CONCEPTUAL FRAMEWORK

Objectives:
1. Describe the basic objective of Financial Statements.
2. Interpret the qualitative characteristics of financial information.
3. Define and distinguish the Elements of Financial Statements
OBJECTIVE of Financial Statements
• The objective of general purpose financial
statements is to provide information about
the financial position, financial performance
and cash flows of an entity that is useful to a
wide range of users in making economic
decisions.
 INFORMATION
Financial Position Financial Performance Cash Flows

 Assets  Revenue  Cash

 Liabilities  Expenses Receipts
 Equity  Net Income  Cash
or Loss Payments

 Statement of Cash
 Statement of Flows
Financial Position  Income Statement or
Statement of
Comprehensive Income
 COMPLETE Set of FSs
 Statement of Financial Position
 Income Statement
 Statement of Comprehensive Income
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes (comprising a summary of SIGNIFICANT accounting policies and other explanatory
information)
 QUALITATIVE Characteristics of USEFUL
Financial Information
• Financial information is useful when it is relevant
AND represents faithfully what it purports to
represent.
• The usefulness of financial information is enhanced
if it is comparable, verifiable, timely AND
understandable.

Enhancing qualitative characteristics (either individually or collectively) cannot render

information useful if that information is irrelevant or not represented faithfully.

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FUNDAMENTAL Qualitative Characteristics
RELEVANCE
• It 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 predictive value,
confirmatory value, OR both.
Materiality is an entity-specific aspect of relevance
based on the nature or magnitude (or both) of the items
to which the information relates in the context of an
individual entity's financial report.
FAITHFUL REPRESENTATION
• Faithful representation means
representation of the substance of
an economic phenomenon instead
of representation of its legal form
only.
Substance over legal form alone
 Completeness
 Neutrality – (Prudence)
Prudence is the exercise of caution when making
judgments under conditions of uncertainty.
 Freedom from error
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ENHANCING Qualitative Characteristics
COMPARABILITY
• Information about a reporting
entity is more useful if
 it can be compared with a similar
information about other entities
AND
 with similar information about
the same entity for another
period or another date.
VERIFIABILITY
• Verifiability means that different
knowledgeable and independent
observers could reach consensus,
although not necessarily
complete agreement, that a
particular depiction is a faithful
representation.
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ENHANCING Qualitative Characteristics

TIMELINESS
• Timeliness means that
information is available to
decision-makers in time to be
capable of influencing their
decisions.
UNDERSTANDABILITY
• Classifying, characterizing and
presenting information clearly
and concisely makes it
understandable.

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ELEMENTS OF FINANCIAL
STATEMENTS
 ELEMENTS RECOGNITION
of (the process of reporting of an A, L, I & E on the
Financial Statements face of the financial statements of an entity)

The elements of financial An item that meets the definition of an element

statements are broad shall be recognized if:
classes of EVENTS or
TRANSACTIONS that are
1. It is probable that any future economic
grouped according to their
benefit associated with the item will flow
Economic Characteristics.
to or from the entity.
2. The item has a cost or value that can be
The elements of financial measured with reliability.
statements are the
Building Blocks from which
financial statements are
constructed.
 ASSET
1. It is probable that future economic benefits
will flow to the entity. AND
2. The cost or value of the asset can be
measured reliably.

The term “probable” means that the chance of the future economic benefit arising is
more likely rather than less likely.
 LIABILITY
1. It is probable that an outflow of economic
benefits will be required for the settlement of
a present obligation. AND
2. The amount of obligation can be measured
reliably.
 INCOME
1. It is probable that future economic benefits
will flow to the entity as a result of an
increase in an asset or a decrease in a
liability. AND
2. The economic benefits can be measured
reliably.

Point of income recognition Point of Sale Point of delivery

 INCOME
SALE OF GOODS
• The entity has transferred to the buyer
the significant risks and rewards of
ownership of the goods
• The entity retains neither continuing
managerial involvement nor effective
control over the goods sold.
• The amount of revenue can be
measured reliably.
• It is probable that economic benefits
associated with the transaction will flow
to the entity.
• The costs incurred or to be incurred in
respect of the transaction can be
measured reliably.
RENDERING OF SERVICES
• The amount of revenue can be
measured reliably.
• It is probable that the economic
benefits associated with the
transaction will flow to the entity.
• The stage of completion of the
transaction at the end of reporting
period can be measured reliably.
• The costs incurred for the transaction
and the costs to complete can be
measured reliably.
PAS 18
 EXPENSE
• It is probable that a decrease in future
economic benefits has occurred as a result of
a decrease in an asset or an increase in a
liability.
• The decrease in economic benefits can be
measured reliably.