Conceptual Framework for Financial Reporting

Conceptual framework, in the field we are concerned with, is a statement of generally accepted
theoretical principles which form the frame of reference for financial reporting. These theoretical
principles provide the basis for the development of new accounting standards and the evaluation of
those already in existence.

Also, conceptual framework describes the fundamental framework for Financial Reporting and
issued by IASB to guide the development of IFRS.

Purposes of Conceptual Framework

1. To assist national standard bodies in developing nationality standards.

2. To assist auditors in forming an opinion whether the Financial Statements comply with IFRSs.
3. To assist the board in the development of future IFRSs and its review of existing IFRSs.
4. To assist preparers of Financial Statements in applying IFRSs and I'm dealing with topics that are
yet to form the subject of an IFRS.
5. To assist the board in promoting the harmonization of regulations and accounting standards.
6. To assist users of the Financial Statements to interpret the information.
7. To provide those interested in the work of IASB with information about its approach to the
formulation of IFRSs.

The Objectives of general purpose Financial Reporting

The objective of general purpose Financial Reporting is to provide information about the reporting
entity that is useful to existing and potential investors, lenders and creditors in making decisions
about providing resources to the entity.

Qualitative characteristics of useful financial information

Qualitative characteristics is categorized into two namely;

 Fundamental qualitative characteristics

 Enhancing qualitative characteristics

1. Fundamental qualitative characteristics

a. Relevance: Relevant information should be capable of making a difference in the decisions made
by the users. The relevance of information is affected by its nature and materiality. That is it has the
ability to influence the economic decisions of users, and is provided in time to influence those
decisions.

The quality of relevance in formation has predictive value which enables users to evaluate or assess
past, present or future events, or confirmatory value that helps to confirm or correct past
evaluations and assessments.

b. Faithful representation: This means that the financial statements should be prepared and
presented to represent faithfully the financial transactions that occurred during the reporting
period.

To achieve faithful representation, information must be complete (contain all the necessary
descriptions and explanations), neutral (free from bias) and free from material errors (exclude
information that will cause the financial statement to be false or misleading and thus unreliable and
deficient in terms of relevance).

2. Enhancing qualitative characteristics

a. Comparability: This means that financial statements should be prepared in such a way that would
enable users to reasonably compare the reporting entity's Financial Statements with other entity's
financial statements to evaluate their performance and position.

b. Understandability: This means that financial statements should be prepared in such a way that
can easily be understood by the users.

c. Verifiability: This means that the financial statements should be prepared in a way that will enable
different users to reach the same conclusion on the financial performance and position of the
reporting entity.

d. Timeliness: This means that the financial statements should be made available to users in time to
enable them make their economic decisions.

Elements of Financial Statements

- Assets
- Liabilities
- Equity
- Income
- Expenses

Assets are resources controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

Liabilities are present obligations of an entity arising from past events, the settlement of which is
expected to result in an outflow of the entity's resources embodying economic benefits.

Equity is the residual interest in the entity after deducting the value of all it's liabilities from the
value of all its assets.

Income are transactions that result in increase in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases in liabilities

Expense are decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities

Measurement of elements of Financial Statements

1. Historical cost
2. Current cost
3. Realisable value
4. Settlement value
5. Present value

Capital maintenance concepts

Financial capital maintenance: From this perspective, profit is earned only if the financial amount of
net assets at the end of the period exceeds the amount of net assets at the beginning of the period
after excluding any distribution to and contribution from, owners during the period. Financial capital
maintenance can be measured in nominal monetary units or unit of constant purchasing power.

Physical capital maintenance: From this perspective, profit is earned only if the entity’s physical
productive capacity of the entity at the end of the period exceeds the physical productive capacity at
the beginning of the period.

(I) Regulatory Framework (including convergence and Ethics): regulation of accounting information is
aimed at ensuring the users of financial statements receive a minimum amount of information that
will enable them to make meaningful decisions regarding their interest in a reporting entity. A
regulatory framework is required to ensure that relevant and reliable financial reporting is achieved
to meet the needs of shareholders and other users.

Accounting standards on their own would not be a complete regulatory framework. In order to fully
regulate the preparation of financial statements and the obligations of companies and directors,
legal and market regulations are also required.

Structure of the regulatory system

The IFRS Foundations

IASB (IFRS Advisory Council)
IFRSIC

IAS 1 - Presentation of Financial Statements.

The objective of IAS 1 is to prescribe the basis of preparation and presentation of financial
statements meant for general purpose.

Financial Statements: are statements that provide a picture relating to the financial health of a
business.

Components of Financial Statements

1. Statement of financial position

2. Statement of profit or loss and other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Explanatory notes

Assumptions in preparing Financial Statements

1. Going concern
2. Accrual basis of accounting
3. Consistency of presentation
4. Materiality and aggregation
5. Off-setting
6. Comparatively information
7. Timeliness
8. Reporting period

Current Assets

An entity shall classify an asset as current when:

- It expects to reality the asset, or intends to sell or consume it, in its normal operating cycle

- It holds the asset primarily for the purpose of trading.

Current Liabilities

An entity shall classify as current when:

- It expects to settle the liability in its normal operating cycle

- It holds the liability primarily for the purpose of trading.