Conceptual Framework for Financial Reporting

Purpose and status of the Framework

The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial
statements for external users. The IFRS Framework serves as a guide to the Board in developing future IFRSs and
as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard
or International Financial Reporting Standard or Interpretation.
In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use
its judgment in developing and applying an accounting policy that results in information that is relevant and reliable.
In making that judgment, IAS 8.11 requires management to consider the definitions, recognition criteria, and
measurement concepts for assets, liabilities, income, and expenses in the IFRS Framework. This elevation of the
importance of the [IFRS] Framework was added in the 2003 revisions to IAS 8.

The IFRS Framework

Scope
The IFRS Framework addresses:
o the objective of financial reporting

o the qualitative characteristics of useful financial information

o the reporting entity

o the definition, recognition and measurement of the elements from which financial statements are constructed

o 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 and
providing or settling loans or other forms of credit. [F OB2]
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). [F OB4]
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. [F OB6]
The IFRS Framework notes that other parties, including prudential and market regulators, may find general purpose
financial reports useful. However, the Board considered that the objectives of general purpose financial reporting
and the objectives of financial regulation may not be consistent. Hence, regulators are not considered a primary user
and general purpose financial reports are not primarily directed to regulators or other parties. [F OB10 and F
BC1.20-BC 1.23]
Economic resources and claims
Information about the nature and amounts of a reporting entity's economic resources and claims assists users to
assess that entity's financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability
to obtain financing. Information about the claims and payment requirements assists users to predict how future
cash flows will be distributed among those with a claim on the reporting entity. [F OB13]
A reporting entity's economic resources and claims are reported in the statement of financial position. [See IAS 1.54-
80A]
Changes in economic resources and claims
Changes in a reporting entity's economic resources and claims result from that entity's performance and from other
events or transactions such as issuing debt or equity instruments. Users need to be able to distinguish between both
of these changes. [F OB15]
Financial performance reflected by accrual accounting
Information about a reporting entity's financial performance during a period, representing changes in economic
resources and claims other than those obtained directly from investors and creditors, is useful in assessing the
entity's past and future ability to generate net cash inflows. Such information may also indicate the extent to
which general economic events have changed the entity's ability to generate future cash inflows. [F OB18-OB19]
The changes in an entity's economic resources and claims are presented in the statement of comprehensive
income. [See IAS 1.81-105]
Financial performance reflected by past cash flows
Information about a reporting entity's cash flows during the reporting period also assists users to assess the
entity's ability to generate future net cash inflows. This information indicates how the entity obtains and spends
cash, including information about its borrowing and repayment of debt, cash dividends to shareholders, etc. [F
OB20] The changes in the entity's cash flows are presented in the statement of cash flows. [See IAS 7] Changes
in economic resources and claims not resulting from financial performance
Information about changes in an entity's economic resources and claims resulting from events and transactions
other than financial performance, such as the issue of equity instruments or distributions of cash or other assets to
shareholders is necessary to complete the picture of the total change in the entity's economic resources and claims.
[F OB21]
The changes in an entity's economic resources and claims not resulting from financial performance is presented
in the statement of changes in equity. [See IAS 1.106-110]

Chapter 2: The Reporting entity

The chapter on the Reporting Entity will be reconsidered as part of the IASB's comprehensive project on
the framework.

Chapter 3: Qualitative characteristics of useful financial information

The qualitative characteristics of useful financial reporting identify the types of information are likely to be most
useful to users in making decisions about the reporting entity on the basis of information in its financial report. The
qualitative characteristics apply equally to financial information in general purpose financial reports as well as to
financial information provided in other ways. [F QC1, QC3]
Financial information is useful when it is relevant and represents faithfully what it purports to represent. The usefulness
of financial information is enhanced if it is comparable, verifiable, timely and understandable. [F QC4]
Fundamental qualitative characteristics
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information. [F
QC5]
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. [F QC6-QC10]
Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to
which the information relates in the context of an individual entity's financial report. [F QC11]
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. This
fundamental characteristic seeks to maximize the underlying characteristics of completeness, neutrality and freedom from
error. [F QC12] Information must be both relevant and faithfully represented if it is to be useful. [F QC17]

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance
the usefulness of information that is relevant and faithfully represented. [F QC19]
1. 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. [F QC20-QC21]
2. 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. [F QC26]
3. Timeliness
Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.
[F QC29]
4. Understandability
Classifying, characterizing 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 analyze the information
with diligence. [F QC30-QC32]

Applying the enhancing qualitative characteristics

Enhancing qualitative characteristics should be maximized to the extent necessary. However, enhancing
qualitative characteristics (either individually or collectively) render information useful if that information is irrelevant
or not represented faithfully. [F QC33]
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general purpose financial reporting.
Reporting such information imposes costs and those costs should be justified by the benefits of reporting that
information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in
relation to individual reporting entities. The IASB will consider whether different sizes of entities and other
factors justify different reporting requirements in certain situations. [F QC35-QC39]
 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.

Going concern 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. [F 4.1]

Accounting Entity means that the entity is separate from the owners, managers, and employees who constitute the
entity.

Time Period requires that the indefinite life of an entity is subdivided into time periods or accounting periods
which are usually of equal length for the purpose of preparing financial reports.

Monetary unit has two aspects, quantifiability and stability.

Quantifiability means that the assets, liability, equity, income and expense should be stated in terms of unit of
measure which is the peso in the Philippines.

Stability of peso means that the purchasing power of peso is stable or constant and that its instability is
insignificant and therefore may be ignored.

Chapter 5: 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: [F 4.4]
o Assets

o Liabilities

o Equity

The elements directly related to performance (income statement) are: [F 4.25]

o Income

o Expenses

The cash flow statement reflects both income statement elements and some changes in balance sheet
elements. Definitions of the elements relating to financial position
o 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. [F 4.4(a)]
o 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. [F 4.4(b)]
o Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities. [F 4.4(c)]
Definitions of the elements relating to performance
o 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. [F 4.25(a)]

o 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. [F 4.25(b)]

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. [F 4.29 and F 4.30]
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. [F 4.33 and F 4.34] 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: [F 4.37 and F 4.38]
o It is probable that any future economic benefit associated with the item will flow to or from the entity; and

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

Based on these general criteria:
o An asset is recognized 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. [F 4.44]
o A liability is recognized 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. [F 4.46]

o Income is recognized 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). [F 4.47]

o Expenses are recognized 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). [F 4.49]

Measurement of the elements of financial statements

Measurement involves assigning monetary amounts at which the elements of the financial statements are to
be recognized and reported. [F 4.54]
The IFRS Framework acknowledges that a variety of measurement bases are used today to different degrees and in
varying combinations in financial statements, including: [F 4.55]
o Historical cost

is the measurement basis most commonly used today, but it is usually combined with other
measurement bases. [F. 4.56] 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.

o Current cost

Is the amount of cash or cash equivalent that would have to be paid if the same of equivalent asset
was acquired currently.

o Net realizable (settlement) value

Is the amount of cash or cash equivalent that could currently be obtained by selling the asset in an
orderly disposal.

o Present value (discounted)

Is the discounted value of the future net cash inflows that the item is expected to generate in the
normal course of business.