Conceptual Framework

for Financial Reporting

The Association of Chartered Certified Accountants

Contents
• Learning objectives
• History and the objective of conceptual framework
• The objective of financial reporting
• Qualitative characteristics of useful financial information
• Elements of financial statements
• Recognition, Measurement, Derecognition and Presentation
• Other concepts
 Conceptual
Framework Learning Objectives

for Financial
Reporting
Conceptual Framework for financial reporting
Learning Objectives (LOs)
• Discuss the importance of a conceptual framework in underpinning the
production of accounting standards
• Discuss the objectives of financial reporting including disclosure of
information that can be used to help access management’s
stewardship of entity’s resources and limitations of financial reporting
• Discuss the nature and qualitative characteristics of useful financial
information
• Explain the roles of prudence and substance over from in financial
reporting.
Conceptual Framework for financial reporting
Learning Objectives (LOs)
• Discuss the high level measurement uncertainty that can make financial
information less relevant
• Evaluate the decisions made by management on recognition,
derecognition and measurement
• Critically discuss and apply definitions of the elements of financial
statements and the reporting of items in the statement of profit or loss
and other comprehensive income
 Conceptual
Framework History and the
objective of

for Financial
Conceptual
Framework

Reporting
Conceptual Framework for Financial Reporting
What is conceptual framework for financial reporting ?
• Set of theoretical principles and concepts that underlie the preparation and presentation of
financial statements

1989 The Framework for the preparation and presentation of financial statements

2010 The Conceptual Framework for financial reporting (a joint project of IASB & FASB)

2018 The Revised Conceptual Framework for financial reporting (a project of IASB)
Conceptual Framework for Financial Reporting
What is the purpose of conceptual framework for financial
reporting ?
• To assist the Board in developing new IFRSs, helping to ensure that these new standards are
based on consistent concepts
• To assist preparers of financial statements when no IFRS applies to a particular scenario, or
when an IFRS offers options to select
• To assist anyone in interpreting IFRSs

Important Notice
• The conceptual framework for financial reporting is not an accounting standard, as a result it
does not override the requirements in a particular standard.
Conceptual Framework for Financial Reporting
Conceptual Framework for financial reporting

The objective of general-purpose financial reporting

Qualitative characteristics of useful financial information

Financial statements and reporting entity

The elements of financial statements

Recognition, Derecognition, Measurement and presentation

Concepts of Capital and Capital maintenance

 Conceptual
Framework The objective financial

for financial
reporting

reporting
Conceptual Framework for Financial Reporting
The objective of financial reporting
The purpose of financial reporting is to provide information about the reporting entity to current and
potential investors, lenders and other creditors in making decisions relating to providing economic
resource to the entity.

Normally, an investor, lender or a creditor to make these decisions would require information about
• The entity’s potential future cashflows
• Management’s stewardship of the entity’s economic resources
To understand the
potential future cash
• Economic Resources of the entity (Assets) flows, users require
• Economic claims against the entity (Liabilities) information on
• Changes in economic resources and claims (Income
and Expenses)
 Conceptual
Framework Qualitative
characteristics of useful

for financial financial information

reporting
Conceptual Framework for Financial Reporting
Qualitative characteristics
Fundamental
Characteristics

Faithful
Relevance representation
Relevant information will make an impact on the Faithful representation of a transaction would
decisions made by the users based on the financial represent its economic form rather than the legal
statements. form.
Relevance requires management to consider the A perfectly faithful representation would be
materiality of such information to the financial • Complete
statements. • Neutral
• Free from error
Conceptual Framework for Financial Reporting
Qualitative characteristics – important concepts
Materiality
Information is considered to be material if omitting, misstating or obscuring it would influence the
economic decisions of the users.
Is there a threshold defined for a particular information to be material ?
No. Information may be material depending on the amount of the information or based on the
influence it could make to the users of the financial statements.
Conceptual Framework for Financial Reporting
Qualitative characteristics – important concepts
Substance over the form
transactions recorded in the financial statements must reflect their economic substance rather
than their legal form.

Examples – transactions where economic substance over legal form

• Accounting for assets on lease where the lease term extends for a substantial period of the
economic useful life of the asset.
• Accounting for sale and leaseback transactions.
Conceptual Framework for Financial Reporting
Enhancing Qualitative characteristics
• Comparability – investors should be able to compare an entity’s financial information year-on-
year, and one entity’s financial information with another.
• Timeliness – older information is less useful
• Verifiability – Knowledgeable users should be able to agree that a particular depiction of a
transaction offers a faithful representation.
• Understandability – information should be presented as clearly and concisely as possible
 Conceptual
Framework Elements of financial

for financial
statements

reporting
Conceptual Framework for Financial Reporting
Elements of financial statements
Elements of financial
statements

Statement of Statements of
financial position financial performance

• Assets • Income
• Liabilities • Expenses
• Equity
Conceptual Framework for Financial Reporting
Elements of financial statements
Economic resource Asset A present economic resource controlled by an entity as a
result of a past event
Economic claim Liability A present obligation of the entity to transfer an economic
resource as a result of a past event
Equity Residual interest in the net assets of the entity
Changes in economic Income Increases in assets or decreases in liabilities that result in an
resources increase to equity (other than contributions from equity
holders)
Expenses Decrease in assets or increases in liabilities that result in
decreases to equity (excluding distributions to equity holders)

Other changes in economic Contributions from / distributions to equity holders.

resources and claims
 Conceptual
Framework Recognition,
Measurement,

for financial
Derecognition and
Presentation

reporting
Conceptual Framework for Financial Reporting
Recognition
• Items are only recognised in the financial statements of they meet the definition of one
of the elements.
• However, not all items meeting these definitions are recognised.
Elements are recognised if recognition provides users with
• Relevant information
• A faithful representation of the asset or liability, and resulting income, expenses or
equity movements
Recognition might not provide relevant If an asset / liability is not recognised,
information if there is uncertainty over the appropriate disclosures may be required
existence of the element or is a low in the financial statements enabling the
probability of an outflow / inflow of users to understand the economic
economic resources. substance of the transaction.
Conceptual Framework for Financial Reporting
Measurement
• When recognised in the financial statements, elements must be quantified in monetary
terms.
Two broad measurement bases specified in the conceptual framework are
• Historical cost
• Current value measurement (fair value, current cost, etc.)

When selecting the measurement basis relevance of information provided to the users
would be maximized if following are considered
• The characteristic of the asset / liability
• The ways in which the asset / liability contribute to future cashflows

Eg: Determining cost or fair value approach to measure investment property / PPE.
Conceptual Framework for Financial Reporting
Presentation and disclosure
• Effective presentation and disclosure is a balance between allowing entities to flexibly
report relevant information about their financial performance and position.
• Key factors considered by IASB in presentations and disclosure
 Entity specific information is more useful than standardized descriptions
 Duplication makes financial information less understandable
Classification
Offsetting classifies dissimilar items together. Therefore, its generally not appropriate.

Aggregation
Aggregation is useful because it summarizes information that would otherwise be too
detailed.
 Conceptual
Framework Other important

for financial
concepts

reporting
Conceptual Framework for Financial Reporting
Going concern
Financial statements are prepared on the assumption that the entity is a going concern.
This means that it will continue to operate for the foreseeable future.

Prudence
When preparing financial statements, preparers should exercise prudence. Prudence
means that assets and income are not overstated, and liabilities and expenses are not
understated, However, this does not mean that assets or income should be purposefully
understated, or liabilities and expenses are purposefully overstated.
Thank you