CONCEPTUAL FRAMEWORK

CONCEPTUAL FRAMEWORK
– A summary of the terms and concepts that
underlie the preparation and presentation of
financial statements for external users.

– An attempt to provide an overall theoretical

foundation for accounting which will guide
standard-setters, preparers and users of financial
information in the preparation and presentation
of statements.
PURPOSES OF CONCEPTUAL FRAMEWORK

– To assist FRSC
– To assist preparers of FS in applying accounting
standards
– To assist auditors
AUTHORITATIVE STATUS OF CONCEPTUAL
FRAMEWORK
– If there is a standard or an interpretation that
specifically applies to a transaction, such
standard or interpretation overrides the
conceptual framework.
– In the absence of a standard, the conceptual
framework shall apply.
– The conceptual framework is not a PFRS
– Nothing in this framework overrides a standard
– In case of conflict, the requirements of the PFRS
shall prevail over the framework.
 USERS OF FINANCIAL INFORMATION
• PRIMARY USERS
• include the existing and potential investors, lenders and
other creditors.

• OTHER USERS
• include the employees, customers, governments and
their agencies, and the public.
USERS OF FINANCIAL INFORMATION

PRIMARY USERS OTHER USERS

INVESTORS EMPLOYEES

LENDERS & OTHER CREDITORS CUSTOMERS

GOVERNMENT AND THEIR

AGENCIES

PUBLIC
 INVESTORS
• need information to help them determine whether they
should buy, hold or sell.
 LENDERS & OTHER CREDITORS
• interested in information which enables them to determine
whether their loans, interest and other amounts owing to
them will be paid when due.
 EMPLOYEES
• to assess the ability of the entity to provide remuneration,
retirement benefits and employment opportunities.
 CUSTOMERS
• long-term involvement with or are dependent on the entity.
 GOVERNMENT AND THEIR AGENCIES
• to regulate the activities of the entity, determine taxation
policies and as a basis for national income and similar
statistics.
 PUBLIC
• provide information about the trend and the range of its
activities.
SCOPE OF THE CONCEPTUAL FRAMEWORK

– Objective of financial reporting

– Qualitative characteristics of useful information
– Definition, Recognition and measurement of the
elements of FS
– Concepts of capital and capital maintenance
 FINANCIAL REPORTING
– It is the provision of financial information about
an entity to external users that is useful to them
in making economic decisions and for assessing
the effectiveness of the entity’s management.
– It encompasses not only FS but also other
information such as financial highlights, analysis
of FS and significant ratios.
– It also includes nonfinancial information such as
description of major products and a listing of
corporate officers and directors.
OBJECTIVES OF FINANCIAL REPORTING
– OVERALL OBJECTIVE

• To provide financial information about the reporting

entity that is useful to existing and potential investors,
lenders and other creditors in making economic
decisions about providing resources to the entity.

• The target users are the primary users.

OBJECTIVES OF FINANCIAL REPORTING
– SPECIFIC OBJECTIVES

• To provide information useful in making decisions

about providing resources to the entity.

• To provide information useful in assessing the

prospects of future net cash flows to the entity.

• To provide information about entity resources, claims

and changes in resources and claims.
ECONOMIC RESOURCES AND CLAIMS
Liquidity - the
availability of cash in
the near future to
cover currently
maturing debts.
Solvency - the
availability o f cash over
a long term to meet
financial commitments
when they fall due.
•
CHANGES IN ECONOMIC RESOURCES AND
CLAIMS
» Result from the entity’s financial
performance
» Financial performance - the
level of income earned by the
entity through the efficient and
effective use of its resources.
» Financial performance of an entity
shall be measured in accordance
with accrual accounting.
» Accrual accounting – income is
recognized when earned
regardless of when received and
expense is recognized when
incurred regardless of when paid.