Conceptual Framework for Financial Reporting

Learning Objectives
• State the basic purpose, authoritative status, and scope of
the Conceptual Framework.
• State the objective of financial reporting.
• Identify the primary users of financial statements.
• Explain briefly the qualitative characteristics of useful
information and how they are applied in financial
reporting.
• Define the elements of financial statements and state their
recognition criteria.

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Standards (by: Zeus Vernon B. Millan)
Conceptual Framework for Financial
Reporting

• The Conceptual Framework sets out the concepts that

underlie the preparation and presentation of financial
statements for external users.

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Standards (by: Zeus Vernon B. Millan)
Authoritative Status and Applicability

• The Conceptual Framework is not a PFRS. When there is a

conflict between the Conceptual Framework and a PFRS, the
PFRS will prevail.
• In the absence of a standard, management shall consider the
Conceptual Framework in making its judgment in developing
and applying an accounting policy that results in information
that is relevant and reliable.
• The Conceptual Framework is concerned with general-
purpose financial statements.

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Standards (by: Zeus Vernon B. Millan)
Objective of general purpose 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. A secondary objective of financial
statements is to show the results of the stewardship of management.

• The objective of general purpose financial reporting forms the

foundation of the Conceptual Framework. Other aspects of the
Conceptual Framework flow logically from the objective.
 

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Standards (by: Zeus Vernon B. Millan)
Users and their Needs

• Primary users – those to whom general purpose financial reports

are directed:
(a) Existing and potential investors
(b) Lenders and other creditors.

• Only the common needs of primary users are met by the financial
statements.

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Standards (by: Zeus Vernon B. Millan)
Qualitative Characteristics

I. Fundamental qualitative characteristics

(1) Relevance
(a) Predictive value
(b) Feedback value
 Materiality – entity-specific aspect of relevance

(2) Faithful representation

(a) Completeness
(b) Neutrality
(c) Free from error

II. Enhancing qualitative characteristics

(3) Comparability
(4) Verifiability
(5) Timeliness
(6) Understandability
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Standards (by: Zeus Vernon B. Millan)
Elements of Financial Statements
Financial Position
1. Asset - resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity
2. Liability - present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
3. Equity – assets less liabilities

Performance
4. Income – encompasses both (a) revenues and (b) gains
5. Expense – encompasses both (b) expenses and (losses)

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Standards (by: Zeus Vernon B. Millan)
Recognition

• Recognition –the process of incorporating in the balance sheet

or income statement an item that meets the definition of an
element and satisfies the recognition criteria.

• An item is recognized if all of the following are satisfied:

a. The item meets the definition of an element;
b. It is probable that any future economic benefit associated with
the item will flow to or from the entity; and
c. The item has a cost or value that can be measured with
reliability.
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Standards (by: Zeus Vernon B. Millan)
Expense Recognition Principles

1. Direct association or matching

2. Systematic and rational allocation
3. Immediate recognition

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Standards (by: Zeus Vernon B. Millan)
Measurement bases

a. Historical cost
b. Current cost
c. Realizable value (Settlement value)
d. Present value

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Standards (by: Zeus Vernon B. Millan)
Concepts of Capital and Capital Maintenance

• Financial concept of capital – capital is regarded as

the invested money or invested purchasing power.
Capital is synonymous with equity or net assets.

• Physical concept of capital – capital is regarded as

the entity’s productive capacity, e.g., units of output per
day.

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