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FAR210 CHAP. 2: MALAYSIAN CONCEPTUAL FRAMEWORK OF FINANCIAL

REPORTING

ACCOUNTING FRAMEWORK
 Structured or coherent system of inter-related objecves, fundamental
characteriscs and concepts that lead to formulaon of high-quality and
consistent reporng standards to prescribe the nature, funcon and limits of
nancial accounng and reporng.
 Need to be developed rst to provide a starng point/ foundaon for the
formulaon of reporng standards.

REASONS FOR DEVELOPING ACCOUNTING FRAMEWORK

 to idenfy a foundaon for nancial reporng;
 to idenfy the objecve of nancial statements;
 to idenfy the desirable qualitave characteriscs of nancial informaon;
 to provide a basis for seng of high-quality and consistent reporng standards;
 to serve as a reference point for resolving accounng issues and disputes.

STATUS OF THE CONCEPTUAL FRAMEWORK

 The Conceptual Framework for Financial Reporng (Conceptual Framework)
describes the objecve of, and the concepts for, general purpose nancial
reporng.
 The Conceptual Framework is not a Standard. Nothing in the Conceptual
Framework overrides any Standard or any requirement in a Standard.
 The Conceptual Framework may be revised from me to me on the basis of the
MASB’s experience of working with it. Revisions of the Conceptual Framework
will not automacally lead to changes to the Standards. Any decision to amend a
Standard would require the MASB to go through its due process for adding a
project to its agenda and developing an amendment to that Standard.
 The Conceptual Framework contributes to the stated mission of the of the
MASB. That mission is to develop Standards that bring transparency,
accountability and eciency to nancial markets around the world. The MASB’s
work serves the public interest by fostering trust, growth and longterm nancial
stability in the global economy. The Conceptual Framework provides the
foundaon for Standards that:
a. contribute to transparency by enhancing the internaonal comparability and
quality of nancial informaon, enabling investors and other market parcipants
to make informed economic decisions.
b. contribute to economic eciency by helping investors to idenfy opportunies
and risks across the world, thus improving capital allocaon. For businesses, the
use of a single, trusted accounng language derived from Standards based on
the Conceptual Framework lowers the cost of capital and reduces internaonal
reporng costs.
c. strengthen accountability by reducing the informaon gap between the
providers of capital and the people to whom they have entrusted their money.
Standards based on the Conceptual Framework provide informaon needed to

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hold management to account. As a source of globally comparable informaon,

those Standards are also of vital importance to regulators

THE PURPOSE OF MASB’S CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

 MASB’s Conceptual Framework describes the objecves of the concept for
general purpose nancial reporng; not a standard but contributes to the stated
mission of MASB:
a. Assist MASB to develop MFRS Standard that are based on consistent concept.
b. Assist preparer to develop consistent accounng policies when no Standards
applies to a parcular transacons of other event, or when a Standard allows a
choice of accounng policy.
c. Assist all pares to understand & interpret the Standards.

OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

 It species in Chapter 1 that “the objecve of general purpose nancial reporng
is to provide informaon about the reporng enty that is useful to exisng and
potenal investors, lenders and other creditors in making decisions about
providing resources to the enty”.
 Primary users of Financial Statements: investors, lenders, & other creditors.
 The decision involved:-
a. Buying, selling or holding equity & debt instruments.
b. Providing or seling loan & other forms of credit; or
c. exercising rights to vote on, or otherwise inuence, management’s acons that
aect the use of the enty’s economic resources

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

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1. RELEVANCE
 Relevant nancial informaon is capable of making a dierence in the decisions
made by users. Informaon may be capable of making a dierence in a decision
even if some users choose not to take advantage of it or are already aware of it
from other sources.
 Financial informaon is capable of making a dierence in decisions if it has
predicve value, conrmatory value or both.
 Financial informaon has predicve value if it can be used as an input to
processes employed by users to predict future outcomes. Financial informaon
need not be a predicon or forecast to have predicve value. Financial
informaon with predicve value is employed by users in making their own
predicons.
 Financial informaon has conrmatory value if it provides feedback about
(conrms or changes) previous evaluaons.
 The predicve value and conrmatory value of nancial informaon are
interrelated. Informaon that has predicve value oen also has conrmatory
value. For example, revenue informaon for the current year, which can be used
as the basis for predicng revenues in future years, can also be compared with
revenue predicons for the current year that were made in past years. The
results of those comparisons can help a user to correct and improve the
processes that were used to make those previous predicons.

2. MATERIALITY
 Informaon is material if oming it or misstang it could inuence decisions
that the primary users of general purpose nancial reports make on the basis of
those reports, which provide nancial informaon about a specic reporng
enty. In other words, materiality is an enty-specic aspect of relevance based
on the nature or magnitude, or both, of the items to which the informaon
relates in the context of an individual enty’s nancial report. Consequently, the
Board cannot specify a uniform quantave threshold for materiality or
predetermine what could be material in a parcular situaon.

3. FAITHFUL REPRESENTATION
 Financial reports represent economic phenomena in words and numbers. To be
useful, nancial informaon must not only represent relevant phenomena, but it
must also faithfully represent the substance of the phenomena that it purports
to represent. In many circumstances, the substance of an economic
phenomenon and its legal form are the same. If they are not the same, providing
informaon only about the legal form would not faithfully represent the
economic phenomenon
 To be a perfectly faithful representaon, a depicon would have three
characteriscs. It would be complete, neutral and free from error. Of course,
perfecon is seldom, if ever, achievable. The Board’s objecve is to maximise
those qualies to the extent possible.
i. Completeness: Include all informaon including necessary descripons and
explanaon for a user to understand the phenomenon being depicted.

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ii. Neutrality: No bias in selecon or presentaon of nancial informaon.

Informaon is not slanted, weighted, emphasized, de- emphasized or
manipulated.
iii. Free from error: There are no errors or omission in the descripon of the
phenomenon, and process to produce report had been selected/applied without
error.

ENHANCING QUALITATIVE CHARACTERISTICS

1. COMPARABILITY
 Ability to be compared with similar informaon about other enes or another
period/date. Consistency is key criterion to ensure informaon is comparable.
 Consistency, although related to comparability, is not the same. Consistency
refers to the use of the same methods for the same items, either from period to
period within a reporng enty or in a single period across enes.
Comparability is the goal; consistency helps to achieve that goal.
 Comparability is not uniformity. For informaon to be comparable, like things
must look alike and dierent things must look dierent. Comparability of
nancial informaon is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look dierent.
 Some degree of comparability is likely to be aained by sasfying the
fundamental qualitave characteriscs. A faithful representaon of a relevant
economic phenomenon should naturally possess some degree of comparability
with a faithful representaon of a similar relevant economic phenomenon by
another reporng enty.
 Although a single economic phenomenon can be faithfully represented in
mulple ways, perming alternave accounng methods for the same
economic phenomenon diminishes comparability.

2. VERIFIABILITY
 Dierent knowledgeable and independent observers could reach same
consensus about nancial informaon being depicted.
 Financial statement should be understandable by users who are assumed to
have reasonable knowledge of business, economic, accounng and willing to
study the informaon with reasonable diligence.
 Indirect vericaon means checking the inputs to a model, formula or other
technique and recalculang the outputs using the same methodology. An
example is verifying the carrying amount of inventory by checking the inputs
(quanes and costs) and recalculang the ending inventory using the same cost
ow assumpon (for example, using the rst in, rst-out method).

3. TIMELINESS
 Having informaon available to decision-makers in me to be capable of
inuencing their decision.
 Generally, the older the informaon is the less useful it is. However, some
informaon may connue to be mely long aer the end of a reporng period
because, for example, some users may need to idenfy and assess trends.

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4. UNDERSTANDABILITY
 Financial statement should be understandable by users who are assumed to
have reasonable knowledge of business, economic, accounng and willing to
study the informaon with reasonable diligence.
 Some phenomena are inherently complex and cannot be made easy to
understand. Excluding informaon about those phenomena from nancial
reports might make the informaon in those nancial reports easier to
understand. However, those reports would be incomplete and therefore possibly
misleading.
 Financial reports are prepared for users who have a reasonable knowledge of
business and economic acvies and who review and analyse the informaon
diligently. At mes, even well-informed and diligent users may need to seek the
aid of an adviser to understand informaon about complex economic
phenomena.

APPLYING THE ENHANCING QUALITATIVE CHARACTERISTICS

 Enhancing qualitave characteriscs should be maximised to the extent possible.
However, the enhancing qualitave characteriscs, either individually or as a
group, cannot make informaon useful if that informaon is irrelevant or does
not provide a faithful representaon of what it purports to represent.
 Applying the enhancing qualitave characteriscs is an iterave process that
does not follow a prescribed order. Somemes, one enhancing qualitave
characterisc may have to be diminished to maximise another qualitave
characterisc. For example, a temporary reducon in comparability as a result of
prospecvely applying a new Standard may be worthwhile to improve relevance
or faithful representaon in the longer term. Appropriate disclosures may
parally compensate for non-comparability.

ASSUMPTION
1. GOING CONCERN
 Financial statements are normally prepared on the assumpon that the
reporng enty is a going concern and will connue in operaon for the
foreseeable future. Hence, it is assumed that the enty has neither the intenon
nor the need to enter liquidaon or to cease trading. If such an intenon or need
exists, the nancial statements may have to be prepared on a dierent basis. If
so, the nancial statements describe the basis used.

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COST CONSTRAINT ON USEFUL FINANCIAL REPORTING

FINANCIAL STATEMENTS & THE REPORTING ENTITY

 Financial statements provide informaon about economic resources of the
reporng enty, claims against the enty, and changes in those resources and
claims, that meet the denions of the elements of nancial statements

OBJECTIVE & SCOPE OF FINANCIAL STATEMENTS

 The objecve of nancial statements is to provide nancial informaon about
the reporng enty’s assets, liabilies, equity, income and expenses that is
useful to users of nancial statements in assessing the prospects for future net
cash inows to the reporng enty and in assessing management’s stewardship
of the enty’s economic resources

ELEMENTS OF FINANCIAL STATEMENTS

 The elements of nancial statements dened in the Conceptual Framework are:
a. assets, liabilies and equity, which relate to a reporng enty’s nancial posion
b. income and expenses, which relate to a reporng enty’s nancial performance.

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RECOGNITION OF FINANCIAL STATEMENTS ELEMENTS

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DETERMINING RECOGNITION CRITERIA

DERECOGNITION
 Derecognion is the removal of all or part of a recognised asset or liability from
an enty’s statement of nancial posion.
 Derecognion normally occurs when that item no longer meets the denion of
an asset or of a liability:
a. for an asset, derecognion normally occurs when the enty loses control of all or
part of the recognised asset
b. for a liability, derecognion normally occurs when the enty no longer has a
present obligaon for all or part of the recognised liability.

MEASUREMENT OF FINANCIAL STATEMENT ELEMENTS

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RECOGNITION VS MEASUREMENT

MEASUREMENT BASES
 A measurement basis are:
a. Historical cost
 Asset is carried at an amount based on the cost incurred; liability is carried at
amount based on proceeds received in exchange for the obligaon

b. Current value (fair value, value in use and fullment value and current cost).
 Provide monetary informaon about assets, liabilies and related income and
expenses, using informaon updated to reect condions at the measurement
date.

CURRENT VALUE MEASUREMENT BASES

i. FAIR VALUE
 price that would be received to sell an asset, or paid to transfer a liability, in an
orderly transacon between market parcipants at the measurement date. can
be determined directly by observing prices in an acve market or determined
indirectly using measurement techniques

ii. VALUE IN USE

 the present value of the cash ows, or other economic benets, that an enty
expects to derive from the use of an asset and from its ulmate disposal.

iii. FULFILMENT VALUE

 is the present value of the cash, or other economic resources, that an enty
expects to be obliged to transfer as it fulls a liability.

iv. CURRENT COST

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 The current cost of an asset is the cost of an equivalent asset at the

measurement date, comprising the consideraon that would be paid at the
measurement date plus the transacon costs that would be incurred at that
date.
 The current cost of a liability is the consideraon that would be received for an
equivalent liability at the measurement date minus the transacon costs that
would be incurred at that date.

MEASUREMENT OF FINANCIAL STATEMENT ELEMENTS

CONCEPTS OF CAPITAL & CAPITAL MAINTENANCE

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PRESENTATION & DISCLOSURE

 Focusing on presentaon and disclosure objecves and principles rather than
focusing on rules;
 Classifying informaon in a manner that groups similar items and separates
dissimilar items; and
 Aggregang informaon in such a way that it is not obscured either by
unnecessary detail or by excessive aggregaon.

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