CONCEPTUAL FRAMEWORK a.

Contribute to transparency by enhancing

international comparability and quality of
The Conceptual Framework for Financial financial information.
Reporting is a complete, comprehensive and
single document promulgated by the
International Accounting Standards Board.
b. Strengthen accountability by reducing
information gap between the providers of
capital and the people to whom they have
The Conceptual Framework is a summary of the entrusted their money.
terms and concepts that underlie the
preparation and presentation of financial
statements for external users.
C. Contribute to economic efficiency by helping
investors identify opportunities and risks across
the world.
In other words, the Conceptual Framework
describes the concepts for general purpose
financial reporting.
Purposes of Revised Conceptual Framnework

The Conceptual Framework is an attempt to

provide an overall theoretical foundation for a. To assist the International Accounting
accounting. Standards Board to develop IFRS Standards
based on consistent concepts.

The Conceptual Framework is intended to guide

standard- setters, preparers and users of
financial information in the preparation and
presentation of statements.
It is the underlying theory for the development
of accounting standards and revision of
previously issued accounting
standards.
b. To assist preparers of financial statements to
develop consistent accounting policy when no
Standard applies to a particular transaction or
other event or where an issue is not yet
addressed by an IFRS.
c. To assist preparers of financial statements to
develop accounting policy when a Standard
allow8 a choice of an accounting policy.

The Conceptual Framework will be used in
future standard setting decision but no changes
will be made to the current
IFRS.
d. To assist all parties to understand and
interpret the IFRS Standards.
Authoritative status of Conceptual Framework

The Conceptual Framework provides the

foundation for Standards that:
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 or 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 releUant and
reliable.
However, it is to be stated that the Conceptual
Framework
Nothing in the Conceptual Framework overrides
any specific In case where there is a contlict, the
requirements of the International Financial
Keporting Standards shall prevail over the
Conceptual Framework.
Users of financial information
Under the Conceptual Framework for Financial
Reporting the users of financial information
may be classified into two, namely:
a. Primary users
b. Other users
The primary users include the existing and
potential investors, lenders and other creditors.
The other users include the employees,
customers, governments and their agencies,
and the public.
Primary users - The primary users of financial
information are the parties to
whom general purpose financial reports are
primarily directed.
Such primary users cannot require reporting
entities to provide information directly to them
and therefore must rely on general purpose
financial reports for how much of the financial
information is needed.
Existing and potential investors
Existing and potential investors are concerned
with the risk inherent in and return provided by
their investments.
The investors need information to help them
determine whether they should buy, hold or
sell.
Shareholders are also interested in information
which enables them to assess the ability of the
entity to pay dividends.
Lenders and other creditors
Existing and potential 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.
Other users
By residual definition, "other users" are users of
financial intormation other than the existing
and potential investors, lenders and other
creditors.
Other Users are so called because they are
parties that may find the general purpose
financial reports useful but the reports are not
directed to them primarily.
Employees
Employees are interested in information about
the stability and profitability of the entity.
The employees are interested in information
which enables them to assess the ability of the
entity to provide remuneration, retirement
benefits and employment opportunities.
Customers
Custoners have an interest in information about
the continuance of an entity especially when
they have a long-term involvement with or are
dependent on the entity.
Governments and their agencies
Governments and their agencies are interested
in the allocation of resources and therefore the
activities of the entity.
These users require information to regulate the
activities of the entity, determine taxation
policies and as a basis for national income and
simnilar statistics.
Public
Entities affect members of the public in a
variety of ways.
For example, entities make substantial
contribution to the Iocal economy in many ways
including the number of people
they employ and ther patronage of local
suppliers.
Financial statements may assist the public by
providing information about the trend and the
range of its activities.
Scope of Revised Conceptual Framework
a. Objective of financial reporting
b. Qualitative characteristics of useful financial
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
OBJECTIVE OF FINANCIAL REPORTING
The objective of financial reporting forms the
foundation of the Conceptual Framework.
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.
The objective of financial reporting is the "why",
purpose or goal of accounting.
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 mnanagement.
The principal way of providing financial
information to external users is through the
annual financial statements.
However, financial reporting encompasses not
only financial statements but also other
information such as financial highlights,
summary of important financial figures, analysis
of financial statements and significant ratios.
Financial reports also include nonfinancial
information such as description of major
products and a listing of corporate
officers and directors.
Target users
Financial reporting is directed primarily to the
existing and potential investors, lenders and
other creditors which compose the primary user
group.
The reason is that existing and potential
investors, lenders and other creditors have the
most critical and immediate need for inform
ation in financial reports.
As a matter of fact, the primary users of
financial information are the parties that
provide resources to the entuty.
Moreover, information that meets the needs of
the specified primary users is likely to meet the
needs of other users such as employees,
customers, governments and their agencies.
The management of a reporting entity is also
interested in financial information about the
entity.
However, management need not rely on
general purpose financial reports because it is
able to obtain or access additional financial
information internally.
Specific objectives of financial reporting
The overall objective of financial reporting is to
provide information that is useful for decision
making.
The Conceptual Framework places more
emphasis on the importance of providing
information needed to assess the
management stewardship of the entity's
economic resources.
Accordingly, the specific objectives of financial
reporting are:
a. To provide information useful in making
decisions about providing resources to the
entity.
b. To provide information useful in assessing
the cash flow prospects of the entity.
c. To provide information about entity
resources, claims and changes in resources and
claims.
Limitations of financial reporting
a. General purpose financial reports do not and
cannot provide all of the information that
existing and potential investors, lenders and
other creditors need.
These users need to consider pertinent
information from other sources, for example,
general economic conditions, political events
and industry outlook.
b. 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.
c. General purpose financial reports are
intended to provide common information to
users and cannot accommodate every request
for information.
d. To a large extent, general purpose financial
reports are based on estimate and judgment
rather than exact depiction.
QUALITATIVE CHARACTERISTICS
Qualitative characteristics are the qualities or
attributes that make financial accounting
information useful to the uSerS.
In deciding which information to include in
financial statements, the objective is to ensure
that the information is useful to the users in
making economic decisions.
Under the Conceptual Framework for Financial
Reporting, qualhtative characteristics are
classified into fundamental qualitative
characteristics and enhancing qualitative
characteristics.
Fundamental qualitative. characteristics
The fundamental qualitative characteristics
relate to the content or substance of financial
information.
The fundamental qualitative characteristics are
relevance and faithful representation.
Information must be both relevant and
faithfully represented if it is to be useful.
Neither a faithful representation of an
irrelevant phenomenon nor an unfaithful
representation of a relevant phenomenon helps
users make good decisions.
Application of qualitative characteristics
The most efficient and effective process of Ingredients of relevance
applying the fundamental qualitative
characteristics would usually be:
Financial information is capable of making a
difference in a decision if it has predictive value
First, identify an economic phenomenon that and confirmatory value.
has the potential to be useful.
Second, identify the type of information about
the phenomenon that would be most relevant Financial information has predictive value if it
and can be faithfully represented. can be used as an input to processes
enmployed by users to predict future Outcome.
Third, determine whether the information is
available.
In other words, financial information has
predictive value when it can help users increase
Relevance the likelihood of correctly or
accurately predicting or forecasting outcome of
events.
In the simplest terms, relevance is the capacity
of the information to influence a decision.
The net cash provided by operating activities is
valuable predicting loan payment or default.
To be relevant, the financial information must
be capable of making a difference in the
decisions made by users.
Materiality

In other words, relevance requires that the

financial information should be related or
pertinent to the economic decision.
Information that does not bear on an economic
decision is useless.
To be useful, information must be relevant to
the decision making needs of users.
More specifically, the earnings per share
information is more relevant than book value
per share in determining the attractiveness of
an investment.
Materiality is a practical rule in accounting
which dictates that strict adherence to GAAP is
not required when the items are not significant
enough to affect the evaluation, decision and
fairness of the financial statements.
The materiality concept is also known as the
doctrine of Convenience.
Materiality is really a quantitatiye "threshold"
linked very closely to the qualitative
characteristic of relevance.
The relevance of information is affected by its
nature and materiality.
In other words, materiality is a subquality of
relevance based on the nature or magnitude or
both of the items to which the information
relates.
The Conceptual Framework does not specify a
uniform auantitative threshold tor materiality
or predetermine what could be material in a
particular situation.
Faithful representation
Faithful representation means that financial
reports represent economic phenomena or
transactions in words and numbers.
Stated differently, the descriptions and figures
must match what really existed or happened.
Simply worded, faithful representation means
that the actual effects of the transactions shall
be properly accounted for and reported in the
financial statements.
Ingredients of faithful representation
To be a perfectly faithful representation, a
depiction should have three characteristics,
namely:
a. Comnple te ness
b. Neutrality
C. Free from error
Completeness
Completeness requires that relevant
information should be presented in a way that
facilitates understanding and avoids erroneous
implication.
Completeness is the result of the adequate
disclosure standard or the principle of full
disclosure.
A complete depiction includes all information
necessary for a user to understand the
phenomenon being depicted, including all
necessary descriptions and explanations.
Neutrality
A neutral depiction is without bias in the
preparation or presentation of financial
information.
A neutral depiction is not slanted, weighted,
emphasized, de-emphasized or otherwise
manipulated to increase the probability that
financial information will be received favorably
or unfavorably by users.
In other words, to be neutral, the information
contained in the financial statements must be
free from bias.
The financial information should not favor one
party to the detriment of another party.
The information is directed to the common
needs of many users and not to the particular
needs of specific users.

Neutrality is synonymous with the all-
encompassing principle of fairness.
To be neutral is to be fair.
Free from error
Free from error means there are no errors or
omissions in the description of the
phenomenon or transaction.
Moreover, the process used to produce the
reported information has been selected and
applied with no errors in the process.
In this context, free from error does not mean
perfectly accurate in all respects.
For example, an estimate of an unobservable
price or value cannot be determined to be
accurate or inaccurate.
However, a representation of that estimate can
be faithful if the amount is described clearly and
accurately as an estimate.
Moreover, the nature and limitations of the
estimating process are explained, and no errors
have been made in selecting and applying an
appropriate process for developing the
estimate.
Substance over form
If information is to represent faithfully the
transactions and other events it purports to
represent, it is necessary that the transactions
and events are accounted in accordance with
their substance and reality and not merely their
legal form.
The economic substance of transactions and
events are usually emphasized when economic
substance differs from legal form.
Substance over form is not considered separate
component of faithful representation because it
would be redundant.
Faithful representation inherently represents
the substance of an economic phenomenon or
transaction rather than merely representing the
legal form.
Representing a legal form that differs from the
economic substance of the underlying
economic phenomenon or transaction could
not result in a faithful representation.
Enhancing qualitative characteristics
The enhancing qualitative characteristics relate
to the presentation or form of the financial
information.
The enhancing qualitative characteristics are
intended to increase the usefulness of the
financial information that is relevant and
faithfully represented.
The enhancing qualitative characteristics are
comparability, understandability, verifiability
and timeliness.
Relevant and faithfully represented financial
information is useful but the information would
be mnost useful if it is comparable,
understandable, verifiable and timely.
Comparability
Comparability means the ability to bring
together for the purpose of noting points of
likeness and difference.
Comparability is the enhancing qualitative
characteristic that enables users to identify and
understand similarities and dissimilarities
among items.
Comparability may be made within an entity or
between and across entities.
Comparability within an entity is the quality of
information that allows comparisons within a
single entity through time or fromn one
accounting period to the next.
Comparability within an entity is also known as
horizontal comparability or intracomparability.
Comparability between and aeross entities is
the quality of information that allows
comparisons between two or more
entities engaged in the same industry.
Comparability across entities intercomparability
or dimensional
comparability is also known as
intercomparability or dimensional comparability
For information to be comparable, like things
must look alike and different things must look
different.
Comparability is not enhanced by making unlike
things look alike or making like things look
different.
Consistency
Implicit in the qualitative characteristic of
comparability is the principle of consistency.
Consistency is not the same as comparability.
In a broad sense, consistency refers to the use
of the same method for the same item, either
from period to period within an entity or in a
single period accross entities.
Comparability is the goal and consistency helps
to achieve that goal.
In a limited sense, consistency is the uniform
application of accounting method from period
to period within an entity.
On the other hand, comparability is the uniform
application of accounting method between and
across entities in the same
industry.
Understandability
Understandability requires that financial
information must be comprehensible or
intelligible if it is to be most useful.
Accordingly, the information should be
presented in a form and expressed in
terminology that a user understands.
Classifying, characterizing and presenting
information "clearly and concisely" makes it
understandable.
An essential quality of the information provided
in financial statements is that it is readily
understandable by users.
Verifiability
Verifiability means that different
knowledgeable and independent observers
could reach consensus, although not
necessarily complete agreement, that a
particular dlepiction is a faithful representation.
In other words, uerifiability implies consensus.
The financial information is verifiable in the
sense that it is supported by evidence so that an
accountant that would look into the same
evidence would arrive at the same economic
decision or conclusion.
Verifiable financial information provides results
that would be substantially duplicated by
measurers using the same measurement
method.
Accordingly, verifiability helps assure users that
information represents the economic
phenomenon or transaction it purports to
represent.
Types of verification
Verification can be direct or indirect.
Direct verification means verifying an amount
or other representation through direct
observation, for example, by counting cash.
Indirect verification means checking the inputs
to a model, formula or other technique and
recalculating the inputs using the same
methodology.
Timeliness
Timeliness means that financial information
must be available or communicated early
enough when a decision is to be made.
Relevant and faithfully represented financial
information furnished after a decision is made is
useless or of no vale."
For example, the most important attribute of
quarterly or interim financial information is its
timeliness.
Generally, the older the information, the less
useful.

However, some information may continue-to be

timely long after the end of reporting period
because, some users may need to identify and
assess trends.

Timeliness enhances the truismn that without

knowledge of the past, the basis for prediction
will usually be lacking and without interest in
the future, knowledge of the past is sterile.

What happened in the past would become the

basis of what would happen in the future.