Conceptual
Framework
Learning Outcomes
• Importance of Conceptual Frameworks -
• Objectives, Principles and Limitations of Financial Reporting, and Presentation and
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Disclosure
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Qualitative Characteristics of Financial Information
• Recognition and Derecognition – Principals
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• Measurement – Principals
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• Elements of Financial Statements
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What is Conceptual Framework?
Conceptual Framework is a set of
Theoretical principles, and
Concepts
That underlie preparation and presentation of financial statements.
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Importance of Conceptual Framework
What if there would be no Conceptual Framework?
Then,
• Accounting standards would be produced on a haphazard basis as particular issues and
circumstances arose,
• Accounting standards might be inconsistent with one another, or perhaps be
contradictory.
Thus, a strong conceptual framework means that there are principles in place from which all
future accounting standards are drawn.
It also acts as a reference point for the preparers of the financial statements if no accounting
standard governs a particular transaction.
Background
~ If
1989 – Framework for the presentation and preparation of Financial statement –E issued
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laslifsUSGAAp.
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2004 – Board and FASB ( Financial Accounting std. Board) initiated a joint project
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2010 – Issued Conceptual framework for Financial Reporting, which covered the objectives
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of Financial reporting and Qualitative characteristics of useful information
But due to some major criticism – Board and FASB suspended the joint project
Criticism were:
• Did not cover certain areas such as derecognition and presentation and disclosure
requirements
• Guidance in some areas was unclear
• Some aspects were outdated
Background
2012 – Board restored this project with FASB
2013 – Discussion paper outlining Board perspective – issued
2015 – Exposure Draft of the proposed amendments was published
2018- Feedback from these documents were taken into consideration and finally published
Purpose of Conceptual Framework
Is to assist:
Board when developing new IFRS standards, helping to ensure that these are based on
consistent concepts,
Preparers of financial statements when NO IFRS standard applies to a particular
transaction, or when an IFRS standard offers a choice of accounting policy, and
All parties (i.e., stakeholders) when understanding and interpreting IFRS standards
NOTE:
Conceptual Framework is not an accounting standard
Also, it does not override the requirements of IFRS standard
Objective of Financial Reporting
The purpose of financial reporting is to -
Provide information to current and potential investors,
Lenders and other creditors,
Which will enable them to make decisions about providing economic resources to an entity.
Financial
How will they make informed decisions?
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They will require information related to -
• Entity's potential future cash flows, and
• Management’s stewardship of the entity’s economic resources.
Further to assess entity’s future cash flows, users need information about
• Assets, Liabilities, Equity, and -income -expense
• Changes in the economic resources and claims i.e., incomes and expenses
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Qualitative Characteristics of Useful information
A. Fundamental Characteristics
B. Enhancing Characteristics I I
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A. Fundamental Characteristics -
A set of financial statements is useful only if it is:
• Relevant
Material Information, and
Should make an impact on the decisions to be made by the users.
• Faithful Representation
It should represent its economic substance rather than its legal form -
Should be complete, neutral, and free from error
NOTE: These qualities are not fully achievable but should be maximised
Preparers should always exercise prudence while preparing financial statements
B. Enhancing Characteristics
Comparable ~ >
- inter & intra
Timeliness ~
Verifiability ~
Understandability ~
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Ermined
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Cost Constraint
When developing IFRS standards, Board should assess whether benefits of reporting
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particular information outweigh the costs involved in providing it.
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Financial Statements and the Reporting Entity
The purpose of financial statements is to provide information to users about an entity’s:
• ASSETS
• LIABILITIES Statement of Financial Position
• EQUITY
• INCOME
⑧
Statement of Profit or Loss and OCI
• EXPENSES other
comprehensive
Income .
Statement of Profit or Loss and Other Comprehensive Income
-00CI
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Statement of Financial Position
- sofP These -
Financial
statements are
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Statement of Cash flows
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always prepared on
the assumption that
Statement of Changes in Equity the Entity is a going
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concern
Guestion
Notes
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Reporting Entity
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Reporting Entity is the one that prepares financial statements (either through choice, or as a
result of legal requirements).
Note: Financial statements prepared for two or more entities that are not
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parent/subsidiaries are called ‘combined
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financial statement’.
Note: Conceptual framework does not stipulate how or when to prepare combined financial
statements.
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Financial statements produced for a reporting entity that comprises a parent and
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subsidiaries is called ‘Consolidated Financial Statements’.
Parent
Subsidian, Group
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Consolidated .
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Elements of Financial Statements
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Particulars Element Understanding
definitions
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Economic Resource ~
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ASSET -
A present economic resource controlled by
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- an entity as a result of a past event.
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LIABILITY A present obligation of the entity to transfer
- an economic resource as a result of a past
event.
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Economic Claim
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EQUITY Residual interest in the net assets of an
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Entity.
& Net worth
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Elements of Financial Statements
2 capital
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Eco a profit
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Dc- Net
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Particulars Element Understanding
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Changes in economic
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- INCOME -
Increase in Assets or Decrease in Liability,
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resources and claims
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ultimately increase to Equity.
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as a result of financial
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EXPENSES Decrease in Assets or Increase in Liability,
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performance
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ultimately decrease in Equity.
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Contributions from, and distributions to,
Other changes in - -
equity holders.
economic resources -
Exchange of assets and liabilities that do not
and claims --
increase or decrease Equity.
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Elements Fin St
of
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Recognition and Derecognition
#RS/IAS
Recognition
• Items are only recognised if they meet the definition of one of the elements.
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• Elements are recognised if recognition provides users with useful information, i.e.,
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recognition must provide:
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Relevant information,
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Faithful representation of Assets or liability, and - =
Resulting income, expenses or equity movements. -
Definition of
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Element -
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Recognition and Derecognition
• Recognition of an element might not provide a faithful representation if there is a very
high degree of uncertainty.
• Judgement is required in deciding if recognition of an element is appropriate, and this is
why recognition criteria of each IAS/IFRS is different.
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• Disclosure is required if an asset/liability is not recognised. ~
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Question
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Answer
Recognition and Derecognition
Derecognition
• It is the removal of some or all of an Asset or Liability from the SOFP.
• When? &
If the entity loses its control&of the OAsset; or
It has no present obligation for the E liability.
• Accounting of the derecognition should faithfully represent the changes in an entity’s net
assets, as well as any asset or liability retained.
Bought Disposal .
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Derecognition - ,
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Measurement
Two broad measurement basis:
• Historical Cost, and -
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• Current Value (either Fair Value, Value-in-Use, and current cost)
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⑭FV .
- cost to
sell
How to Select Measurement base? -
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• It must be relevant and offer a faithful representation of the transactions that have
occurred.
• Relevance is maximized when selecting a measurement basis, if the following are
considered:
The characteristics of the assets and/or liability,
The ways in which the asset and/or liability contribute the future cash flows.
Note: this applies to the Board when developing or revising an IFRS standard, and to
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preparers of the financial statements as well.
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Presentation and Disclosure
It is a-
balance between allowing entities to flexibly
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report relevant information about their
financial performance and position, and requiring information that enables comparisons to
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be drawn whether it is an intra or inter level comparison.
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The Board believes that:
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• Entity specific information is more useful than standardized descriptions, and
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• Duplication of information makes the information less understandable.
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Classification ~
Classification of an Asset or Liability into M
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separate components may provide relevant
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information if the components have-
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different characteristics.
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Offsetting
It classifies dissimilar items together and is therefore generally not appropriate.
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Aggregation
• It refers to the adding together of items that have shared characteristics.
• It is useful because it summarizes information that would be otherwise be too detailed.
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• However, too much aggregation will obscure relevant information. -
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Profit or Loss and Other Comprehensive Income
• Primary source of entity’s financial performance - of an item -
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• Income and expense resulting from T remeasuring to its current value will be recorded in
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• Items recorded in OCI may be reclassified to Profit or Loss account if doing so results in
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providing more relevant information.
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Current Issues -
Tested -
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Question
Answer
Answer
Answer
Criticism of Financial Reporting
• Historical Information ~ users
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• Unrecognised Assets and Liabilities – for e.g. Self generated Goodwill ~
• Clutter – due to extensive disclosure requirements ~
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• Financial/Non-financial
⑰
• Estimates -
biased. -
Th
neutral
• Personal Judgement – for e.g. Lessors when classify a lease intoA
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Financial Lease or an
Operating Lease.
Judgements ⑭
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• Policy Choices - -
est .
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Materiality ~
Definition
Subjective
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Information is material if omitting, misstating or obscuring it would influence the economic
decisions of financial statement users.
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The objective of financial statements is to provide useful information about the reporting
entity to existing and potential investors, lenders and other creditors to help them make
decisions about the entity.
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When assessing materiality, an entity should consider:
Quantitative Factors – revenue, profits, assets, and cash flows
Qualitative Factors – related party-
or
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transactions, unusual transactions, geography, etc.
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NOTE: Entity should recognize and disclose information only when the effects of such items
are MATERIAL.
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