CONCEPTUAL

FRAMEWORK FOR
FINANCIAL
REPORTING 2018
Prepared by:
MA. DOLORES S. OROT
CHAPTER 1 :The Objective Of Financial Reporting

CHAPTER 2:Qualitative Characteristics Of Useful

Financial Information

Chapter 3: Financial Statements and the Reporting

Entity

CHAPTER 4: Elements Of Financial Statements

CHAPTER 5 :Recognition And Derecognition

CHAPTER 6: Measurement

Chapter 7: Presentaiton And Disclosure

Chapter 8: Concepts Of Capital And Capital

Maintenance
AMENDMENTS TO IAS 1 AND IAS8
(Definition Of Material)
PURPOSE
 1. To assist the Board to develop standards based on
concsistent 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
Status
 • provides concepts and guidance that underpin the
decisions the Board makes when developing
Standards
 • not a Standard
 • does not override any Standard or any requirement
in a Standard
Effective date

• immediately for the Board and the IFRS

Interpretations Committee
• annual periods beginning on or after 1 January 2020
for preparers who develop an accounting policy based
on the Conceptual Framework
Why have we revised the Conceptual Framework?
 CHAPTER 1
The Objective Of Financial
Reporting
 CHAPTER 1: THE OBJECTIVE OF
FINANCIAL REPORTING

 To provide financial information that is useful to

users in making decisions relating to providing
resources to the entity
 Users’ decisions invovle decisions about

1. buying, selling or holding equity or debt

instruments
2. providing or settling loans and other forms of
credit
3. voting, or otherwise influencing management’s
actions
 To make decisions, users assess:

1. Prospects for future net cash inflows to the

entity
2. Management’s stewardship of the entity’s
economic resources
 To make both these assessements, users need
information about both
1. The entity’s economic resources, claims against
the entity and changes in those resources and
claims
2. How efficinetly and effectively management
has discharged its responsibilities to use the
entity’s economic resources
 Users of Financial Reports:

1. Existing and potential investors

2. Lenders and other creditors
 CHAPTER 2
Qualitative Characteristics Of Useful
Financial Information
 Chapter 2: Qualitative characteristics of Useful
Financial Information

 Types of Qualitative Charateristics

1. Fundamental qualitative characteristics

2. Enhancing qualitative characteristics
I. Fundamental Characteristics (required)
a) Relevance
 Capable of making a difference to the decisions made
by users
 Has Predictive value or confirmatory value

b. Faithful representatioon
 Must faithfully represent the substance of what it
purports to represent
 Ingredients: complete, neutral, free from error
II. Enhancing characteristics (not required, only
maximized)

V-erifiability
C-omparability
U-nderstandability
T-imeliness
II. Enhancing characteristics (not required, only
maximized)

V-erifiability
C-omparability
U-nderstandability
T-imeliness
 CHAPTER 3
Financial Statements and the
Reporting Entity
 Chapter 3: Financial Statements and the Reporting
Entity
FINANCIAL STATEMENTS
 Financial statements provide information about
economic resource of the reporting entity,claim
against the entity , and changes in those
resources andclaims, that meet the definition of
the elements of financial statements
 Chapter 3: Financial Statements and the Reporting
Entity
 The objective of the financial statements is to provide
financial information about the reporting entity’s assets ,
liabilities, equity , income and expenses that is useful to
users of financial statements in assessing the prospects
for:
 Future net cash inflows to the reporting entity
 In assessing management’s stewardship of the entity’s
economic resources
 Chapter 3: Financial Statements and the Reporting
Entity
 Financial statements provide information about
transactions and other events viewed from the
prespective of the reeporting entity as a whole,
not from the perspective of any particular group
od the entity’s existing or potential investors,
lenders or other creditors
 Chapter 3: Financial Statements and the Reporting
Entity
 It is assumed that the entity will continue in operation
for the foreeable future and has nneither the intention
nor the need to enter liquidatioon or to cease trading
 If such an intention or need exists, the financial
statements may have to b prepared on a different basis
 Chapter 3: Financial Statements and the Reporting
Entity
Reporting Entity

 An entity that is required , or chooses, to prepare

financial statements
 Can be a single entry or a portion of an entity or can
comprise more than one entity
 not necessarily a legal entity
 UNCONSOLIDATED COMBINED
FINANCIAL FINANCIAL
CONSOLIDATED
STATEMENTS STATEMETN
FINANCIAL
STATEMENTS S

provide information
are designed to are financial statement
about assets, liabilities,
provide information on which the reporting
equity, income and
about the parent’s entity comprises two or
expenses of both and its
assets, liabilities, more entities that are not
subsidiaries as asingle
equity, income and all linked by a parent-
reporting entity
expenses and not abut subsidiary relationship
its subsidiaries
 CHAPTER 4
ELEMENTS OF FINANCIAL
STATEMENTS
 ASSET
i o n : Ne w d e f i n i t i o n :
Old d e f i n i t
 a pr e s e n t e c o n o m i c
c e c o n t r o l l e d b y o n t r o l l e d b y
a re s o u r
r e s u l t o f p a s t resource c r e s u l t of
entity a s a i c h t h e e nt i t y a s a
d f r o m w h
even t s a n
c o n o m i c past events . resource
f u t u r e e pe c t e d t o A n e c o n o m i c
h e
be n e f i t s a r e e x i s a r i gh t t h a t h a s t
f l ow t o t h e e n t i t y a l t o p r o d u c e
potenti e f i t s
econo m i c b e n
 RIGHT
Right that have the potential to produce econnomic benefits take many forms , including:

 Rights that correspond to an obligation

 Rights that do not correspond to an obligation
of another party
of another party
 Right to receive cash
 Right over physical objects, such as
 Rights to receive goods or services
property , plant and euipment or
 Rights to exchange economic rources with
inventories. Examples of such right
another part on favourable terms
are a right to use a physical object or
 Rights to benefit from an obligation of
a right to benefit from th residual
another party to transfer an economic
value of a leased object
reosurce if a specified uncertain future
 Rights to use intellectual property
event occur

PARAGRAPH 4.8
An entity’s right to obtain the
economic benefits produced
by such goods or services
exists momentarily until the
entity consumes the goods or
services
PARAGRAPH 4.10
An entity cannot have a right to
obtain economic beenfits fro m
PARAGRAPH 4.9 itself
Not all of an entity;s
rights are assets of that
entity
 PARAGRAPGH 4.12
PARAGRAPGH 4.11 PARAGRAPGH 4.13
In many cases, he set of
In principle, each of an In some cases, it is uncertaain
rights arising from legal
entity’s rights is a separate whether a right exists. Until
ownership of a physical
asset. However, for that existence incertainty is
object is accounted for
accoounting purposes, related reslved –for exanoke, by a
as a single asset .
rights are often treated as a cour ruling– it is uncertain
Conceptually, the
single unit of account that is a whether the entity has a right
economic reource is the
single asset and , consequently whether an
set of rights not the
asset exists
physical object
 POTENTIAL TO PRODUCE
ECONOMIC BENEFITS
 An economic reSource is a right that has the potential to
pROduce economic benefits
 A right can meet the definition of an economic resource,
and hence can be an asset, even if the probability that it
will produced economic benefits is low
 POTENTIAL TO PRODUCE ECONOMIC BENEFITS
An economic resource
could produce eocnomic
benefits for an enntity by
entitling or enabling it to
do, for example, one or
more of the following
1. Receive conttractual cash flows or
another eocnomic resource
2. Exchange economic resource with
another party on favourable terms
3. Produce cash inflows or avoid cash
outflows
4. Receive cash or other eocnomic
resources by selling the economic
resource
5. Extinguish liabilitires by transferring
the economic resource
 CONTROL
Assesing whether control exists
help to identify the economic
resources for which the entity
accounts
Control of an economic reosurce
usually arises from an ability to
enforce legal rights
An enity controls an economic resource if it
has the present ability to direct the use of the
economic resosurce and obtain the economic
benefits that may flow from it
Havinf exposure to siginificant variations in
the amount of the economic beenfits
produced by an economic resource may
indicate that tue entity controls the resource
 CONTROL
For an entity to control an economic
resource , the future, economic benefits
from tht resource must flow ti the
entity either directly, or indirectly rhter
that to another party
A princiIPal may engage an agent to
arrange sales of goods controlled by
the principl .If an agent has custody
of an economic reosurce controlle
dby the principal that economic
reosurce is not an asset of the agent
 LIABILITY
i t i o n : Ne w d e f i n i t i o n :
Old d e f i n
n o f t h e a pr e s e nt o b l i g a t i o n o f
pr e s e n t o b l i g a t i o t r a n s f e r a n
ent i t y a r i si n g f r o m p a s t the entity to ource as a
e s e t t l e m e n t o f ec o n o m i c r e s
evnts , t h a s t e v e n t s .
e p
hi c h i s e x out f l ow c t e d t o reuslt of p a d u t y o r
a n A n o b l i g a t i o n i s
re s u l t i n f p o n s i b i l i t y t h a t t h e
from th bodying e e n t i t y o r e po s c t i c a l
m entity has n void. o p r a
r e s o u r c e e
economic b e n e f i t s ability to a
 For a liability to eXist, three criteria must all be
satisfied:
 The entity has an obligation
 The obligation is to transfer an economic reosurce
 The obligation is a present obligation that exists as
result of past events
OBLIGATION
 An obligation is a duty or responsibility that an
entity has no practical ability to avoid
 A reQuirement for one party to recognise a liability
and measure it at a specified amount does not imply
that the other party (or parties) must recognized an
asset or measure it a the same amount
TYPE OF OBLIGATIONS
 Legal Obligation – many obligations are establishrf by
contract, legislation or similar means and legally
enforceable by the party (or parties) to whom they are
owed
 Constructive Obligations- obligations from an entity’s
customary practices, published poliies or specific
statements if the entity has no practical ability to act in a
ammner inconsistent with thoses practices, policies or
statements
OBLIGATION
 In some situations, aan entity’s duty or
responsibility to trasnfer an economic reouces is
conditioned on a particular future action that thte
entity itssefl may take
 In some cases, it is uncertain whetheer an
obligation exists
TRANSFER OF AN ECONOMIC RESOURCE
 To satisfy this criterion, the obligation must have
the potential to require the entity to transfer an
economic resource to another party (or parties)
 An obligation can meet the definition of a
lliability even if the probability of a trannsfer :
og an economic resource is low
TRANSFER OF AN ECONOMIC RESOURCE
 Obligations to transfer an economic resource include
 Obligations to pay cash
 Obligations to deliver goods or provide services
 Oblilgations to exchange economic reosurce with
annother party or unfavourable terms
 Obligations to transfer economic reosurce if a specified
uncertain future event occur
 Obligations to issue a financial instrument if that financial
instrument will oblige the entity totransfer an economic
resource
 Instead of fulfilling an obligation to trasnfer economic
resource to the party that has a right to receive that
reouce, entities sometimes decide to, for example:
 Settle the obligation by negotiating a release from the
obligation
 Transfer the obligation to a third party
 Replace that obligation to transfer an economic
reosurce with another obligation by entering into a
new transaction
PRESENT OBLIGATION AS A RESULT OF PAST EVENTS
 A present obligations exists as a result of past events only if:
 The entity has already obtained economic benefits or taken an
action
 As a consequence, the entity will or may have to trasnfer an
economic reosurce that it would not otherwise have had to
transfer
 An enactment of legislation is not itself sufficient to give an entity
a present obligation
 A rpresent ibligation can exist even if a trasnfer of economic
resourcesc cannot be enforced until some point in the futre
 Possible units of account incllude:
 An individual right or individual obligation
 All rights, all obligations , or all rights and all obligations ,
arising from a signgle source , for example , a contract
 A subgroup of thoses rights and /or obligations
 A group of rights and / or obligations ariing from a portfolio
id similar items]
 A group of rights and / or obligations ariisng from a
portfolio of dissimilar items
 A risk expoure within a portfolio of items- if a portfolio of
items is subject to a common risk
EXECUTORY CONTRACT
 An executory contract is a contract ot a portion of
contract that is equally unpeformed neither party has
fulfilled any of its obligations or both partis have
partially fulfileled their obligaations to an equal extent
 An executory contract establishes a combine right and
obligation to exchange economic resources
 To the extent that either party fulfils its obigations under
the contract, the contract is no longer executory
 Equity
The residual interest in the assets of the entity after
dedcuting all its liabilities
Equity claims are claims on the residual interest in the
assets of the entity after deducting all its liabilities
Shares of various types, issued by the entity
Some obligations of the entity to issue another equity
claim
 Equity
Different classes of equity claims, such as ordinary shares
and prefeerence shares , may confer or their holder;s
different rights, for example rights to receive some of all
of the folloing form the entity:
Dividends if the emtity decides to pay dividents to eligible
holders
The proceeds from satisfying the equity claims, either full
on liqudation or in part of other times
Other equity claims
 INCOME EXPENSES
e t s , o r d e c r e a s e s i n a s s e t s , o r
i nc r e a s e s i n a s s a l a i b i l i t i e s ,
de c r e a s e s i n l i a i b l i t i e s, increases in creases in
t i n i n c r e a s e s tha t r e s u l t I n d e
th a t r e s u l r t h a n t h o s e
o t
i n e qu i t y a t i ng t oh e r t h a n equity, othe rubtions to
re l a t i n g t o d i s t
those rel s from h o l d e r s o f e q u i t y c l a i m s
con t r i b u t i o n
r o f e q u i t y c l a i m s
ho l d e
 CHAPTER 5
RECOGNITION AND
DERECOGNITION
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 laiiblity, equity, income or
expenses
RECOGNITION

It involves depecting the item in one of those

statements-either alone or in aggregation with
other items- in words and by a monetary amount
and including that amount in one or more totals in
that statemnt
RECOGNITION
Only items that meet the definition of a n asset ,
a liability , or equity are recognized in the
statement of financial position
Only items that meet the definition of income or
expensses are recognized in the statement of
financial performance
UNCERTAINTY

 Existence of uncertainty- it is uncertain whther

an asset or liability exists
 Measurement uncertainty- for an asset or
liability to be recognized it must be measured .
In many cases, such measures must be
estimated.
DERECOGNITION

the removal of all or part of a recognized

asset or liabiity from an entity’s statement
of financial position
 DERECOGNITION
derecognition normaly occUr when thatt item no longer
meets the definition of an asset ot of a liability:
 for an asset: when the entity loses control of all part of the
recongized asset
 for liability: when the entity no longr has a present
obligation for all or part of the recognized liability
CHAPTER 6
MEASUREMENT
 CHAPTER 6: MEASUREMENT

Is the process of quantifing , in monetary terms, an

element recognized in the financial statement

Measurement Basis
- is an identified feature- for example , historical cost,
fair value or fulfilment value– of an item being
measured
 CHAPTER 6: MEASUREMENT

A standard may need to describe how to implement

the measurement basis selected in that stabdard. That
description could include
-specifying techniques that may or must be used to
estimate a measure applying a particular measurement
basis
MEASUREMENT BASES

 HISTORICAL COST
 CURRENT VALUE
 fair value
 Value in use for assets and fulfilllment value for
liabilities
 Current cost
Historical cost

 Historical cost measures provide monetary information about

assets, liaiblities and related income and expenses , using
information derived, at least in part , from the price of the
transaction or other event that gave rise to them
 Historical cost does not reflect changes in values, except to the
extent that those changes relate to impairment of an asset or a
liabilty
Historical cost

 The historical cost of an asset when it is acquired or created is

the value of the costs incurred in aqcuiring or creating the asset,
compirsing the consideration aid to acquire or create the asset
plus transaction costs
 The historical cost of a liability whe it is incurred or taken on is
the value of the consideration received to incure or take on the
liability minus transaction costs
Historical cost

 The historical cost of an asset is updated over time to depict , if

applicable:

-The consumption of part or all the economic resource that

constitutes the asset (depreciation or amortization)
-Payments received that extinguish part of all of the asset
-The effect of events that cause part or all of the historical cost of
the asset to be no longer recoverbale (impairment)
-Accrual of interest to reflect any financing component of the
asset
Historical cost

 The historical cost of an liability is updated over time to depict , if

applicable:
-Fulfilment of part or all of the liaiblity, for example by making
payments that extinguish part or all of the liability or by satisfying an
obligation to deliver goods
-The effect of events that increase the value of the obligation to transfer
the economic resources needed to fulfill the liability to such an extent
that the liability becomes onerous’
-Accrual of interest to reflect any financing component of the liability
CURRENT VALUE

 Current value measures provide monteray information about assets,

liabilities and related income and expenses , using information updated
to reflect conditions at the measurement date
 Current value measuremnt bases include
a) Fair value
b) Value in use for assets and fulfillment value of liabilities
c) Current cost
CURRENT VALUE

 Current value measuremnt bases include

a) Fair value - is 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 measuremnt date

 FV is not increased by transaction costs incurred when acquiring an

asset and is not decreased by the transaction costs incurred when the
liability is incurred or taken on
CURRENT VALUE

b. Value in use for assets and fulfillment value for liabilities

- Value in use is the PV of the cash flows, or other economic benefits

that an entity expects to deriive from the use of an asset and from its
ultimate disposal
- Fulfilment value is the PV of the cash, or other economic
resource ,that an entity expects to be obliged to transfer as it fulfull a
liability
c.CURRENT cost

- Curent Cost of an asset is the cost of an equivalent asset a the

measurement date, comprising the consideration that would be paid at
the measurement date plus the transaction cost that would be incurred at
that date
- Current cost of liability is the consideration that would be received for
an equivalent liability at the measuremnt date minus the transaction
costs that would be incurred at that date
 CHAPTER 7
PRESENTATION AND DISCLOSURE
PRESENTATION AND DISCLOSURE AS
COMMUNICATION TOOLS

 A reporting entity communicates nformation about

assets, laiblities, euity, income, and expenses is
communicated through presentaiton and disclusre in
the financial statements.
 Effective communication of informatiion in financial
statemnts makes that information more relvant and
contributes t oa faithful representation of an entity’s
assets, liabilities, equity, income and expenses
 CHAPTER 8
CONCEPTS OF CAPITAL AND
CAPITAL MAINTENANCE
There are two concepts:
1. Financial concept of capital
Capital is regarded as the invested money or invested
purchasing power
Capital I sysnonymous with equity, net asssets or net
worth
2. Physical Concept of Capital
Capital is regarded as the entity’s productive capacity
e.g. units of output per day
DETERMINATIONOF PROFIT
Financial capital maintenance-
profit is earned if th net assets at the end of the
period exceeds the net assets at thebginning of the
period, after excluding any distributions to , and
contributions from owners during theperiod
 Does not require any ppaprticular measrement
basies
Physical capital mainternance-
profit is earned only if the entity;’s productive
capcacity 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
-required the use of current cost as measuremtn
basis
AMENDMENTS TO IAS 1 AND IAS8
(Definition Of Material)
 AMENDMENTS TO IAS 1 AND IAS8 -Definition Of Material

Old guidance Why change?

Materiality Difficult to apply old def’n in practice
Amendment clarifies

Defined in IAS 1 & IAS 8

Definition of what
How to apply
is material to financial
definition
Entities should apply statements
definition of materiality
when judging if information
should be included, or
amounts adjusted, in the
financial statements
Old Definition (IAS 1 and IAS 8)
Omissions or misstatements of
items are material if they could,
individually or collectively,
influence the economic
decisions that users make on
the basis of the financial
statements.
New Definition (IAS 1 only)
Information is material if omitting,
misstating or obscuring it could
reasonably be expected to influence
the decisions that the primary
users of general purpose financial
statements make on the basis of those
financial statements, which provide
financial information about a specific
reporting entity.
Additional guidance has also been provided to accompany the
revised definition, including

Materiality depends on nature or Information in financial statements

magnitude of information (or can be obscured if it has a similar
both) effect for primary users to omitting
or misstating information

Assess whether information is Financial statements are prepared for

material on its own or when economically literate users
combined with other information
DISCLOSURE
Preparers may be able to reduce
the sheer size of financial
statements by more easily
justifying that certain
disclosures are immaterial to
users of financial statements.
More meaningful disclosures
may need to be re-ordered or
presented in a more prominent
manner due to the additional
guidance on the effects of
obscuring information.
Potential practical impacts of the revised definition
of material may include:
PRESENTATION
Immaterial classes of balances
and transactions may be MEASUREMENT
presented together in
aggregate, while more Simplifications and practical
meaningful and significant application of standards to
items may require distinct and immaterial balances and
separate presentation in the transactions may be more
financial statements. easily applied in practice.
THANK YOU!