consistent • to understand and
accounting policies interpret Standards
Chapter 1
The Objective of General
Purpose Financial Reporting
The Objective of General Purpose Financial
Reporting
Provide financial information useful to users in making decisions

Users’ decisions involve decisions about

voting and influencing
buying, holding or selling providing or settling loans
management

To make these decisions, users assess

prospects for future net cash inflows to the management’s stewardship of the entity’s
entity economic resources

To make both these assessments, users need information about both

economic resources, claims and changes in how efficiently and effectively management has
those resources and claims discharged its responsibilities
Economic resources and claims
• Information about the nature and amounts of a reporting entity's
economic resources and claims assists users to assess that entity's
financial strengths and weaknesses; to assess liquidity and solvency,
and its need and ability to obtain financing.
• Information about the claims and payment requirements assists users
to predict how future cash flows will be distributed among those with
a claim on the reporting entity.
• A reporting entity's economic resources and claims are reported in
the statement of financial position.
Changes in economic resources and claims
• Changes in a reporting entity's economic resources and claims result
from that entity's performance and from other events or transactions
such as issuing debt or equity instruments.
• Users need to be able to distinguish between both of these changes.
Financial performance reflected by accrual
accounting
• Information about a reporting entity's financial performance during a
period, representing changes in economic resources and claims other
than those obtained directly from investors and creditors, is useful in
assessing the entity's past and future ability to generate net cash
inflows.
• Such information may also indicate the extent to which general
economic events have changed the entity's ability to generate future
cash inflows.
• The changes in an entity's economic resources and claims are
presented in the statement of comprehensive income.
Financial performance reflected by past cash
flows
• Information about a reporting entity's cash flows during the reporting
period also assists users to assess the entity's ability to generate
future net cash inflows and to assess management’s stewardship of
the entity’s economic resources.
• This information indicates how the entity obtains and spends cash,
including information about its borrowing and repayment of debt,
cash dividends to shareholders, etc.
• The changes in the entity's cash flows are presented in the statement
of cash flows.
Changes in economic resources and claims not resulting from
financial performance

• Information about changes in an entity's economic resources and

claims resulting from events and transactions other than financial
performance, such as the issue of equity instruments or distributions
of cash or other assets to shareholders is necessary to complete the
picture of the total change in the entity's economic resources and
claims.
• The changes in an entity's economic resources and claims not
resulting from financial performance is presented in the statement of
changes in equity.
Purpose of Conceptual Framework

Question
Which of the following is NOT the purpose of having a
conceptual framework?
a. A practical tool that assists Board to develop Standards.
b. A practical tool that assists Preparers to develop
consistent accounting policies.
c. A practical tool that assists Regulator to make sure that
economic activity can be identified with a particular
legal entity.
d. A practical tool that assists all users to understand and
interpret Standards.
LO 4
Chapter 2
Qualitative Characteristics of
Useful Financial Information
Qualitative characteristics
Fundamental qualitative characteristics

Relevance Faithful representation

• Information is relevant if it is capable of • Information must faithfully represent the
making a difference to the decisions made substance of what it purports to
by users represent

Enhancing qualitative characteristics

Comparability Verifiability Timeliness Understandability

Cost constraint
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.
• The predictive value and confirmatory value of financial information are
interrelated.
• Materiality is an entity-specific aspect of relevance based on the
nature or magnitude (or both) of the items to which the information
relates in the context of an individual entity's financial report.
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.
• Faithful representation means representation of the substance of an
economic phenomenon instead of representation of its legal form only.
• A faithful representation seeks to maximise the underlying characteristics of
completeness, neutrality and freedom from error.
• A neutral depiction is supported by the exercise of prudence.
• Prudence is the exercise of caution when making judgements under conditions of
uncertainty. 
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.
• Comparability enables users to identify and understand similarities in,
and differences among, items.
Verifiability
• Verifiability helps to assure users that information represents
faithfully the economic phenomena it purports to represent.
• Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
Timeliness
• Timeliness means that information is available to decision-makers in
time to be capable of influencing their decisions.
Understandability
• Classifying, characterising and presenting information clearly and
concisely makes it understandable.
• While some phenomena are inherently complex and cannot be made
easy to understand, to exclude such information would make financial
reports incomplete and potentially misleading.
• Financial reports are prepared for users who have a reasonable
knowledge of business and economic activities and who review and
analyse the information with diligence.
Fundamental qualitative characteristics

Question
Accounting information is considered to be relevant when it
a. can be depended on to represent the economic
conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of
accounting information.
d. is verifiable and neutral.

LO 4
Enhancing qualitative characteristics

Question
Enhancing qualities as described by Conceptual Framework,
include all of the following except:
a. Comparability.
b. Neutrality.
c. Understandability.
d. Verifiability.

LO 4
The cost constraint on useful financial
reporting
• Cost is a pervasive constraint on the information that can be provided
by general purpose financial reporting.
• Reporting such information imposes costs and those costs should be
justified by the benefits of reporting that information.
Chapter 3
Financial Statements and the
Reporting Entity
Objective of financial statements
• The objective of financial statements is to provide information about
an entity's assets, liabilities, equity, income and expenses that is
useful to financial statements users in assessing the prospects for
future net cash inflows to the entity and in assessing management's
stewardship of the entity's resources.
The reporting entity
• A reporting entity is an entity that is required, or chooses, to prepare
financial statements. It can be a single entity or a portion of an entity
or can comprise more than one entity. A reporting entity is not
necessarily a legal entity.
• Determining the appropriate boundary of a reporting entity is driven
by the information needs of the primary users of the reporting
entity’s financial statements.
Chapter 4
The Elements of Financial
Statements
Elements of financial statements—
assets, liabilities and equity
• Relate to financial position

A present economic resource controlled by the entity as a result of past

events
Asset • An economic resource is a right that has the potential to produce
economic benefits

A present obligation of the entity to transfer an economic resource as a

result of past events
Liability • An obligation is a duty or responsibility that the entity has no
practical ability to avoid

The residual interest in the assets of the entity after deducting all its
liabilities
Equity • Financial Instruments with Characteristics of Equity research project
further explores how to distinguish liabilities from equity
Elements of financial statements—
income and expenses
• Relate to financial performance

Increases in assets, or decreases in liabilities, that result in increases

Income in equity, other than those relating to contributions from holders of
equity claims

Decreases in assets, or increases in liabilities, that result in decreases

Expenses in equity, other than those relating to distributions to holders of
equity claims

Information about income and expenses is just as important as information about

assets and liabilities
Chapter 5
Recognition and Derecognition
Recognition
• Recognition is the process of incorporating in the balance sheet or
income statement an item that meets the definition of one of the
elements of financial statements.
Recognition

Recognition criteria

Relevance Faithful representation

Whether recognition of an item results in relevant
information may be affected by, for example:
• low probability of a flow of economic benefits
• existence uncertainty
Whether recognition of an item results in a faithful
representation may be affected by, for example:
• measurement uncertainty
• recognition inconsistency
• presentation and disclosure of resulting income,
expenses and changes in equity

Cost constraint
Derecognition
• Derecognition is the removal of all or part of a recognised asset or
liability from an entity’s statement of financial position.
• Derecognition normally occurs when that item no longer meets the
definition of an asset or of a liability:
• (a) for an asset, derecognition normally occurs when the entity loses control
of all or part of the recognised asset; and
• (b) for a liability, derecognition normally occurs when the entity no longer has
a present obligation for all or part of the recognised liability.
Chapter 6
Measurement
Measurement
• Measurement involves assigning monetary amounts at which the
elements of the financial statements are to be recognised and
reported.
Measurement
Historical cost measurement bases Current value measurement bases
• include amortised cost • include fair value, value in use, fulfilment value and
current cost

Selecting a measurement basis

Relevance Faithful representation

• characteristics of the asset or liability • measurement inconsistency
• contribution to future cash flows • measurement uncertainty

Information in both the statement of financial position and the statement(s) of

financial performance

Enhancing qualitative characteristics and cost constraint

Chapter 7
Presentation and Disclosure
Presentation and Disclosure
• A reporting entity communicates information about its assets,
liabilities, equity, income and expenses by presenting and disclosing
information in its financial statements.
• A balance is needed between:
• (a) giving entities the flexibility to provide relevant information that faithfully
represents the entity’s assets, liabilities, equity, income and expenses; and
• (b) requiring information that is comparable, both from period to period for a
reporting entity and in a single reporting period across entities.
Profit or loss and OCI
Statement of profit or • Primary source of information about performance
loss • Default location for income and expenses

Other comprehensive • Exceptional circumstances

• Only changes in current values of assets and liabilities
income • In principle, OCI items are recycled

Classification into profit or loss and OCI and recycling

Relevance Faithful representation

Only the Board can take decisions on OCI and recycling

Chapter 8
Concepts of Capital and Capital
Maintenance
Concepts of Capital
• Under a financial concept of capital, such as invested money or
invested purchasing power, capital is synonymous with the net assets
or equity of the entity.
• Under a physical concept of capital, such as operating capability,
capital is regarded as the productive capacity of the entity based on,
for example, units of output per day.
Concepts of capital maintenance and the
determination of profit
• Financial capital maintenance.
• Under this concept a profit is earned only if the financial (or money) amount
of the net assets at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.
• Financial capital maintenance can be measured in either nominal monetary
units or units of constant purchasing power.
Concepts of capital maintenance and the
determination of profit
• Physical capital maintenance.
• Under this concept a profit is earned only if the physical productive capacity
(or operating capability) of the entity (or the resources or funds needed to
achieve that capacity) at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.
Concepts of capital maintenance and the
determination of profit
• The principal difference between the two concepts of capital
maintenance is the treatment of the effects of changes in the prices
of assets and liabilities of the entity.
• In general terms, an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the
period.
• Any amount over and above that required to maintain the capital at
the beginning of the period is profit.
Concepts of capital maintenance and the
determination of profit
• Under the concept of financial capital maintenance where capital is defined in
terms of nominal monetary units, profit represents the increase in nominal
money capital over the period.
• Thus, increases in the prices of assets held over the period, conventionally referred to
as holding gains, are, conceptually, profits.
• They may not be recognised as such, however, until the assets are disposed of in an
exchange transaction.
• When the concept of financial capital maintenance is defined in terms of constant
purchasing power units, profit represents the increase in invested purchasing power
over the period. Thus, only that part of the increase in the prices of assets that exceeds
the increase in the general level of prices is regarded as profit.
• The rest of the increase is treated as a capital maintenance adjustment and, hence, as
part of equity.
Concepts of capital maintenance and the
determination of profit
• Under the concept of physical capital maintenance when capital is
defined in terms of the physical productive capacity, profit represents
the increase in that capital over the period.
• All price changes affecting the assets and liabilities of the entity are viewed as
changes in the measurement of the physical productive capacity of the entity;
hence, they are treated as capital maintenance adjustments that are part of
equity and not as profit.
• Konsep pemeliharaan modal fisik memerlukan penggunaan dasar pengukuran
biaya kini. Akan tetapi, konsep pemeliharaan modal keuangan tidak
memerlukan penggunaan dasar pengukuran tertentu.