CONCEPTUAL

FRAMEWORK FOR
FINANCIAL REPORTING

International Accounting Standards Board

Prepared by: Samuel B. Glova, CPA

Course Facilitator, Fundamentals of
Accounting
THE OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING
Objective

‘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.’
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QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
1. Relevance

Capable of making a difference in the decisions made by users.

• Predictive value (input to predict future outcomes)
• Confirmatory value (feedback about previous evaluations)
Materiality
If its omission or misstatement could influence the decisions made by
users.
• Entity specific
• No quantitative threshold.
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FUNDAMENTAL QUALITATIVE CHARACTERISTICS
2. Faithful Representation

• Free from Error

• Neutral (without bias)
• Complete

Constraint – Cost/Benefit

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ENHANCING QUALITATIVE CHARACTERISTICS
1. Comparability

• Comparability enables users of financial information to understand

similarities and differences among items included in information presented
by two or more entities.
• Compare between
• Two or more different entities
• Same entity – different periods/dates
• Consistency helps comparability

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ENHANCING QUALITATIVE CHARACTERISTICS
2. Understandability

• Classifying, characterising and presenting information clearly and concisely

makes it understandable.
• Users assumed to have a reasonable knowledge of business and economic
activities.

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ENHANCING QUALITATIVE CHARACTERISTICS
3. Timeliness

• Having information available in time to influence users decisions.

• Generally, older information is less useful.

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ENHANCING QUALITATIVE CHARACTERISTICS
4. Verifiability

• 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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UNDERLYING ASSUMPTION
 Financial statements are normally
prepared on the assumption that the
reporting entity is a going concern and
will continue in operation for the
foreseeable future. Hence, it is
assumed that the entity has neither the
GOING CONCERN intention nor the need to enter
liquidation or to cease trading. If such
an intention or need exists, the
financial statements may have to be
prepared on a different basis. If so, the
financial statements describe the basis
used.

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THE ELEMENTS OF FINANCIAL
STATEMENTS
THE ELEMENTS OF FINANCIAL STATEMENTS – FINANCIAL POSITION

- a resource controlled by the entity as a result of past

ASSETS events and from which future economic benefits are
expected to flow to the entity

- a present obligation of the entity arising from past events, the

LIABILITIES settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.

EQUITY - residual interest in the assets of the entity after deducting all its liabilities.

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THE ELEMENTS OF FINANCIAL STATEMENTS – FINANCIAL PERFORMANCE

- increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets
INCOME or decreases of liabilities that result in increases in
equity, other than those relating to contributions from
equity participants.

- decreases in economic benefits during the accounting period in the

form of outflows or depletions of assets or incurrences of liabilities that
EXPENSES result in decreases in equity, other than those relating to distributions to
equity participants.

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RECOGNITION OF THE ELEMENTS
OF FINANCIAL STATEMENTS
Criteria for recognition

• Should meet the definition of the element

• Probability of future economic benefit
• Reliability of measurement

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MEASUREMENT OF THE ELEMENTS OF
FINANCIAL STATEMENTS
Measurement

• Historical Cost – Carry at amount paid.

• Current Cost – Carry at amount payable to obtain same asset
now.
• Realisable Value – Settlement value. Carry at cost asset could
sell for in an orderly disposal.
• Present Value – Carry at present discounted value of future cash
inflows.

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 Life is like accounting…
“END” Everything must be balanced.