CONCEPTUAL FRAMEWORK

Conceptual Framework of Accounting evolved over years as a result of:

- Practises
- individual country laws

 A conceptual framework is:

• a system (collection) of related principles.
• It prescribes nature, function and limits of accounting and financial statements

If there were no framework, accounting standards would be developed in a random, way to

deal with issues as they arise. This would result in standards which would be inconsistent with
each other or legislation.

- Concept is an idea of something. Principle is a standard adhered to by individual or group.

© 2009 Prentice-Hall, Inc. 6–1

 IASB – CONCEPTUAL FRAMEWORK ON FINANCIAL
REPORTING
A document issued by the IASB to describe:
(i) Objectives
(ii) Concepts (principles)
of general purpose financial reporting.

Purpose of Conceptual Framework Issued by IASB:

(a) assist IASB to develop IFRS that are based on consistent concepts.

(b) assist preparers to develop consistent accounting policies

(c) assist all parties to understand and interpret the standards

*The Conceptual Framework is not a Standard. Nothing in Conceptual Framework overrides any Standard.
© 2009 Prentice-Hall, Inc. 6–2
 CONTENTS OF IASB CONCEPTUAL FRAMEWORK
1. THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

2. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

3. FINANCIAL STATEMENTS AND THE REPORTING ENTITY

4. THE ELEMENTS OF FINANCIAL STATEMENTS

5. RECOGNITION AND DERECOGNITION

6. MEASUREMENT

7. PRESENTATION AND DISCLOSURE

8. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

(Its around 86 pages document & is not in syllabus in entirety) © 2009 Prentice-Hall, Inc. 6–3
 1. OBJECTIVES OF FINANCIAL REPORTING

 Objective of financial reporting is to provide financial information about reporting entity.

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 2. QUALITATIVE CHARACTERISTICS OF FINANCIAL
INFORMATION
Qualitative characteristics are attributes that make information useful to others.
Fundamental qualitative characteristics

(i) Relevance
Information is relevant if:
 is provided in time to influence those decisions.

 it has ability to influence economic decisions of users (predictive & confirmatory)

Materiality has a direct impact on the relevance of information.

Relevance = Timely, Predictive & Confirmatory

© 2009 Prentice-Hall, Inc. 6–5

 QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
(ii) Faithful representation [true to the facts or original.]
 Transactions must be accounted for & presented in accordance with their substance
Not merely their legal form.

To be perfectly faithful, financial information possess following characteristics:

<Ingredients of Faithful Representation>

(i) Completeness: Information must contain all necessary descriptions & explanations.

(ii) Neutrality: Information must be neutral, i.e. free from bias. Financial statements are not neutral
if, presentation is made intentionally to alter judgement.

(iii) Free from error: Information must be free from error

© 2009 Prentice-Hall, Inc. 6–6

 QUESTIONS
 Identify fundamental qualitative characteristics under the Conceptual Framework.
I. Relevance II. Reliability
III. Faithful representation IV. Comparability
V. Verifiability VI. Timeliness
VII. Understandability

a. I, II

b. I, III

c. I, II, III, IV, V, VI

d. IV, V, VI, VII

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 QUESTIONS

 Which of following are ingredients of relevance under Conceptual

Framework?

I. Predictive value II. Confirmatory value

III. Timeliness IV. Materiality

a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV

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 QUESTIONS

 Which of following are ingredients of faithful representation under

Conceptual Framework?

I. Completeness II. Neutrality

III. Free from error IV. Reliability

a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV

© 2009 Prentice-Hall, Inc. 6–9

 ENHANCING QUALITATIVE CHARACTERISTICS OF
INFORMATION
(ii) Enhancing qualitative characteristics

– Comparability

– Verifiability

– Timeliness

– Understandability

Mnemonic?

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 ENHANCING QUALITATIVE CHARACTERISTICS OF
INFORMATION
Comparability
Users must be able to:
 compare financial statements over time to identify trends in its financial position and
performance
 compare financial statements of different entities to evaluate their relative financial
performance and financial position

For this to be the case there must be:

 Consistency
 Disclosure

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 ENHANCING QUALITATIVE CHARACTISTICS OF INFORMATION
 Verifiability

Verification means confirming an amount through direct observation i.e. counting cash.

 Timeliness
Timeliness means having information available to decision makers in time to be capable of
influencing their decisions. Generally, the older the information is the less useful it becomes.

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 ENHANCING QUALITATIVE CHARACTISTICS OF INFORMATION
 Understandability
Understandability depends on:
• the way in which information is presented
• the capabilities of users.

It is assumed that users:

• have a reasonable knowledge of business and economic activities
• are willing to study the information provided with reasonable diligence.

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3. Financial Statements & Reporting Entity

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 Remaining Contents of Conceptual Framework

5. RECOGNITION AND DERECOGNITION

6. MEASUREMENT

7. PRESENTATION AND DISCLOSURE

8. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

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 4. ELEMENTS OF FINANCIAL STATEMENTS

Element – meaning – part of something

Assets a resource controlled by entity from which future economic benefit is expected to inflow

Liabilities are obligations to transfer economic benefits as a result of past transactions.

Equity interest is residual amount after deducting liabilities of entity from all of entity’s assets

Income is increase in economic benefits in form of inflows of assets or decreases in liabilities.

Expenses decreases in economic benefits in form of outflows of assets or incurrence of liabilities

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 Self-Test Questions
1. Describe standard setting process? (2)
Subject Identified  SAC Advice  Discussion Paper  Public Comments (if any)  Exposure Draft
 Public Comments (if any)  Final Standard.

2. What is meant by conceptual framework? (3.1)

3. What are the qualitative characteristics of financial statements? (6)

4. What are the elements of financial statements? (7)

5. What are the enhancing qualitative characteristics of financial statements?(6.3)

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