BOOK Chapter (02) - Conceptual Frame Work

2.1 What is a conceptual framework in accounting?

 A conceptual framework is defined as a set of broad principles that provide the basis
for guiding actions or decisions.
An accounting conceptual framework can be described as: a coherent system of
concepts that underlie financial reporting (i.e. the preparation and presentation of
financial reports for external users’).

2.2 What is the difference between the conceptual framework in accounting and
accounting standards?

 The conceptual framework provides high level concepts such as definitions of

elements of financial statements, qualitative characteristics, definition of the
objective of general purpose financial reporting.

 Standards apply the concepts in specific situations — for example, accounting for
financial instruments, leases and inventory, intangible assets and fixed assets.

 The standards setters base new accounting standards, and amendments to old, on the
conceptual framework.


2.3 What are the underlying assumptions to be applied in preparing financial
statements according to the Framework? How do these assumptions affect the
financial statement items?
 There are two underlying assumptions identified in the Framework in the preparation
of the financial statements. These are the accrual basis and the going concern basis.

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The accrual basis is described in the Framework.
 Under this basis, the effects of transactions and other events are recognised when they
occur (and not as cash is received or paid) and they are recorded in the accounting
records and reported in the financial reports of the periods to which they relate.

 Preparing financial reports using accrual basis, will inform users not only about past
transactions involving payment and receipts of cash, but also of obligations to pay cash
in the future and cash to be received in the future.

The going concern basis is described in the Framework.

 Financial reports are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed
that the entity has neither the intention to liquidate; if such an intention exists, the
financial report may have to be prepared on a different basis and, if so, the basis used
is disclosed.

 For example, if the company will not continue in the future, this require assets to be
measured at liquidation basis (e.g. fair value)

2.4 Identify the qualitative characteristics of information in the Framework. How

are these related to the objectives of general purpose financial statements?
 The Framework states that:
Qualitative characteristics are the attributes that make the information provided in
financial reports useful to users. The four principal qualitative characteristics are
understandability, relevance, reliability and comparability.

 So the role of qualitative characteristics is to ensure that information provided to users

has these qualities as they will help ensure that the information is useful to users. This
is directly related to the objective of general purpose financial reports, which in the
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 Framework, is to provide information that is useful to a wide range of users in making
economic decisions.

 There may be a need to balance these qualities and trade these off.
For example: The cost of an item purchased 20 years ago is very reliable and objective,
however, it may not be relevant. A more relevant measure (such as value it could be sold
for now, or the cash flows it is expected to generate in the future) may be less reliable.

2.5. What is the difference between recognition and disclosure in accounting?

According to the Framework, when should an item be recognised in the financial
statements? (IMP)
 Recognition is the process of recording information about an element in the body (on
face) of the financial statements. Recognition is the process of incorporating in the
balance sheet or income statement an item that meets the definition of an element and
satisfies the criteria for recognition set out in paragraph.

 Disclosure normally means that information is included (disclosed) either in the body
(on the face of the statements) or in the notes to the accounts.

Examples
• A company may have a relatively small expense (e.g. for postage). This would meet
the definition and recognition criteria of an expense and thus be recognised (included in
expense on the face of the income statement). However, this item (postage expense)
would not need to be separately disclosed.

Recognition is a two-stage process

Firstly, the item must satisfy the definition of an element of the financial statements.
Secondly, information about an element will be recognised in the financial statements if

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it satisfies certain recognition criteria (these relate to probability and reliable
measurement).

Probability test
In the Framework the term ‘probable’ refers to ‘the degree of uncertainty that the future
economic benefits associated with the item will flow to or from the entity.

Reliable measurement
For an item to be recognised it is necessary that it possess a cost or other value that can
be measured reliably.