THE NEW

CONCEPTUAL
FRAMEWORK
1.
Introduction
 INTRODUCTION

▰ The IASB issued the revised Conceptual

Framework for Financial Reporting in
March 2018.
▰ This is a comprehensive set of concepts
for financial reporting.

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 PURPOSE

1. To assist the Board to develop standards based on consistent

concepts, resulting in financial information that is useful to investors,
lenders and other creditors
2. To assist preparers of financial reports to develop consistent
accounting policies for transactions or other events when no standard
applies, or a standard allows a choice of accounting policies
3. To assist all parties to understand and interpret standards

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 STATUS

▰ provides concepts and guidance that support the

decisions the Board makes when developing
standards
▰ not a Standard
▰ does not override any Standard or any
requirement in a Standard

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 EFFECTIVE DATE

▰ immediately for the Board and the IFRS

Interpretations Committee
▰ annual periods beginning on or after January 1,
2020 for preparers who develop an accounting
policy based on the Conceptual Framework

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Chapter 1
The Objective of
Financial Reporting
 OBJECTIVE OF FINANCIAL
REPORTING

▰ To provide financial information that is useful to users in

making decisions relating to providing resources to the entity
▰ Users assess:
1. Prospects for future net cash inflows to the entity
2. Management’s stewardship of the entity’s economic resources

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 OBJECTIVE OF FINANCIAL
REPORTING

▰ Primary users:
1. Existing and potential investors
2. Lenders and other creditors
▰ Information needs of users:
1. the entity’s economic resources, claims against the entity and changes
in those resources and claims
2. how efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources

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Chapter 2
Qualitative
Characteristics of
Useful Financial
Information
 QUALITATIVE
CHARACTERISTICS

▰ Fundamental Characteristics: (required)

1. Relevance
▰ capable of making a difference to the decisions made by users
▰ Has predictive value or confirmatory value
2. Faithful representation
▰ must faithfully represent the substance of what it purports to
represent
▰ Ingredients: complete, neutral, free from error

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 QUALITATIVE
CHARACTERISTICS

▰ Enhancing Characteristics: (not required,only maximized)

1. Verifiability
2. Comparability
3. Understandability
4. Timeliness

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 COST CONSTRAINT

▰ the benefit of providing the information needs to justify the

cost of providing and using the information

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Chapter 3
Financial Statements
and the Reporting
Entity
 REPORTING ENTITY

▰ an entity that is required, or chooses, to prepare financial

statements
▰ not necessarily a legal entity—could be a portion of an entity
or comprise more than one entity

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 FINANCIAL STATEMENTS

▰ a particular form of financial reports that provide information

about the reporting entity’s assets, liabilities, equity, income
and expenses

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 FINANCIAL STATEMENTS

▰ Statement of Financial Position – for recognized assets, liabilities and

equity
▰ Statement of Financial Performance – for income and expenses
▰ Other statements and notes – for additional information on recognized
assets and liabilities, information on unrecognized assets and liabilities,
information on cash flows, information on contributions
from/distribution to owners, and other relevant information

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 FINANCIAL STATEMENTS

▰ Consolidated FS – provide information about assets, liabilities,

equity, income and expenses of both the parent and its subsidiaries as
a single reporting entity
▰ Unconsolidated FS – provide information about assets, liabilities,
equity, income and expenses of the parent only
▰ Combined FS – provide information about assets, liabilities, equity,
income and expenses of two or more entities that are not all linked by
a parent-subsidiary relationship
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Chapter 4
The Elements of
Financial Statements
 ASSET

▰ OLD DEFINITION:
▰ A resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the
entity
▰ NEW DEFINITION:
▰ A present economic resource controlled by the entity as a result of
past events. An economic resource is a right that has the potential
to produce economic benefits
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 LIABILITY

▰ OLD DEFINITION:
▰ 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
▰ NEW DEFINITION:
▰ A present obligation of the entity to transfer an economic
resource as a result of past events. An obligation is a duty or
responsibility that the entity has no practical ability to avoid.

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 EQUITY

▰ The residual interest in the assets of the entity after

deducting all its liabilities

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 INCOME

▰ Increases in assets, or decreases in liabilities, that result in

increases in equity, other than those relating to
contributions from holders of equity claims

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 EXPENSE

▰ Decreases in assets, or increases in liabilities, that result in

decreases in equity, other than those relating to
distributions to holders of equity claims

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Chapter 5
Recognition and
Derecognition
 RECOGNITION

▰ The process of capturing for inclusion in the statement of

financial position or the statement(s) of financial performance an
item that meets the definition of an asset, a liability, equity,
income or expenses
▰ Recognition is appropriate if it results in both relevant
information and a faithful representation of those items.

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 RECOGNITION

▰ Relevance may be affected by:

1. low probability of a flow of economic benefits
2. existence uncertainty
▰ Faithful representation may be affected by:
1. measurement uncertainty
2. recognition inconsistency (accounting mismatch)
3. presentation and disclosure

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 DERECOGNITION

▰ The removal of all or part of a recognized asset or liability from

an entity’s statement of financial position
▰ Derecognition normally occurs:
▰ For an asset: when the entity loses control of all or part of the
recognized asset
▰ For a liability: when the entity no longer has a present obligation
for all or part of the recognized liability

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Chapter 6
Measurement
 HISTORICAL COST

▰ provides information derived, at least in part, from the price of the

transaction or other event that gave rise to the item being measured
▰ historical cost of assets is reduced if they become impaired
▰ one way to apply a historical cost measurement basis to financial assets
and financial liabilities is to measure them at amortized cost

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 CURRENT VALUE

▰ provides information updated to reflect conditions at the measurement

date
▰ Measurement bases include:
1. Fair value – the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at
the measurement date
2. Value in use – reflects entity-specific current expectations about the
amount, timing and uncertainty of future cash flows
3. Current cost – reflects the current amount that would be paid to acquire an
equivalent asset
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Chapter 7
Presentation and
Disclosure
 BETTER COMMUNICATION

▰ Information about assets, liabilities, equity, income and expenses is

communicated through presentation and disclosure in the financial
statements.
▰ Effective communication of information in financial statements makes
that information more relevant and contributes to a faithful
representation of an entity’s assets, liabilities, equity, income and
expenses.

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Chapter 8
Concepts of Capital
and Capital
Maintenance
 FINANCIAL CONCEPT OF
CAPITAL

▰ Capital is regarded as the invested money or invested purchasing

power.
▰ Capital is synonymous with equity, net assets or net worth.

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 PHYSICAL CONCEPT OF
CAPITAL

▰ Capital is regarded as the entity’s productive capacity, e.g. units

of output per day.

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 CHOICE OF CAPITAL
CONCEPT

▰ Based on users’ needs

▰ If users are primarily concerned with the maintenance of nominal
invested capital or purchasing power of invested capital, the financial
concept should be used.
▰ If users’ primary concern is the entity’s operating capability, the physical
concept should be used.
▰ Most entities adopt the financial concept.

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 DETERMINATION OF
PROFIT

▰ Financial capital maintenance – profit is earned if the net

assets at the end of the period exceeds the net assets at the
beginning of the period, after excluding any distributions to, and
contributions from, owners during the period
▰ Does not require any particular measurement basis

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 DETERMINATION OF
PROFIT

▰ Physical capital maintenance – profit is earned only if the

entity’s productive capacity at the end of the period exceeds the
productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners
during the period
▰ Requires the use of current cost as measurement basis

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 TEST YOUR
KNOWLEDGE!
1. According to the Conceptual Framework, these are the qualitative
characteristics that make information useful to users.
A. Fundamental
B. Enhancing
C. Relevance
D. Comparability

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 TEST YOUR
KNOWLEDGE!
2. Which of the following does not meet the definition of an asset?
A. Equipment that the entity intends, and is very certain, to acquire in
the future.
B. Inventories purchased and received but not yet paid.
C. Land received from a donation.
D. A publishing title for a college textbook. The publishing title has no
physical substance, meaning you cannot see it or touch it.

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 Thanks!
AJ Cresmundo
@ajcresmundo

Sir AJ Cresmundo
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