Conceptual Framework &

Accounting Standards
 Conceptual Framework
• The conceptual framework is a coherent
system of interrelated objectives and
fundamentals that is expected to lead to
consistent standards and that prescribes
the nature, function, and limits of
financial accounting and reporting.
 Conceptual Framework
• A set of interrelated concepts that define
the nature, subject, purpose and broad
content of general purpose financial
reporting in the private and public
sectors
• Normative basis for accounting standards
 Underlying Philosophy
• The CF reflects the 4 (four) features as
the decision usefulness
– Primary objective - decision usefulness [the
primary objective of financial reporting is to
provide information useful for resource
allocation decisions].
– Secondary-accountability [assumed to be
satisfied if the decision usefulness objective
is met].
– Common information needs - predicting
cash flows (The common information needs
of different user groups are to be satisfied
by GPFR).
– Qualitative characteristics - criteria for
useful information (what qualities should
accounting information possess if it’s to be
useful for decision making?)
 Why construct a CF?
• The primary purpose of CF is as a guide
to the Boards when developing and
reviewing Accounting Standards and
other authoritative documents
• Preparers
• Auditors
• Users
Statement of Financial Accounting
Concepts
• Objectives of Financial Reporting by
Business Enterprises (1978).
• Qualitative Characteristic of Accounting
Information (1980).
• Elements of Financial Statements of
Business Enterprises (1980).
• Objectives of Financial Reporting by
Nonbusiness Organizations (1980).
• Recogniton and Measurement in
Financial Statements of Business
Enterprises (1984).
• Elements of Financial Statements (1985),
• Using Cash Flow Information and Present
Value in Accounting Measurements
[2000]
• Conceptual Framework for Financial
Reporting (2010)
 [1] Objectives of Financial
Reporting by Business Enterprises
• Information useful in Investment and credit
decisions & assessing cash flow prospects
• Information about enterprises resources,
claims to those resources, and changes in
them
• Economic resources, obligations, and
owners‘ equity
 [1] Objectives of Financial
Reporting by Business Enterprises
• Enterprise Performance and Earnings
• Liquidity, Solvency, and Funds Flows
• Management Stewardship and
Performance
• Management Explanations and
Interpretations
[2] Qualitative Characteristic of
Accounting Information
 [3] Elements of Financial Statements
of Business Enterprises
• Assets • Comprehensive
• Liabilities income
• Equity • Revenues
• Investments by • Expenses
owners • Gains
• Distributions to • Losses
owners
 [6] Elements of Financial Statements
of Business Enterprises
• Assets are probable future economic benefits
obtained or controlled by a particular entity as
a result of past transactions or events
• Liabilities are probable future sacrifices of
economic benefits arising from present
obligations of a particular entity to transfer
assets or provide services to other entities in
the future as a result of past transactions or
events
• Equity or net assets is the residual assets of an
entity that remains after deducting its
liabilities. In the business enterprise, the
equity is the ownership interest.
• In a not-for-profit organization, which has no
ownership interest n the same sense as a
business enterprise, net assets is divded into
three classses base on presence or absence of
donor-imposed restrictions—permanently
restricted, temporarily restricted, and
unrestricted net assets
• Investments by owners are increases in equity
of a particular business enterprise resulting
from transfers to it from other entities of
something valuable to obtain or increase
ownership interests (or equity) in it.
• Assets are most commonly received as
investements by owners, but that which is
received may also include services or
satisfaction or conversion of liabilities of the
enterprise
• Distributions to owners are decreases in
equity of a particular business enterprise
resulting from transferring assets, rendering
services, or incurring liabilities by the
enterprise to owners. Distributions to owners
decrease ownership interest (or equity) in an
enterprise
• Comprehensive income is the change in equity
of a business enterprise during a period from
transactions and other event and
circumstances from nonowner sources.
• It includes all changes in equity during a
period except those resulting from
investements by owners and distrbutions to
owners
• Revenues are inflows or other enhancements
of assets of an entity or settlements of its
liabilities (or a combination of both) from
delivering or producing goods, rendering
services, or carrying out other activities that
constitute the entitiy's ongoing major or
central operations
• Expenses are outflows or other using up of
assets or incurrences of liabilities (or a
combination of both) from delivering or
producing of goods, rendering services, or
carrying out other activities that constitute the
entity's ongoing major or central operations
• Gains are increse in equity (net assets) from
peripheral or incidental transactions of an
entity and from all other transactions or other
events and circumstances affecting the entity
except those that result from revenues or
investements by owners
• Losses are decreses in equity (net assets) from
peripheral or incidental transactions of an
entity and from all other transactions or other
events and circumstnces affecting the entity
except those that result from expenses or
distributions to owners
 [4] Objectives of Financial Reporting
by Nonbusiness Organizations
• Characteristics of nonbusiness organizations
– receipts of significant amounts of resources
from resource providers who do not expect
to receive either repayment or economic
benefits proportionate to resources provided
– operating purposes that are primarily other
than to provide goods or services at a profit
or profit equivalent
 – absence of defined ownership interests that can
be sold, transferred, or redeemed, or that convey
entitlement to a share of a residual distribution of
resources in the event of liquidation of the
organization.
• Types of transactions that are infrequent in
business enterprises, such as contributions
and grants, and in the absence of transactions
with owners.
 [5] Recogniton and Measurement in
Financial Statements of Business Enterprises
• Historical cost
• Current cost (replacement cost),
• Current market value (exit value),
• Net realizable value (sales price – disposal
assets),
• Present (discounted) value of future cash flow
 [7] Using Cash Flow Information and
Present Value in Accounting Measurements
• Accounting measurement is a very broad
topic.
• Consequently, the FASB focused on a series of
questions relevant to measurement and
amortization conventions that employ present
value techniques.
 [8] Conceptual Framework for
Financial Reporting
• The Objective of General Purpose
Financial Reporting
• Qualitative Characteristics of Useful
Financial Information.
– Fundamental Qualitative Characteristics
– Enhancing Qualitative Characteristics
• Fundamental Qualitative Characteristics
– Relevance
• Materiality
– Faithful Representation
• Enhancing Qualitative Characteristics
– Comparability
– Verifiability
– Timeliness
– Understandability
Accounting Standards
• Principles vs Rules-based Standards