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Conceptual Framework and
Accounting Standards
Learning Outcomes
At the end of this module, you are expected to:
1. Describe the scope and purpose of the Conceptual Framework;
2. Describe the objective of general purpose financial reporting;
3. Identify the qualitative characteristics of useful financial information;
4. Describe the underlying assumptions of the Conceptual Framework and
elements and apply the recognition and derecognition criteria of the
elements of financial statements;
5. Describe the measurement bases, the factors to be considered when
selecting a measurement basis, and how information should be
presented and disclosed in financial statements.
Topics Included
Included in this module are the following:
1. Underlying concepts of the Conceptual Framework
2. The objective of financial reporting
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3. Qualitative characteristics of useful financial information
4. Elements of financial statements
5. Recognition and derecognition of the elements of financial statements
6. Measurement, presentation, and disclosure of those elements
7. Concept of capital and capital maintenance
Purpose and Status
The main purpose of the Conceptual Framework is to guide the International
Accounting Standards Board (IASB) in the development of International
Financial Reporting Standards (IFRS). It outlines the concepts underlying the
preparation and presentation of financial statements intended for external
users. The Framework serves various stakeholders:
Preparers: It aids in developing consistent accounting policies where no
specific IFRS applies or where choices of policies exist.
Auditors: It assists auditors in forming opinions on compliance with IFRS.
Users of Financial Statements: It helps users interpret the information
contained in financial statements prepared in accordance with IFRS.
IASB: It promotes harmonization of regulations and accounting
standards.
Others: It provides information about IASB's approach to formulating
IFRSs.
While the Conceptual Framework is foundational to IFRS Standards, it is not
an IFRS Standard itself and lacks its authoritative weight. In conflicts,
specific IFRS standards take precedence over the Framework, which is
subject to revisions based on the IASB's practical experiences.
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Scope of the Conceptual Framework
The Conceptual Framework addresses:
1. The objective of general purpose financial reporting;
2. The qualitative characteristics of useful financial information;
3. The definition, recognition, and measurement of the elements from
which financial statements are constructed;
4. Concepts of capital and capital maintenance.
Objective of General Purpose Financial
Reporting
The objective of general purpose financial reporting is to provide useful
financial information to existing and potential investors, lenders, and other
creditors for informed decision-making regarding resource provision. Key
groups of users and their needs include:
Investors: Information on future net cash inflows, management
stewardship, economic resources and claims, and management
efficiency in resource usage.
Lenders and Creditors: Information essential for deciding on loans and
credit provision.
Employees: Stability and profitability insights.
Suppliers: Insight to determine repayment likelihood of owed amounts.
Government Agencies: Information for regulation, tax policy formulation,
and statistical bases.
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The Public: Understanding implications on the local economy and job
creation.
However, general purpose financial reports cannot provide all needed
information, and users must also consider external factors such as economic
conditions and political climates.
Qualitative Characteristics of Useful Financial
Information
Qualitative characteristics apply to financial information reported in various
ways and are categorized into:
Fundamental Qualitative Characteristics
Relevance: Information must significantly impact users' decision-
making. Characteristics of relevance include predictive value and
confirmatory value.
Faithful Representation: Financial information must accurately reflect
the phenomena it represents, encompassing completeness, neutrality,
and freedom from error.
Enhancing Qualitative Characteristics
These characteristics improve the usefulness of relevant and faithfully
represented information:
Comparability: Enables users to identify similarities and differences
across entities and periods.
Verifiability: Allows independent observers to reach consensus on the
faithful representation of financial information.
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Timeliness: Ensures information is made available promptly for decision-
making.
Understandability: Clearly presenting information to enhance
comprehension by users with reasonable business knowledge.
Cost is a pervasive constraint affecting the information provided in financial
reporting. The costs of reporting must be justified by the benefits derived
from the provided information.
Elements of Financial Statements
Financial statements represent the financial effects of transactions by
classifying them into:
Financial Position: Elements are assets, liabilities, and equity.
Financial Performance: Elements include income and expenses.
Definition of Elements
Each element has a specific definition:
Asset: A present economic resource controlled by the entity from past
events, expected to generate future economic benefits.
Liability: A present obligation of the entity arising from past events to
transfer an economic resource.
Equity: The residual interest in an entity's assets after deducting
liabilities.
Income: Increases in economic benefits leading to asset inflows and
equity increases.
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Expense: Decreases in economic benefits represented by asset
outflows and equity decreases.
Recognition Criteria of Financial Statements
Recognition is the process by which an item that meets financial statement
element definitions is incorporated in financial reports. Items should be
recognized if:
It is probable that any future economic benefit will flow to or from the
entity.
The item has a reliable measurable cost or value.
Probabilities and Reliability: Recognizing items reflects an assessment of
future benefit flows based on available evidence. Items lacking reasonable
estimates are not officially recognized but should be disclosed in
supplementary materials.
Derecognition of Financial Elements
Derecognition occurs when an asset or liability no longer meets its
respective definition. An asset is derecognized when the entity loses control,
while a liability is when the obligation ceases.
Measurement of Financial Elements
Measurement determines monetary amounts for financial statement
elements involving specific measurement bases:
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Measurement Bases for Assets and Liabilities
Basis Assets Liabilities
Historical Amount paid at acquisition or Amount expected to settle in
Cost fair value normal operations
Current Cost Amount needed for acquisition Current outflow amount to settle
currently obligations
Realizable Amount obtainable from orderly Undiscounted amount expected
Value asset disposal for liability settlement
Present Discounted value of expected Discounted value of expected
Value future net cash inflows future cash outflows
Presentation and Disclosure
Financial statements present and disclose assets, liabilities, equity, income,
and expenses in ways that enhance relevance, faithful representation,
understandability, and comparability of information.
Concepts of Capital and Capital Maintenance
Capital concepts include:
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1. Financial Concept: Equates capital with net assets or equity.
2. Physical Concept: Regards capital as productive capacity or output
units.
Capital Maintenance Concepts
Profit determination links to capital maintenance, with two concepts:
Financial Capital Maintenance: Profit exists if end-period net assets
exceed beginning-period net assets after excluding distributions.
Physical Capital Maintenance: Profit exists if end-period productive
capacity exceeds beginning-period capacity after excluding
distributions, requiring a current cost measurement basis.
Self-Check Exercises
After reading, consider the following:
1. Enumerate the scope of the Conceptual Framework.
2. Enumerate the qualitative characteristics of useful financial information.
3. Compare relevance and faithful representation.
4. Identify the elements of financial statements.
5. Outline recognition criteria meeting element definitions.
6. List the different measurement bases of financial statement elements.
True or False Exercise:
When there is conflict between the Conceptual Framework and IFRS
Standard, the former overrides the latter.
Understandability ensures observers can reach consensus.
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Financial information has predictive and confirmatory value.
Enhancing characteristics make information useful regardless of
relevance or faithful representation.
Obligations may arise from customary practices.
Capital is synonymous with net assets.
A liability is a present obligation to receive economic resource.
Qualitative characteristics enhancing usefulness include comparability
and verifiability.
Materiality refers to the influence of omitted or misstated information on
decisions.
Performance information helps assess management stewardship
responsibilities.
Identification Exercise:
Obligation arising from the settlement of a present obligation.
Process of capturing an item's definition in financial statements.
Qualitative characteristic allowing comparison among items.
Financial statement elements derived from transactions.
Pervasive constraint on reporting information.
Obligations from customary practices or published policies.
Complete depiction including all necessary information.
Duty or responsibility to perform.
Timely availability of information for decision-making.
Consistency in methods used across periods or entities.
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