Conceptual Framework

The Conceptual Framework is a summary of the terms and

concepts that underlie the preparation and presentation of financial
statements.

Purpose

 Assist the International Accounting Standards Board (IASB) to develop

IFRSs that are based on consistent concepts;
 Assist preparers of financial statements to develop consistent accounting
policies:
 when no standard applies to a particular transaction or other event;
or
 when a standard allows a choice of accounting policy;
 Assist all parties to understand and interpret IFRS.

The Conceptual Framework provides the foundation for the development of

Standards that:

a. promote transparency by enhancing the international comparability

and quality of financial information.

b. strengthen accountability by reducing the information gap between

providers of capital and the entity's management.

c. contributes to economic efficiency by helping investors to identify

opportunities and risks around the world, thus improving capital
allocation.

Authoritative Status

In the absence of a standard or an interpretation that specifically

applies to a transaction, management shall consider the applicability of the
Framework in developing and applying an accounting policy that results in
information that is relevant and reliable.

THE FRAMEWORK IS NOT A STANDARD AND NOTHING IN IT OVERRIDES

ANY SPECIFIC STANDARD OR ANY REQUIREMENT OF ONE
 CHAPTER 1

Objective of General-Purpose Financial Reporting

To provide financial information about the reporting entity that

is useful to existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity.

Users of Financial Information

1. PRIMARY USERS

The primary users include the existing and potential investors, lenders
and other creditors

The primary users of financial information are the parties to whom

general purpose financial reports are primarily directed.

REASON: These users cannot generally require reporting entities to

provide information directly to them and must rely on general purpose
financial reports for much of the financial information they need.

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.

EXISTING AND POTENTIAL 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.
2. OTHER USERS

The other users include the employees, customers, governments and

their agencies, and the public

By residual definition, "other users" are users of financial information

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

Customers 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.

GOVERNMENT 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 similar
statistics.
PUBLIC

Entities affect members of the public in a variety of ways. Financial statements

may assist the public by providing information about the trend and the range
of its activities.

SPECIFIC OBJECTIVES

 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

Limitations

 General purpose financial reports do not, and cannot, provide all of

the information needed by providers of capital.
 General purpose financial reports are not designed to show the value
of a reporting entity.
 To a large extent, financial reports are based on estimates, judgements
and models rather than exact depictions.
 CHAPTER 2

Qualitative Characteristics of Useful Financial Information

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

information must have that qualities or attributes to be useful to the users
in making economic decisions.

Qualitative Characteristics of Useful Financial Information

The Framework states that the types of information likely to be most useful to
providers of capital are identified by various qualitative characteristics,
comprising:

 two fundamental qualitative characteristics;

 (Supplemented by) four enhancing qualitative characteristics.

Components of the Conceptual Framework

The qualitative characteristics of useful financial information apply to

all financial information, whether provided in financial statements or in other
ways.

NOTE: All financial information is also subject to a pervasive cost constraint

on the reporting entity’s ability to provide useful financial information.
Fundamental Qualitative Characteristics

In order to be useful, financial information must be relevant and

faithfully represent what it purports to represent.

Neither a faithful representation of an irrelevant phenomenon nor an

unfaithful representation of a relevant phenomenon helps users make good
decisions.

RELEVANCE

Relevant financial information is capable of making a difference in the

decisions made by users.

Financial information is capable of making a difference in decisions if it

has:

a. predictive value

b. confirmatory value.
 Ingredients of Relevant Information

The predictive value and confirmatory value of financial information are

interrelated.

PREDICTIVE VALUE

Financial information has predictive value if it can be used as an input to

processes employed by users to predict future outcomes.

CONFIRMATORY VALUE

Financial information has confirmatory value if it confirms or changes

previous evaluations.

MATERIALITY

Information is material if omitting, misstating or obscuring it could

reasonably be expected to influence the economic decisions that primary
users of general-purpose financial statements make on the basis of those
statements which provide financial information about a specific reporting
entity.

COULD REASONABLY BE EXPECTED TO INFLUENCE

The “could be reasonably expected to influence” threshold means that

materiality of information is relevant only to primary users and not to other
users.

OBSCURING INFORMATION

Information is obscured if presenting or communicating it would have a

similar effect as omitting or misstating the information.

PRIMARY USERS

Only primary users of financial statements are considered.

]

Materiality

OLD DEFINITION NEW DEFINITION

Information is material if its omission Information is material if omitting,

or misstatement could influence the
economic decision that the users
make on the basis of the financial
information about an entity.
misstating or obscuring it could
reasonably be expected to
influence the economic decisions
that primary users of general-
purpose financial statements make
on the basis of those statements
which provide financial information
about a specific reporting entity.

Materiality Threshold

The Conceptual Framework does not specify a uniform quantitative

threshold for materiality or predetermine what could be material in a
particular situation.

Materiality of an item depends on relative size rather than absolute

size.

Factors of Materiality

RELATIVE SIZE

The size of the item in relation to the total of the group to which the
item belongs is taken into account.

NATURE OF AN ITEM

The nature of the item relates to the inherent characteristics of a specific

item.
Faithful Representation

To be useful, financial information must not only represent relevant

phenomena, but it must also faithfully represent the substance of the
phenomena that it purports to represent.

Ingredients of Faithful Representation

COMPLETENESS

Relevant information should be presented in a way that facilitates

understanding and avoids erroneous implication.

NEUTRALITY

One without bias in the selection or presentation of financial information.

FREE FROM ERROR

No errors or omissions either in the description of the economic phenomenon

being depicted or in the selection or application of the process used to produce
the reported information.

Substance Over Form

Transactions must be accounted for in accordance with their

economic substance and reality and not merely their legal form.

Prudence

CONCEPTUAL FRAMEWORK

The Conceptual Framework did not include conservatism or prudence as an

aspect of faithful representation because to do so would be inconsistent with
neutrality.
REVISED CONCEPTUAL FRAMEWORK

The Revised Conceptual Framework has reintroduced the concept of

prudence.

Neutrality is supported by the exercise of prudence.

Prudence

Prudence is the exercise of caution when making judgements under

conditions of uncertainty.

The exercise of prudence means that:

 assets and income are not overstated; and

 liabilities and expenses are not understated.

Enhancing Qualitative Characteristics

The enhancing qualitative characteristics are intended to increase the

usefulness of the financial information that is relevant and faithfully
represented.

COMPARABILITY

Enables users to identify and understand similarities in, and differences

among items.

VERIFIABILITY

Different knowledgeable and independent observers could reach a consensus,

although not necessarily complete agreement, that a particular depiction is a
faithful representation.

TIMELINESS

Information is available to decision-makers on time to be capable of

influencing their decisions.

UNDERSTANDABILITY
Information is made understandable by classifying, characterizing and
presenting it clearly and concisely.

Cost Constraint

Cost is a pervasive constraint on the information provided by financial

reporting, and that the cost of producing information must be justified by
the benefits that it provides.

The benefit derived from the information should exceed the cost incurred in
obtaining the information.