Conceptual Framework

Qualitative Characteristics
 What is the meaning of
qualitative characteristics of
financial information?
The Qualities or attributes
that make financial
accounting information
useful to the users
 What are the two (2)
classifications of Qualitative
Characteristics?
 Classifications
Fundamental Enhancing
 What are fundamental
qualitative characteristics?
 Classifications
Fundamental Characteristics

Relate to the content or substance of

financial information
 What are the two
fundamental qualitative
characteristics?
Fundamental Qualitative Characteristics
Relevance Faithful Representation
Fundamental Qualitative Characteristics
Relevance Faithful Representation
• Capacity of the
information to
influence a decision
Fundamental Qualitative Characteristics
Relevance Faithful Representation
• Capacity of the • Figures must match
information to what really existed or
influence a decision happened
What are the ingredients of
relevance?
 Ingredients of relevance
Financial Information
Predictive Value Confirmatory Value
 Ingredients of relevance
Financial Information
Predictive Value Confirmatory Value
• Used as an input to
predict future outcome
• Forecasting Outcome of
Events
Dividends, Wage Payment,
Maturing Commitments
 Ingredients of relevance
Financial Information
Predictive Value Confirmatory Value
• Used as an input to • Used as an input to
predict future outcome feedback about
• Forecasting Outcome of previous evaluation
Events • Confirm earlier
expectations
Dividends, Wage Payment,
Maturing Commitments
 Ingredients of relevance
Information can be both Predictive & Confirmatory
Value
 Ingredients of relevance
Information can be both Predictive & Confirmatory
Value
EXAMPLE
1st Quarter - ₱ 2,000,000.00 – Confirmatory Value

If trend continues after;

4 Quarters - ₱ 8,000,000.00 – Predictive Value
What is Materiality?
 Materiality
• A practical rule when items are not Significant
enough to affect the evaluation, decision and
fairness
• Also known as the “Doctrine of Convenience”
What is an Item Material?
 When is an Item Material?
• No Strict or Uniform Rule
• Dependent on good judgement, professional
expertise and common sense
• If omission or misstatement would influence the
decision of the user.
• Depends on Relative Size rather than Absolute Size
What are the 2 factors of
materiality?
 Factors of Materiality
SIZE NATURE
Relation to the total Inherently Material
group to which the item regardless of size
belongs
What are the ingredients of
Faithful Representation?
Ingredients of faithful representation
COMPLETENESS NEUTRALITY

FREE FROM ERROR

 Ingredients of faithful representation
COMPLETENESS NEUTRALITY
• Depiction of all Information
necessary for a user to
understand
• Principle of Full Disclosure

FREE FROM ERROR

 Ingredients of faithful representation
COMPLETENESS
• Depiction of all Information necessary for a user to
understand
• Principle of Full Disclosure
 Standard of Adequate Disclosure
• All significant & Relevant Information leading to
the preparation of financial statements shall be
clearly reported

• Disclosure or Non disclosure shall not be make the

financial statement would not be misleading.
 Standard of Adequate Disclosure
To be complete, the financial statement shall be
accompanied by notes of financial statements.
• Narrative description
• Disaggregation of item
• Other information not qualified for recognition
 Ingredients of faithful representation
COMPLETENESS NEUTRALITY
• Depiction of all Information
necessary for a user to
• Free from Bias
understand
• Principle of Full Disclosure

FREE FROM ERROR

 Explain neutrality of
financial information
 Neutrality
Financial Statement is not
– Slanted,
– Weighted,
– Emphasized / Deemphasized
– Manipulated
That will favor or un-favor any specific user but
directed for the common needs
 Ingredients of faithful representation
COMPLETENESS NEUTRALITY
• Depiction of all Information
necessary for a user to
• Free from Bias
understand
• Principle of Full Disclosure

FREE FROM ERROR

• No errors or omissions
 Free from Error
Does not mean a perfectly accurately
in all aspect due to estimates.
Explain the Concept of
substance over form
 Substance over Form
Faithful Representation INHERENTLY
represents the substance of an
economic phenomenon

ECONOMIC SUBSTANCE > LEGAL

FORM
 Conservatism
• Not Part of the Conceptual Framework
• Conflict with neutrality
 Conservatism
If alternative exist, choose the least
effect users prefer
Understatement > Overstatement
of
Net Asset or Net Income
 Conservatism
In Case of Doubt, record any loss & no
gain

Don’t count your chicks until the eggs

are hatched
 What are enhancing
qualitative characteristics?
 Classifications
Enhancing Characteristics

Relate to the presentation or form of

financial information

Increase usefulness of information

Enumerate the enhancing
qualitative characteristics
and Explain.
 Enhancing qualitative characteristics
Verifiability Comparability
• Different knowledgeable &
independent observers
could reach consensus

Understandability Timeliness
 Verifiability
Verifiability implies consensus
Financial Information must be
supported by EVIDENCE
2 Types of Verification
 2 Types of Verification
Direct Indirect
 2 Types of Verification
Direct Indirect
Verifying through Checking inputs to a
Model,
Direct Observation Formula,
Ex. Counting Cash Technique or,
Recalculation
 Enhancing qualitative characteristics
Verifiability Comparability
• Different knowledgeable & • Ability to identify the
independent observers similarities and
could reach consensus
difference of items
Understandability Timeliness
2 Types of Comparability
 2 Types of Comparability
Within Entity Across Entity
• Horizontal Comparability • Dimensional Comparability
• Intra-Comparability • Inter-Comparability
• Single Entity through • Between 2 or more entities
TIME on the same Industry
 Enhancing qualitative characteristics
Verifiability Comparability
• Different knowledgeable & • Ability to identify the
independent observers similarities and
could reach consensus
difference of items
Understandability Timeliness
• Financial Information is
comprehensible &
Intelligible
 Understandability
Financial Information must be
• Clear & Concise
• Presented & Expressed with Terminologies
users readily understands

Note: Users must have “Reasonable knowledge of business & economic

activities”, other wise seek guidance from Advisors
 Enhancing qualitative characteristics
Verifiability Comparability
• Different knowledgeable & • Ability to identify the
independent observers similarities and
could reach consensus
difference of items
Understandability Timeliness
• Financial Information is • Financial Information
comprehensible & are available or
Intelligible Communicated Early
 Timeliness
Quarterly or Interim Reports enhances Timeliness to Financial Information

The Older the Information the Less Useful

Except
When assessing Trends
Explain cost constraint on useful
financial information
 Cost Constraint

The benefit derived from information

should exceed the Cost

BENEFIT > COST