FAR210

TOPIC 2
MALAYSIAN CONCEPTUAL
FRAMEWORK FOR FINANCIAL
REPORTING
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Topic Outcome
Ability to:
1. Explain the needs and objectives of financial reporting.
2. Explain the Information about a reporting entity’s economic resources,
claims and changes in resources & claims.
3. Explain the qualitative characteristics of financial statements.
4. Explain the objectives of financial statements, assumptions and types of
reporting entity.
5. Explain the definition of elements of financial statements and the term
unit of accounts.
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Topic Outcome
Ability to :
6. Explain the recognition issue of each elements of financial statements
(emphasize on relevant & faithful representation).
7. Explain the measurement basis and factors to consider when choosing
the basis.
8. Explain the objectives and principles (classification & aggregation) in
presenting & disclosure of financial information.
9. Explain the concept of capital and capital maintenance.
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Introduction
» In November 2011 the MASB issued the Conceptual Framework for
Financial Reporting (the Conceptual Framework).
» The Conceptual Framework is applicable for the preparation and
presentation of financial statements in accordance with the Malaysian
Financial Reporting Standards (MFRSs).
» In April 2018, the MASB issued a revised Conceptual Framework for
Financial Reporting.
» They are respectively equivalent to the Conceptual Framework for
Financial Reporting and revised Conceptual Framework for Financial
Reporting as issued by the International Accounting Standards Board
(IASB).
 5

What is a Conceptual Framework?

 Status and Purpose of the
6

Conceptual Framework
Purpose of the Conceptual Framework is to:
a) assist the MASB to develop MFRS Standards (Standards) that
are based on consistent concepts;
b) assist preparers to develop consistent accounting policies
when no Standard applies to a particular transaction or other
event, or when a Standard allows a choice of accounting
policy; and
c) assist all parties to understand and interpret the Standards.
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Status and Purpose of the

Conceptual Framework
The Conceptual Framework provides the foundation to
develop Standards that:
a) contribute to transparency by enhancing the
international ….
b) strengthen accountability by reducing information
gap …..
c) contribute to economic efficiency to financial
markets. ….
[textbook p.32 ]
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SCOPE- 8 Chapters in the Framework

» 1. THE OBJECTIVE OF » 5. RECOGNITION AND
GENERAL PURPOSE DERECOGNITION
FINANCIAL REPORTING
» 6. MEASUREMENT
» 2. QUALITATIVE
CHARACTERISTICS OF
USEFUL FINANCIAL » 7. PRESENTATION AND
INFORMATION DISCLOSURE
» 3. FINANCIAL STATEMENTS » 8. CONCEPTS OF CAPITAL
AND THE REPORTING AND CAPITAL
ENTITY MAINTENANCE
» 4. THE ELEMENTS OF
FINANCIAL STATEMENTS
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CHAPTER 1—THE OBJECTIVE OF GENERAL

PURPOSE FINANCIAL REPORTING
This chapter discuss the:
» Objective of financial reporting
» Users of financial reports
» Information needed to achieve the
objective
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Objective of financial reporting

» The objective of general purpose financial

reporting is to provide financial information
about the reporting entity that is useful to
existing and potential investors, lenders
and other creditors in making decisions about
providing resources to the entity.
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Users of financial reports

» Entity’s existing and potential investors
» Lenders; and
» Other creditors
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Decisions made
by investors returns and their
lenders and amount,
other creditors
(the USERS) timing and uncertainty of
depends on (or prospects for) future
expectationsabou net cash inflows to the
t: entity
 13

(a)buying, selling or holdingequity

and debt instruments;
The users
make (b)providing or settling loansand
decisions other forms of credit; or
about:
exercising rights to vote on, or
otherwise influence management’s
actions that affect the use of the
entity’s economic resources.
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reporting entity’s
To make economicresources
those
assessment claimsagainst the entity
these changesin a reporting entity’s
USERS economic resources and claims
NEED
information how efficiently and effectively the
about: entity’s management and governing
board have discharged their
responsibilities to use the entity’s
resources
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Information about a Reporting Entity

about the entity’s the assets
1. Provides information economic resources
about the Financial
Position the claims against the equity’s &
the entity liabilities

2. Provides information about the Changes in a reporting

effects of transactions and events -the entity’s economic resources
Financial performance and claims

3. Both (1)&(2) provide useful inputs about providing resources to the

entity
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CHAPTER 2—QUALITATIVE
CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
» This chapter discuss what
makes financial information
useful
 Qualitative Characteristics of Useful
17

Financial Information
Fundamental Qualitative Characteristics

Relevance Faithful representation

Predictive Value Materiality Completeness Neutrality

Confirmatory Free from error

Value

Enhancing Qualitative characteristics

Comparability Verifiability Timeliness Understandability

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For information to be useful it must both be

relevant and provide a faithful representation
of what it purports to represent.

FUNDAMENTAL QUALITATIVE CHARACTERISTICS of

useful financial information

RELEVANCE FAITHFUL REPRESENTATION

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FUNDAMENTAL QUALITATIVE
CHARACTERISTICS (FQC)
Relevance

is relevant if it is is capable of making a

capable of making difference in decisions
a difference to the if it has predictive
decisions made by value, confirmatory
users. value or both
 FQC-RELEVANCE
20

If it has the following characteristics:

Confirmatory Predictive Value Materiality
Value
• Financial • Financial • Information is
information has information can considered
confirmatory be used as an material if omitting
value if it provides input to predict it or misstating it
feedback about future outcomes could influence
(confirms or decisions users
changes) previous make on the basis
evaluations. of financial
information about
a specific
reporting entity
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FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
FAITHFUL REPRESENTATION

Financial information
to be a perfectly faithful
faithfully represent the
representation, a depiction
substance of the
would have three
economic phenomena
characteristics; that are
(in words and numbers)
completeness, neutrality
that it purports to
and free from error.
represent.
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FQC-FAITHFUL REPRESENTATION
Completeness Neutrality Free from Error

• A complete depiction • A neutral depiction is • Free from error means

includes all information without bias in the there are no errors or
necessary for a user to selection or omissions in the
understand the presentation of financial description of the
phenomenon being information. phenomenon, and the
depicted, including all • A neutral depiction is process used to
necessary descriptions not slanted, weighted, produce the reported
and explanations. emphasised, de- information has been
emphasised or selected and applied
otherwise manipulated with no errors in the
to increase the process.
probability that financial
information will be
received favourably or
unfavourably by users.
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Enhancing Qualitative Characteristics (EQC)

» Comparability, verifiability, timeliness and
understandability are qualitative
characteristics that enhance the usefulness of
information that both is relevant and provides a
faithful representation of what it purports to
represent.
 Enhancing Qualitative Characteristics
24

Comparability Verifiability Timeliness Understandability

• information about • Verifiability means • Timeliness means • Financial

a reporting entity is that different having information information can be
more useful if it knowledgeable available to read and
can be compared and independent decision-makers in understood by
with similar observers could time to be capable users
information about reach consensus, of influencing their • Classifying,
other entities and although not decisions. characterising and
with similar necessarily presenting
information about complete information clearly
the same entity for agreement, that a and concisely
another period or particular depiction makes it
another date. is a faithful understandable.
representation.
 Applying the Enhancing Qualitative
25

Characteristics (EQC)
» Should be maximised to the extent possible.
» Process does not follow prescribed order.
» Sometimes, one EQC may have to be diminished to
maximize another EQC.
» For example: Temporary reduction in Comparability (EQC)
to apply new MFRS such as MFRS 15 Revenue from Contract
with Customers may be worthwhile to improve Relevance
(FQC)and Faithful Representation (FQC) in the longer term.
 Cost constraint on useful financial
26

reporting

» Reporting financial information imposes costs.

» Cost is a pervasive constraint on information
provided by financial reporting
» The benefits derived from information should
exceed the cost of providing it.
» Different individuals’ assessments of the COSTS and
BENEFITS of reporting particular items will vary.
 Cost constraint on useful financial 27

reporting

Providers of financial Users of financial information

information bear the bear the following costs:
following costs: » costs of analysing and
» collecting, processing, interpreting the information
verifying and provided
disseminating financial » additional costs to obtain the
information information elsewhere or to
estimate it (if needed
information is not provided)
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CHAPTER 3—FINANCIAL STATEMENTS AND

THE REPORTING ENTITY
This chapter describe:
» The objective and scope of financial statements
» Reporting period
» Going concern assumption
» The reporting entity
» Consolidated and unconsolidated financial statements
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The objective of financial statements

» The objective of 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 and in assessing management’s stewardship of
the entity’s economic resources
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Reporting period
» Financial statements are prepared for a specified period of time
(reporting period)
» To help users of financial statements to identify and assess
changes and trends, financial statements also provide
comparative information for at least one preceding reporting
period.
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Going concern assumption
» Financial statements are normally prepared on the
assumption that the reporting entity is a going concern
and will continue in operation for the foreseeable future.
» It is assumed that the entity has neither the intention nor
the need to enter liquidation or to cease trading.
» If such an intention or need exists, the financial
statements may have to be prepared on a different basis.
If so, the financial statements describe the basis used.
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The Reporting Entity

» A reporting entity is an entity that is
required, or chooses, to prepare
financial statements.
» A reporting entity can be a single entity
(such as a stand-alone reporting entity)
or a portion of an entity or can comprise
more than one entity.
 The Reporting Entity
33

» Sometimes one entity (parent) has control over another

entity (subsidiary). Reporting entity may comprise:
⋄ both parent and subsidiary (as a single entity)
⋄ parent only
» There is a reporting entity comprises two or more
entities that are not all linked by a parent-subsidiary
relationship.
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Financial statements

Both parent & Not linked as

Parent only
subsidiary parent-subsidiary
• Consolidated • Unconsolidated • Combined
financial financial financial
statements statements statements
 Consolidated and unconsolidated financial
35

statements
Consolidated financial Unconsolidated financial
statements statements
• provide information • provide information
about the assets, about the parent’s
liabilities, equity, assets, liabilities, equity,
income and expenses income and expenses,
of both the parent and and not about those of
its subsidiaries as a its subsidiaries.
single reporting entity. • a parent may be
required, or choose, to
prepare unconsolidated
financial statements in
addition to consolidated
financial statements
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CHAPTER 4—THE ELEMENTS OF

FINANCIAL STATEMENTS
» This chapter describes the five
elements of financial
statements
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THE ELEMENTS OF FINANCIAL
STATEMENTS

Elements of
Financial
Statements

Elements of
Elements of
Financial
Financial Positions
Performance
 Elements of Financial Position -
38

Definition
Assets Liabilities Equity
- A present economic - A present - The residual
resource controlled obligation of the interest
by the entity as entity - in the assets of
- a result of past - to transfer an the entity
events. economic - after deducting all
An economic resource resource its liabilities.
is a right that has the - as a result of
potential to produce past events.
economic benefit.
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ASSETS
The criteria to determine the existence of assets are :
1. RIGHT TO, including:
a) Rights that correspond to an obligation of another party
b) Rights that do not correspond to an obligation of another party;

2. Potential to produce ECONOMIC BENEFITS FROM ;

3. CONTROL of, an economic resource which implies that an asset

need not necessarily take a particular form (can be tangible or
intangible).
 ASSETS
40

Control criterion
Has the present ability

To direct the use of To prevent others parties

economic resource from directing the use of
and economic resources and

to obtain the economic from obtaining the economic

benefits that may flow benefits that may flow from it
from it
 41

LIABILITIES

For a liability to exist, three criteria must all be

satisfied:
a) the entity has an OBLIGATION
b) the obligation is to TRANSFER AN ECONOMIC
RESOURCE; and
c) the obligation is a present obligation that exists AS
A RESULT OF PAST EVENTS.
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Elements of Financial Performance

- Definition
Income Expenses
- Income is increases in - Expenses are
assets, or decreases in decreases in assets, or
liabilities, that result in increases in liabilities,
increases in equity, that result in decreases
other than those in equity, other than
relating to contributions those relating to
from holders of equity distributions to holders
claims. of equity claims.
 43

CHAPTER 5—RECOGNITION AND

DERECOGNITION

This chapter discuss:

» Criteria for including assets and liabilities in
financial statements (recognition); and
» Guidance on when to remove the assets and
liabilities (derecognition)
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RECOGNITION
» Recognition is 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 liability, equity,
income or expenses.
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RECOGNITION CRITERIA
1 Only items that meet the definition of
Asset Liability Equity Income Expenses

are recognised in the are recognised in the

statement of statement(s) of
financial position financial performance
(also known as
SOPL&OCI)
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RECOGNITION CRITERIA
2 When the items provide USERS of financial
statements with USEFUL INFORMATION in line with
Relevance and Faithful representation:
 47

DERECOGNITION
» Derecognition is the removal of all or
part of a recognised asset or liability
from an entity’s statement of
financial position.
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DERECOGNITION

Derecognition normally occurs when that item no

longer meets the definition of an asset or of a liability:
(a) for an asset, derecognition normally occurs when
the entity loses control of all or part of the
recognised asset; and
(b) for a liability, derecognition normally occurs when
the entity no longer has a present obligation for all
or part of the recognised liability.
 49

CHAPTER 6—MEASUREMENT
This chapter:
» Describe measurement bases;
» Discuss factors to be considered when
selecting a measurement basis
 50

MEASUREMENT
» Elements recognised in financial statements are
quantified in monetary terms.
» “how much” an entity allocates to amount
recognized as element in financial statements
» - it is a process of determining the monetary
amounts at which the elements of the financial
statement are to be recognized
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Measurement
Bases

CURRENT
HISTORICAL VALUE
COST

Value in use
(for asset) and
Fair value Current cost
fulfilment value
(for liabilities)
 52

Historical Cost
» Historical cost measures provide monetary information about
assets, liabilities 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
 53

Historical Cost – for assets

The historical cost of an asset when it is
acquired or created is the value of the costs
incurred in acquiring or creating the asset,
comprising the consideration paid to acquire or
create the asset plus transaction costs.
 54

Historical Cost – for liabilities

» The historical cost of a liability
when it is incurred or taken on is the
value of the consideration received
to incur or take on the liability minus
transaction costs
 55

Current value
» Provides information updated to reflect
conditions at the measurement date
» Measurement bases include:
⋄ Fair value
⋄ Value in use (for assets), fulfilment value
(for liabilities)
⋄ Current cost
 56

Fair value

» 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
measurement date.
» In some cases, fair value can be determined directly
by observing prices in an active market.
 57

Value in use (for assets)

» Value in use is the present value of the cash

flows, or other economic benefits, that an
entity expects to derive from the use of an
asset and from its ultimate disposal.
 58

Fulfilment value (for liabilities)

» Fulfilment value is the present value of the cash, or
other economic resources, that an entity expects to be
obliged to transfer as it fulfils a liability. Those amounts
of cash or other economic resources include not only
the amounts to be transferred to the liability
counterparty, but also the amounts that the entity
expects to be obliged to transfer to other parties to
enable it to fulfil the liability.
 59

Current cost
Reflects the current amount that would be:
» Paid to acquire an equivalent asset
» Received to take on an equivalent liability
 60

Factors to consider when selecting a

measurement basis
The relevance of information provided by a measurement
basis for an asset or liability and for the related income
and expenses is affected by:
(a) the characteristics of the asset or liability; and
(b) how that asset or liability contributes to future cash
flows
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(a) the characteristics of the asset or

liability
The relevance of information depends on:
» the variability of cash flows;
» whether the value of the asset or liability is
sensitive to market factors or other risks.
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(b) how that asset or liability contributes to

future cash flows
» some economic resources produce cash flows directly; in other
cases, economic resources are used in combination to produce
cash flows indirectly.
» How economic resources are used, and hence how assets and
liabilities produce cash flows, depends in part on the nature of
the business activities conducted by the entity.
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» When a business activity of an entity involves the use of several

economic resources that produce cash flows indirectly, by being used in
combination to produce and market goods or services to customers,
historical cost or current cost is likely to provide relevant information
about that activity.
» For example, property, plant and equipment is typically used in
combination with an entity’s other economic resources. Similarly,
inventory typically cannot be sold to a customer, except by making
extensive use of the entity’s other economic resources (for example, in
production and marketing activities).
 64

» For assets and liabilities that produce cash flows

directly, such as assets that can be sold independently
and without a significant economic penalty (for
example, without significant business disruption), the
measurement basis that provides the most relevant
information is likely to be a current value that
incorporates current estimates of the amount, timing
and uncertainty of the future cash flows.
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CHAPTER 7—PRESENTATION AND

DISCLOSURE
 66

Presentation and disclosure as

communication tools
» A reporting entity communicates information
about its assets, liabilities, equity, income
and expenses by presenting and disclosing
information in its financial statements.
 Presentation and disclosure
67

objectives and principles

To facilitate effective communication of information in financial
statements, a balance is needed between:
» (a) giving entities the flexibility to provide relevant information that
faithfully represents the entity’s assets, liabilities, equity, income and
expenses; and
» (b) requiring information that is comparable, both from period to
period for a reporting entity and in a single reporting period across
entities.
 68

Classification

» Classification is the sorting of assets, liabilities, equity,

income or expenses on the basis of shared characteristics for
presentation and disclosure purposes.
» Such characteristics include—but are not limited to—the
nature of the item, its role (or function) within the business
activities conducted by the entity, and how it is measured.
 69

Classification
» Classifying dissimilar assets, liabilities, equity,
income or expenses together can obscure
relevant information, reduce understandability
and comparability and may not provide a
faithful representation of what it purports to
represent.
 70

Classification of assets and liabilities

» to separate an asset or liability into components that
have different characteristics and to classify those
components separately
» classifying those components separately would enhance
the usefulness of the resulting financial information.
» For example, it could be appropriate to separate an asset
or liability into current and non-current components and
to classify those components separately.
 71

Offsetting
» Offsetting occurs when an entity recognises and
measures both an asset and liability as separate units
of account, but groups them into a single net amount
in the statement of financial position.
» Offsetting classifies dissimilar items together and
therefore is generally not appropriate.
 72

Classification of equity
» To provide useful information, it may be necessary to
classify equity claims separately if those equity claims
have different characteristics
» it may be necessary to classify components of equity
separately if some of those components are subject to
particular legal, regulatory or other requirements
 73

Classification of income and

expenses
Profit or loss and other comprehensive income:
» Income and expenses are classified and included
either:
» (a) in the statement of profit or loss; or
» (b) outside the statement of profit or loss, in other
comprehensive income.
 74

Aggregation
» Aggregation is the adding together of assets,
liabilities, equity, income or expenses that have
shared characteristics and are included in the
same classification.
» Aggregation makes information more useful by
summarising a large volume of detail.
 75

CHAPTER 8—CONCEPTS OF CAPITAL AND

CAPITAL MAINTENANCE
This chapter discuss:
» Concept of capital
» Concept of capital maintenance
» Capital maintenance adjustments
 76

Concepts of Capital

Financial concept Physical concept

of capital of capital
• capital is the net • capital is
assets or equity regarded as the
of the entity productive
• invested money capacity of the
or invested entity
purchasing power • operating
capability
 Concepts of Capital maintenance
77

Financial capital Physical capital

maintenance maintenance
• profit is only • profit is only
earned if the earned if the
financial or money physical
amount of net productive
assets at the end capacity at the
exceeds at the end exceeds the
beginning of the physical
period productive
capacity at the
beginning
 78
Capital maintenance adjustments
» The revaluation or restatement of assets and liabilities
gives rise to increases or decreases in equity.
» While these increases or decreases meet the definition
of income and expenses, they are not included in the
income statement under certain concepts of capital
maintenance.
» Instead these items are included in equity as capital
maintenance adjustments or revaluation reserves.
 79

» The end

References:
Tan Liong Tong (2019). “Financial Accounting and Reporting in Malaysia”, CCH
(Malaysia) Sdn Bhd, Vol. 1, 7th Edition.
IFRS Foundation (2018). The Conceptual Framework for Financial Reporting.