Chapter 2: CONCEPTUAL FRAMEWORK Objective of Financial Reporting

1. What is the meaning of Conceptual Framework? The Conceptual Framework is a summary

of the terms and concepts that underlie the preparation and presentation of financial
statements for external users. It is intended to guide the standard-setters, preparers, and
users of financial information in the preparation and presentation of statements.
2. What are the purposes of the Revised Conceptual Framework? The purposes of the RCF are:
 To assist the IASB to develop IFRS Standards based on consistent concepts.
 To assist preparers of financial statements to develop consistent accounting policy
when no Standard applies to a particular transaction or other event or where and
issue is not yet addressed by an IFRS.
 To assist preparers of financial statements to develop accounting policy when as
Standard allows a choice of an accounting policy.
 To assist all parties to understand and interpret the IFRS Standards.
3. Explain the authoritative status of the Conceptual Framework.

If there is a standard or an interpretation that specifically applies to a transaction, the

standard or interpretation overrides the Conceptual Framework. In the absence of a
standard of an interpretation that specifically applies to a transaction, management shall
consider the applicability of the Conceptual Framework in developing and applying an
accounting policy that results in information that is relevant and reliable.

4. Explain the “primary users” and their information needs. The primary users include the:

 Existing and potential investors - are concerned with the risk inherent in and
return provided by their investment, to help them determine whether they should
buy, hold or sell, and the ability of the entity to pay dividends.
 Lenders and other creditors - are interested in information which enables them to
determine whether their loans, interest thereon and other amounts owing to
them will be paid when due.

They are the parties whom general purpose financial reports are primarily directed.

5. Explain the “other user” and their information needs. Other users are the users of financial
information other than the “primary users”, such as:
 Employees – the stability and profitability of the entity
 Customers – continuance of an entity especially when they have a long-term
involvement with or are dependent on the entity.
 Government and their agencies – in the allocation of resources and therefor the
activities of the entity
 Public – trend and the range of its activities.
6. What is the scope of the Revised Conceptual Framework? The scope of the Conceptual
Framework are the following:
a. Objective of financial reporting
b. Qualitative characteristics of useful information
c. Financial statements and reporting entity
d. Elements of financial statements
e. Recognition and derecognition
f. Measurement
g. Presentation and disclosure
h. Concepts of capital and capital maintenance
7. Explain financial reporting. Financial reporting is the provision of financial information
about an entity to external users that is useful to them in making economic decisions and
for assessing the effectiveness of the entity’s management.
8. What is the overall objective of financial reporting? The overall objective of 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. It is to provide information that is useful for decision
making.
9. What are the specific objectives of financial reporting? The specific objectives of financial
reporting are:
 To provide information useful in making decisions about providing resources to
the entity.
 To provide information useful in assessing the cash flow prospects of the entity.
 To provide information about entity resources, claims and changes in resources
and claims.
10. Explain financial position. Financial position is information about the entity’s economic
resources and the claims against the reporting entity.
11. Explain liquidity and solvency. The liquidity is the availability of cash in the near future to
cover currently maturing obligations, while the solvency is the availability of cash over a
long term to meet financial commitments when they fall due.
12. Explain financial performance. Financial performance is the level of income earned by the
entity through the efficient and effective use of its resources. It comprises of revenue,
expenses and net income or loss for a period of time. It is also known as the results of
operations and is portrayed in the income statement and statement of comprehensive
income.
13. Explain accrual accounting. Accrual accounting depicts the effects of transactions and other
events and circumstances on an entity’s economic resources and claims in the periods in
which those effects occur even if the resulting cash receipts and payments occur and not
as cash is received or paid. Accrual accounting means that income is recognized when
earned regardless of when received and expense is recognized when incurred regardless of
when paid.
14. Explain management stewardship of the entity’s economic resources. Information about
how efficiently and effectively management has discharged its responsibilities to use the
entity’s economic resources helps users to assess management stewardship of those
resources. It is also useful for predicting how management will use the entity’s economic
resources in future periods.
15. What are the limitations of financial reporting? The limitations of financial reporting are the
following:
 General purpose financial reports do not and cannot provide all of the information
that existing and potential investors, lenders and other creditors need.
 General purpose financial reports are not designed to show the value of an entity
but the reports provide information to help the primary users estimate the value
of the entity.
 General purpose financial reports are intended to provide common information to
users and cannot accommodate every request for information.
 To a large extent, general purpose financial reports are based on estimate and
judgement rather than exact depiction