The CONCEPTUAL FRAMEWORK

for FINANCIAL REPORTING

Part 1

(Excerpted from Financial Accounting Textbook of Conrado T. Valix)

 TECHNICAL KNOWLEDGE
• To know the nature of conceptual framework.
• To describe the purpose and usefulness of a conceptual
framework.
• To understand the authoritative status of a conceptual
framework.
• To understand the objectives of financial reporting.
• To understand how financial reporting will satisfy the
needs of users for information about financial position,
financial performance and cash flows.
• To know the limitations of financial reporting.
• To understand the underlying assumptions of accounting.
 DEFINITION
of Conceptual Framework

• a complete, comprehensive and single document promulgated

by the International Accounting Standards Board (IASB)
• summary of terms and concepts that underlie the preparation
and presentation of financial statements (FS) for external users
• overall theoretical foundation for accounting
• a guide for standard-setters in the development of new
accounting standards and revision of previously issued ones
• concerned with general purpose FS prepared at least annually
to meet common needs of wide range of users
• special purpose financial reports are outside the scope of the CF
PURPOSE OF CONCEPTUAL FRAMEWORK

• assist the FRSC develop and review GAAPs

review and adoption of IFRS
• assist the preparers of FS apply GAAP and deal
with accounting issues
• assist users of FSinterpret information in the FS
• assist auditorsform an opinion conformity of FS
to Philippine GAAP
• provide information to those interested in the work
of FRSC in the formulation of PFRS
 AUTHORITATIVE STATUS OF CONCEPTUAL
FRAMEWORK

• accounting standards and Interpretations has

primary authority
• absent standards and interpretations that
applies to a specific transaction, CF can be
used to develop and apply accounting policy
to provide relevant and reliable information
 USERS OF FINANCIAL INFORMATION

• Primary usersInvestors and creditors

• Other usersemployees, customers,
suppliers, government and general public
SCOPE OF CONCEPTUAL FRAMEWORK

• Objective of financial reporting

• Qualitative characteristics of useful financial
information
• Definition, recognition and measurement of
the elements from which FS are constructed
• Concepts of capital and capital expenditure
 OBJECTIVE OF FINANCIAL REPORTING
• forms the foundation of the CF
• 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.
• Target usersinvestors and creditorsnot
management
 OBJECTIVE OF FINANCIAL REPORTING

• Specific objectives of CF for Financial

Reporting are to provide information:
– Useful in making decisions about providing
resources to the entity
– Useful in assessing the cash flow prospects of the
entity
– About entity resources, claims and changes in
resources and claims
 OBJECTIVE OF FINANCIAL REPORTING

• Economic resources and claims

– Statement of Financial Position or the Balance
Sheet
– Financial positionassets (resources) and
liabilities and equity (claims)
• At a particular moment in time
• Shows financial strength and weakness
• Helps assess entity’s liquidity, solvency and the need
for additional financing or the overall financial
stability
 OBJECTIVE OF FINANCIAL REPORTING
• Changes in economic resources and claims
– Income Statement and Statement of Comprehensive
Income
– Financial performancerevenues and expensesnet
income
– Also known as the results of operations
– Helps assess entity’s profitability level of income earned
through effective and efficient use of the entity’s resources
– Useful in assessing the entity’s ability to generate future
cash inflows from operations
 OBJECTIVE OF FINANCIAL REPORTING

• Accrual Accounting
– “Income is recognized when earned regardless of
when cash is received and expense is recognized
when incurred regardless of when paid.”
 OBJECTIVE OF FINANCIAL REPORTING
• Limitations of financial reporting
– Do not and cannot provide all information needed by
users
– Not designed to show the value of an entity but
provide information to help the primary users
estimate the value of the entity
– Intended to provide common information and cannot
accommodate every request for information
– To a large extent are based on estimate and judgment
rather than exact depiction
 UNDERLYING ASSUMPTIONS

• Also known as postulatesbasic notions or

fundamental premises
• Serves as the foundation or bedrock of
accounting
– To avoid misunderstanding
– To enhance understanding and usefulness of FS
 UNDERLYING ASSUMPTIONS

• Going concern the only assumption mention in the

CF
– Continuity assumption
– FS are normally prepared on the assumption that the
entity will continue in operations as long as it is feasible to
do so
– Foundation of cost principle
– Liquidating concernwhen the entity’s existence is in
great jeopardy
• Users are interested on how much cash is generated upon
liquidation of the entity
 UNDERLYING ASSUMPTIONS

• Implicit basic assumptions in accounting

– Accounting entity
– Time period
– Monetary unit
 UNDERLYING ASSUMPTIONS

• Accounting entity
– The entity is separate from the owners, managers,
and employees who constitute the entity
– To have a fair presentation of financial statements
– Each business is a separate accounting entity
– The shareholder is not the corporation and the
corporation is not the shareholder.
– Parent and subsidiary companies are treated as
“single economic entity accounting done
separately”consolidated FS
 UNDERLYING ASSUMPTIONS

• Time period
– Users need timely information for decision making
– The time period assumption requires that the indefinite
life of an entity is subdivided into accounting periods
which are usually of equal length for the purpose of
preparing financial reports on financial position,
performance and cash flows.
– By conventionone year
• Accounting period or fiscal period
• Calendar yearends every December 31
• Natural business yearend every lowest or slack season
 UNDERLYING ASSUMPTIONS

• Monetary unit
– Two aspects
• Quantifiability Accounting elements stated in
Philippine pesos
• Stability of the pesoaccount for nominal pesos only
and not for constant pesos or changes in purchasing
power amplifies going concern assumption not
necessarily valid fair value accounting to fix gap
between historical cost and fair market value
END OF LECTURE

Thank you for listening!