THE CONCEPTUAL FRAMEWORK

WHAT IS A CONCEPTUAL FRAMEWORK?

▪ A statement of generally accepted theoretical principles which form a frame of reference for financial
reporting.

▪ These provide a basis for developing new accounting standards and a platform to evaluate those already in
existence.
 ADVANTAGES OF A CONCEPTUAL FRAMEWORK

 Having a consistent conceptual base should avoid contradictions and inconsistencies in basic concepts and so
produce standardised consistent accounting practices.

 The development of standards is less subject to political pressure.

 A consistent statement of financial position driven or profit or loss driven approach is used.
 DISADVANTAGES OF A CONCEPTUAL FRAMEWORK

Financial statements have many users all with differing needs:

 A single framework cannot satisfy the needs of all users.
 There may be a need for a variety of accounting standards, each produced for a different purpose with
different conceptual bases.

 Having a conceptual framework may not make it any easier to prepare accounting standards.
 THE FRAMEWORK - SCOPE
The Framework addresses:
 The objective of general purpose financial reporting
 Qualitative characteristics of useful financial information
 Financial statements and the reporting entity
 The elements of financial statements
 Recognition and derecognition
 Measurement
 Presentation and disclosure
 Concepts of capital and capital maintenance
 CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
 The primary users of general purpose financial reporting are present and potential investors, lenders and
other creditors, who use that information to make decisions about buying, selling or holding equity or debt
instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise
influence, management’s actions that affect the use of the entity’s economic resource
 CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
 The primary users need information about the resources of the entity not only to assess an entity's prospects
for future net cash inflows but also how effectively and efficiently management has discharged their
responsibilities to use the entity's existing resources (i.e., stewardship)
 CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
 The IFRS Framework notes that general purpose financial reports cannot provide all the information that
users may need to make economic decisions. They will need to consider pertinent information from other
sources as well.
 INFORMATION ABOUT A REPORTING ENTITY'S ECONOMIC RESOURCES, CLAIMS,
AND CHANGES IN RESOURCES AND CLAIMS

 Economic resources and claims

 Changes in economic resources and claims
 Financial performance reflected by accrual accounting
 Financial performance reflected by past cash flows
 Changes in economic resources and claims not resulting from financial performance
 CHAPTER 2: QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
 Fundamental Qualitative Characteristics - Relevance and faithful representation are the of useful financial
information

 Relevance - Relevant financial information is capable of making a difference in the decisions made by users.
Financial information is capable of making a difference in decisions if it has predictive value, confirmatory
value, or both. The predictive value and confirmatory value of financial information are interrelated

 Faithful representation - General purpose financial reports represent economic phenomena in words and
numbers. To be useful, financial information must not only be relevant, it must also represent faithfully the
phenomena it purports to represent. Faithful representation means representation of the substance of an
economic phenomenon instead of representation of its legal form only
 CHAPTER 2: QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
Enhancing Qualitative Characteristics
1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
 CHAPTER 2: QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
 Comparability - Information about a reporting entity is more useful if it can be compared with a similar
information about other entities and with similar information about the same entity for another period or
another date. Comparability enables users to identify and understand similarities in, and differences among,
items.

 Verifiability - Verifiability helps to assure users that information represents faithfully the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement, that a particular depiction is
a faithful representation.
 CHAPTER 2: QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
 Timeliness - Timeliness means that information is available to decision-makers in time to be capable of
influencing their decisions.

 Understandability - Classifying, characterising and presenting information clearly and concisely makes it
understandable. While some phenomena are inherently complex and cannot be made easy to understand, to
exclude such information would make financial reports incomplete and potentially misleading. Financial
reports are prepared for users who have a reasonable knowledge of business and economic activities and
who review and analyse the information with diligence
 CHAPTER 3: FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
 The objective of financial statements is to provide information about an entity's assets, liabilities, equity,
income and expenses that is useful to financial statements users in assessing the prospects for future net
cash inflows to the entity and in assessing management's stewardship of the entity's resources.

 This information is provided in the statement of financial position and the statement(s) of financial
performance as well as in other statements and notes.
 CHAPTER 4: THE FRAMEWORK: THE REMAINING TEXT

 Chapter 4 contains the remaining text of the Framework approved in 1989. As the project to revise the
Framework progresses, relevant paragraphs in Chapter 4 will be deleted and replaced by new Chapters in the
IFRS Framework. Until it is replaced, a paragraph in Chapter 4 has the same level of authority within IFRSs as
those in Chapters 1-3.
 UNDERLYING ASSUMPTION

 The IFRS Framework states that the going concern assumption is an underlying assumption. Thus, the
financial statements presume that an entity will continue in operation indefinitely or, if that presumption is
not valid, disclosure and a different basis of reporting are required
 THE ELEMENTS OF FINANCIAL STATEMENTS
 Financial statements portray the financial effects of transactions and other events by grouping them into
broad classes according to their economic characteristics. These broad classes are termed the elements of
financial statements.
 The elements directly related to financial position (balance sheet) are:
 Assets
 Liabilities
 Equity
 The elements directly related to performance (income statement) are:
 Income
 Expenses
 DEFINITIONS OF THE ELEMENTS RELATING TO
FINANCIAL POSITION
 Asset. An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

 Liability. A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.

 Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities.
 DEFINITIONS OF THE ELEMENTS RELATING TO
FINANCIAL POSITION
Definitions of the elements relating to performance
 Income. Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating
to contributions from equity participants.

 Expense. Expenses are decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating
to distributions to equity participants.
 DEFINITIONS OF THE ELEMENTS RELATING TO
FINANCIAL POSITION
 The definition of income encompasses both revenue and gains.
 Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different
names including sales, fees, interest, dividends, royalties and rent.
 Gains represent other items that meet the definition of income and may, or may not, arise in the course of the
ordinary activities of an entity.
 Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence,
they are not regarded as constituting a separate element in the IFRS Framework
 DEFINITIONS OF THE ELEMENTS RELATING TO
FINANCIAL POSITION
 The definition of expenses encompasses losses as well as those expenses that arise in the course of the
ordinary activities of the entity.
 Expenses that arise in the course of the ordinary activities of the entity include, for example, cost of sales,
wages and depreciation.
 They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory,
property, plant and equipment.
 Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of
the ordinary activities of the entity.
 Losses represent decreases in economic benefits and as such they are no different in nature from other
expenses. Hence, they are not regarded as a separate element in this Framework
 RECOGNITION OF THE ELEMENTS OF FINANCIAL
STATEMENTS
 Recognition is the process of incorporating in the balance sheet or income statement an item that meets
the definition of an element and satisfies the following criteria for recognition

 It is probable that any future economic benefit associated with the item will flow to or from the entity; and

 The item's cost or value can be measured with reliability.

 RECOGNITION OF THE ELEMENTS OF FINANCIAL
STATEMENTS
Based on these general criteria:
 An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to
the entity and the asset has a cost or value that can be measured reliably.

 A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying
economic benefits will result from the settlement of a present obligation and the amount at which the
settlement will take place can be measured reliably.
 RECOGNITION OF THE ELEMENTS OF FINANCIAL
STATEMENTS
 Income is recognised in the income statement when an increase in future economic benefits related to an
increase in an asset or a decrease of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in
assets or decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or
the decrease in liabilities arising from the waiver of a debt payable).

 Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an
increase of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in
liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of
equipment).
 MEASUREMENT OF THE ELEMENTS OF FINANCIAL
STATEMENTS
 The IFRS Framework acknowledges that a variety of measurement bases are used today to different degrees
and in varying combinations in financial statements, including:
1. Historical cost
2. Current cost
3. Net realisable (settlement) value
4. Present value (discounted)
 Historical cost is the measurement basis most commonly used today, but it is usually combined with other
measurement bases. The IFRS Framework does not include concepts or principles for selecting which
measurement basis should be used for particular elements of financial statements or in particular
circumstances. Individual standards and interpretations do provide this guidance, however.
 MEASUREMENT OF THE ELEMENTS OF FINANCIAL
STATEMENTS
 Historical cost is the measurement basis most commonly used today, but it is usually combined with other
measurement bases.
 The IFRS Framework does not include concepts or principles for selecting which measurement basis should
be used for particular elements of financial statements or in particular circumstances.
 Individual standards and interpretations do provide this guidance, however.