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THE CONCEPTUAL FRAMEWORK

Conceptual Framework
The search for a conceptual framework
• The conceptual framework is not a standard as such, but is a framework which
sets out the concepts underlying the of accounting standards and the general
spirit behind them.
• A conceptual framework 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
those already in existence.
• The financial reporting process is concerned with providing information that is
useful in the business and economic decision making process. Therefore a
conceptual framework will form theoretical basis for determining which events
should be accounted for, how they should be measured and how they should be
communicated to users.
Conceptual Framework
The IASB’s Conceptual Framework
The conceptual framework for financial reporting is currently as follows:
Chapter 1: The objective of general purpose financial reporting.
Chapter 2: The reporting entity (to be issued)
Chapter 3: Qualitative characteristics of useful financial information.
Chapter 4: Remaining text of the 1989 framework:
• Underlying assumption
• The elements of financial statements.
• Recognition of the elements of financial statements.
• Measurements of financial statements elements.
• Concepts of capital and capital maintenance.
Conceptual Framework
Purpose and status
1. To assist the board in the development of future IFRSs and its review of the existing
one.
2. To assist the board in promoting harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.
3. To assist national standards setting bodies in developing national standards.
4. To assist auditors in forming an opinion as to whether financial statements comply with
IFRS.
5. To assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRS.
 The conceptual framework is not an IFRS and so does not overrule any individual
IFRS. In the (rare) case of conflict between an IFRS and the conceptual
framework, the IFRS will prevail.
Conceptual Framework
Scope
The conceptual framework deals with:
a) The objective of financial statements.
b) The qualitative characteristics that determine the usefulness of information in
financial statements.
c) The definition, recognition and measurement of the elements from which
financial statements are constructed.
d) Concepts of capital and capital maintenance.
Conceptual Framework
The objective of general purpose financial reporting
The objective is to provide
information that is useful to
existing and potential
investors, lenders and other
creditors in making
decisions about providing
resources to the entity.
• Information about the entity’s economic
resources and the claims against it helps
users to assess the entity’s liquidity and
solvency and its likely needs for additional
financing.
• Accrual accounting method An entity must
prepare its financial statements according to
the accrual method of accounting, meaning
that the revenue and expenses are
recognized as from they when they take
place, whether or not the associated cash
flow takes place at the same time or at a later
date.
Conceptual Framework
Underlying assumption
• The financial statements must be prepared on
Going Concern is the the going concern basis unless it is highly
underlying assumption in likely that the entity will go into liquidation or
cease trading
preparing financial • If management has significant concerns about
statements. the entity's ability to continue as a going
concern, the uncertainties must be disclosed.
• If management concludes that the entity is
NOT a going concern, the financial statements
should NOT be prepared on a going concern
basis, in which case IAS 1 requires a series of
disclosures.
Conceptual Framework
Qualitative Characteristics of useful information
The two fundamental qualitative characteristics of accounting information are
Relevance and Faithful representation
Conceptual Framework
Qualitative Characteristics of useful information
Qualitative
Characteristics

Faithful
Relevance
Representation

Confirmatory
Predictive value Complete Neutral Free from error
Value

Comparability Timeliness Verified Understandability

Conceptual Framework
Qualitative Characteristics of useful information
Relevant information is capable of • Predictive value requires that information
be used to predict future outcomes.
making a difference in a user's
decision. Financial information is • Confirmatory value requires that
information either confirms or changes prior
relevant if it has predictive value,
evaluations.
confirmatory value or both.
 The relevance of information is affected by
its nature and its materiality.
Conceptual Framework
Qualitative Characteristics of useful information
Information has the quality of
faithful representation if the
information depicts what it purports
to represent. A faithful
representation should be complete,
neutral, and free from error.
• Completeness requires that information is
presented or depicted in a way that users
can understand the item being depicted.
• Neutrality requires that the item is depicted
without bias either favorably or unfavorably
to users.
• Free from error means that there are no
errors or omissions in the information
reported.
 Substance over form this is not a separate
qualitative characteristic under the
conceptual framework. It is implied in faithful
representation.
Conceptual Framework
Enhancing qualitative characteristics
1. Comparability enables users to identify and understand similarities and differences
between items.
• Consistency of presentation: The methods adopted for presentation and classification of
item must be maintained from one period to the next unless a change is necessary in order to
comply with standard or will result in a more appropriate presentation
2. Verifiability occurs when different sources reach consensus or agreement on an
amount of representation of an item.
3. Timelines requires that information is available to a decision maker when it is useful to
make the decision.
4. Understandability involves classifying, characterizing, and presenting information
clearly and concisely. Understandability assumes that a user has a reasonable
knowledge of business and economic activities to comprehend financial reports.
 Constraint : Benefit should not exceed the cost.
Conceptual Framework
The elements of Financial Statements
1. Asset A resource controlled by an entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
The existence of an asset, particularly in terms of control, is not reliant on:
a. Physical form (patents, copyrights, etc.) nor
b. Legal rights (leases)
2. Liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
3. Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
Conceptual Framework
The elements of Financial Statements
4. Income increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.
 Both revenue and gains are included in the definition of income.
5. Expenses decreases in economic benefits during the accounting period in the
form of outflows or depletion of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.
 Both expenses and losses are included in the definition of expenses.
Conceptual Framework
Recognition of Financial Statements Elements
Recognition principles establish
criteria concerning when a
transaction or event should be
recorded in the accounting records,
while measurement principles
govern the valuation of those
elements.
There are three fundamental criteria that
relate to all transactions that must be met
before an item is recognized in the financial
statements. These events are:
1. Definitions, meets the definition of an
element.
2. Measurability, can be reliably measured.
3. Probability, it is probable that any future
economic benefit associated with the item
will flow to or from the entity.
Conceptual Framework
Measurement of Financial Statements Elements
A number of different attributes are used are used to measure items shown in the financial
statements, they include the following:
• Historical cost assets are reported with the amount of cash or its equivalents paid, or the fair
value of the consideration given to acquire an asset. Liabilities are reported with the amount of
cash or its equivalents received in exchange for the obligation.
• Current cost is the amount of cash, or its equivalent that would have to be paid if the same or
an equivalent asset were acquired currently.
• Realisable Value is the expected amount of cash or cash equivalents that could currently be
received by selling the asset in the due course of business.
• Settlement Value is the amount that the company expects to pay to satisfy the liabilities in the
due course of business.
• Present value A current estimate of the present discounted value of the future net cash flows
in the normal course of business.
THE POWER
OF BEING
UNDERSTOOD
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