Conceptual Framework for Financial Reporting 2018: Chapter 1

Objective of General-Purpose Financial Reporting:

- Provide financial information to primary users, including investors and lenders.

- Assist primary users in making decisions about providing resources to the reporting entity.

- Primary users include management, creditors, suppliers, and the general public, but the framework
primarily caters to investors and lenders.

Decisions of Primary Users:

- Primary users make decisions regarding the provision of resources to the reporting entity.

- Information required includes financial position and changes in a reporting entity's resources and
claims.

- Financial performance can be measured using accrual accounting or cash flow information.

Measurement of Financial Performance:

- Financial performance can be assessed using accrual accounting or cash flow information.

Importance of Changes in Resources:

- Changes in resources not resulting from financial performance are crucial.

- Examples include the issuance of debt and equity securities.

Necessity of Information about Economic Resources:

- Users need information about an entity's use of economic resources.

- Essential for evaluating management's stewardship function over the entity's assets.

- Assess how management protects valuable assets and ensures compliance with laws and regulations.

Focus of General-Purpose Reports:

- Primary focus is on providing information about changes to resources and claims, both from financial
performance and outside of it.

Major Takeaways:

- Importance of supplying users with information about resources and claims.

- Qualitative characteristics of useful financial information will be discussed in the next chapter.

Chapter 2 - Qualitative Characteristics of Useful Financial Information

Fundamental Qualitative Characteristics:

1. Relevance

- Makes a difference in decision-making

- Predictive value for anticipating future outcomes

- Confirmatory value for providing feedback on past evaluations

- Example: Cutoff grade for a bachelor's degree program

2. Faithful Representation

- Represents the substance of phenomena accurately

- Goes beyond the legal form of transactions

- Emphasis on accounting for the substance of leases

Additional Fundamental Qualitative Characteristics

1. Representation

2. Completeness

- Includes all necessary information

3. Neutrality

- Absence of bias

4. Freedom from Error

- Absence of errors or omissions, not necessarily accuracy

Enhancing Qualitative Characteristics:

1. Comparability

- Helps identify similarities and differences among items

2. Verifiability

- Ensures different observers can reach similar conclusions

3. Timeliness

- Information must be available in a timely manner

4. Understandability

- Financial reports should be comprehensible to users with reasonable knowledge of business and
economic activities

Important Note:

- Enhancing characteristics improve information but cannot replace fundamental characteristics.

Chapter 3: Financial Statements and the Reporting Entity

Objective of Financial Statements:

- Provide valuable information to users.

- Assess a reporting entity's future net cash inflows.

- Evaluate management stewardship.

Components of Financial Statements:

- Statement of Financial Position

- Assets, liabilities, and equity.

- Statement of Financial Performance

- Income and expenses.

- Other statements and notes.

Types of Reporting Entities:

- Single entity.

- Portion of an entity.

- Multiple entities.

- Consolidated financial statements for parent-subsidiary relationships.

- Combined financial statements for entities without a parent-subsidiary relationship.

Reporting Period:

- Financial statements cover a specific reporting period.

- May include transactions or events after the period.

Assumption: Going Concern:

- Entities are assumed to exist for the foreseeable future.

- Operating under the going concern assumption.

Chapter 4: The Elements of the Financial Statements

Elements of Financial Statements:

1. Assets:

- Economic resources controlled by an entity due to past events.

- Potential to produce economic benefits.

- Various forms, such as rights, intellectual property, or physical objects.

2. Liabilities:

- Present obligations of an entity to transfer economic resources due to past events.

- Opposite of assets.

- Obligations can be established by contracts, legislation, or constructive obligations based on

customary practices.

3. Equity:

- Residual interest in assets after paying off liabilities.

4. Financial Position Elements Criteria:

- Existence of a present obligation.

- Transfer of economic resources.

- Result of past events.

Additional Concepts:

- Unit of Account:

- How assets and liabilities are grouped for financial reporting purposes.

- Executory Contracts:

- Combined right and obligation that cannot be separated.

- Recognized as an asset or liability based on the assessment of the entity.

Major Takeaways:

- Elements of financial statements: assets, liabilities, equity.

- Loans as potential rights requiring control and uncertainty of economic benefits.

- Constructive liabilities recognized.

- Equity calculated as assets minus liabilities.

- Income and expenses affect equity, excluding contributions or distributions.

- Executory contracts represent equally unperformed rights and obligations.

Chapter 5: Recognition and Derecognition

Recognition:

- Process of including items in financial statements meeting the definition of the elements.
- Involves depicting the item in the statements with a monetary amount.

Derecognition (D recognition):

- Removal of recognized assets or liabilities when they no longer meet the definition.

Measurement Uncertainty:

- May prevent item recognition if a reasonable estimate cannot be made.

Interconnected Financial Statements:

- Recognition of one item is linked with the recognition of other items.

- Financial statements are interconnected.

Derecognition Examples:

- Occurs when an asset is sold.

- Occurs when a liability is paid.

- Results in the removal of the asset or liability from financial statements.

Chapter 6: Measurement

Introduction to Measurement:

- Focus on selecting the appropriate measurement basis in financial statements.

Measurement Bases:

- Historical cost and current value are discussed.

- Current value measurement bases include fair value, value in use, fulfillment value, and current cost.

Factors Influencing Measurement Basis:

- Relevance and faithful representation are crucial considerations.

- Characteristics of assets and liabilities and their impact on future cash flows affect relevance.

Measurement of Equity:

- While total equity is not directly measured, components like total par value of shares are measured
directly.

Cash Flow-Based Measurement Techniques:

- Discussed as a way to estimate certain measurements.

- Not considered standalone measurement bases.

- Can be used in conjunction with historical cost or current value measurements.

Key Insights:

- Emphasis on choosing the right measurement basis for accuracy and usefulness.

- Different measurement bases provide diverse perspectives on asset and liability values.

- Fair value, determined by market participants, differs from historical cost and is not affected by
transaction costs.

- Value in use and fulfillment value are entity-specific, considering the present value of expected cash
flows.

- Distinction between entry values (historical cost and current cost) and exit values (fair value and value
in use).

- Consideration of measurement uncertainty, outcome uncertainty, and existence and certainty in

choosing a measurement basis.
Chapter 7: Presentation and Disclosure

Accounting as the Language of Business:

- Emphasizes that accounting is the language of business.

- Effective communication of financial information is crucial.

Framework Emphasis on Presentation and Disclosure:

- Emphasizes presentation and disclosure objectives and principles over strict rules.

Classification:

- Involves grouping similar items and separating dissimilar items for better presentation and disclosure.

Aggregation:

- Essential for summarizing a large volume of detail.

- Should be done carefully to avoid excessive aggregation that conceals relevant information.

Offsetting:

- Generally not appropriate.

- Involves grouping separate units of account into a single net amount.

Balancing Detail and Summary:

- Excessive aggregation can hide relevant details.

- Excessive detail can make financial statements chaotic.

Key Insights:

- Accounting as the language of business, stressing effective communication through financial

statements.

- Recognition of the need for classification to present and disclose financial position and performance
accurately.

- Importance of careful aggregation to avoid obscuring relevant information.

- Generally, offsetting is not appropriate as it may obscure relevant details.

- Striking a balance between providing necessary detail and avoiding excessive detail in financial
statements.

- Framework allows flexibility in reporting while requiring comparable information for meaningful
analysis.

Chapter 8: Concept on Capital and Capital Maintenance

Financial Concept vs. Physical Concept of Capital:

- Financial concept: Capital as net assets or the difference between assets and liabilities.

- Physical concept: Capital as the productive capacity of the entity, measured by units of output per day.

Choice of Capital Concepts:

- Entities can choose between the financial and physical concepts of capital based on the users' needs.

Concepts of Capital Maintenance:

- Financial Capital Maintenance:

- Profit if ending net assets are greater than beginning net assets (excluding owner investments and
distributions).

- Reflects interconnectedness of financial statements.

- Physical Capital Maintenance:

- Profit earned only if physical productive capacity at the end exceeds that at the beginning.

- Accounts for the physical or operating capacity, not financial capacity.

- Requires the adoption of the current cost basis of measurement.

Comparison: Financial vs. Physical Capital Concept:

- Financial concept does not require a specific basis of measure.

- Physical concept requires the adoption of the current cost basis of measurement.