1 CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING - 2018

FRANCIS H. VILLAMIN
2 CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING

Learning Objectives
• State the purpose, status, and scope of the Conceptual
Framework.
• State the objective of financial reporting.
• Identify the primary users of financial statements.
• Explain briefly the qualitative characteristics of useful
information and how they are applied in financial reporting.
 CONCEPTUAL FRAMEWORK FOR
3 FINANCIAL REPORTING

Learning Objectives:
• Define the elements of financial statements and state their
recognition criteria and their derecognition.
• State the measurement bases used in financial reporting.
4 PURPOSE OF THE
CONCEPTUAL FRAMEWORK
• The Conceptual Framework prescribes the concepts for general purpose
financial reporting. Its purpose is to:
a. Assist the International Accounting Standards Board (IASB) in
developing Standards that are based on consistent concepts;
b. Assist preparers in developing consistent accounting policies
when no Standard applies to a particular transaction or when
a Standard allows a choice of accounting policy; and
c. Assist all parties in understanding and interpreting the
Standards.
 5
STATUS OF THE CONCEPTUAL FRAMEWORK

• The Conceptual Framework is not a PFRS. When there is a conflict

between the Conceptual Framework and a PFRS, the PFRS will prevail.
• In the absence of a standard, management shall consider the
Conceptual Framework in making its judgment in developing and
applying an accounting policy that results in useful information.
 SCOPE OF THE CONCEPTUAL
6
FRAMEWORK

The Conceptual Framework is concerned with general purpose financial

reporting. General purpose financial reporting involves the preparation of
general purpose financial statements. The Conceptual Framework provides the
concepts regarding the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
 SCOPE OF THE CONCEPTUAL
7
FRAMEWORK

The Conceptual Framework is concerned with general purpose financial

reporting. General purpose financial reporting involves the preparation of
general purpose financial statements. The Conceptual Framework provides the
concepts regarding the following:
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
 8
OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING

• The objective of general purpose financial reporting is to

provide financial information about the reporting entity that is useful
to primary users in making decisions about providing resources to
the entity.
• The objective of general purpose financial reporting forms the
foundation of the Conceptual Framework.
9 PRIMARY USERS

• Primary users – are those who cannot demand

information directly from reporting entities. The primary
users are:
(a) Existing and potential investors
(b) Lenders and other creditors.

• Only the common needs of primary users are met by the

financial statements.
FUNDAMENTAL CONCEPTS
 Relevance

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

LO 4
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

To be relevant, accounting information must be capable of making

a difference in a decision.
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to

predictive processes used by investors to form their own expectations
about the future.
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
 Faithful Representation

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

LO 4
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor

one set of interested parties over another.
 FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.
 FUNDAMENTAL CONCEPTS

Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.
 FUNDAMENTAL CONCEPTS

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.
 FUNDAMENTAL CONCEPTS

Enhancing Qualities

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.
 FUNDAMENTAL CONCEPTS

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.
25
QUALITATIVE CHARACTERISTICS

I. Fundamental qualitative characteristics

(1) Relevance
(a) Predictive value
(b) Feedback value
 Materiality – entity-specific aspect of relevance
26
QUALITATIVE CHARACTERISTICS

I (2) Faithful representation

(a) Completeness
(b) Neutrality
(c) Free from error
27
QUALITATIVE CHARACTERISTICS

II. Enhancing qualitative characteristics

(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability
28 FUNDAMENTAL VS.
ENHANCING

• The fundamental qualitative characteristics are the

characteristics that make information useful to users.
• The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of information
29 RELEVANCE

• Information is relevant if it can affect the decisions of

users.
• Relevant information has the following:
a. Predictive value – the information can be used in making
predictions
b. Confirmatory value – the information can be used in confirming
past predictions

 Materiality – is an ‘entity-specific’ aspect of relevance.

30 FAITHFUL REPRESENTATION

• Faithful representation means the information provides a true, correct

and complete depiction of what it purports to represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to
understand the phenomenon being depicted is provided.
b. Neutrality – information is selected or presented without bias.
c. Free from error – there are no errors in the description and in
the process by which the information is selected and applied.
31 ENHANCING QUALITATIVE
CHARACTERISTICS
1. Comparability – the information helps users in identifying
similarities and differences between different sets of
information.
2. Verifiability – different users could reach consensus as to
what the information purports to represent.
3. Timeliness – the information is available to users in time
to be able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.
32 FINANCIAL STATEMENTS AND
THE REPORTING ENTITY

Objective and scope of financial statements

• The objective of general purpose financial statements is to
provide financial information about the reporting entity’s
assets, liabilities, equity, income and expenses that is useful in
assessing:
a. the entity’s ability to generate future net cash inflows;
and
b. management’s stewardship over economic resources.
33 FINANCIAL STATEMENTS AND
THE REPORTING ENTITY
Reporting period
• Financial statements are prepared for a specific period of time (i.e.,
the reporting period) and include comparative information for at
least one preceding reporting period.

Going concern
• Financial statements are normally prepared on the assumption that
the reporting entity is a going concern, meaning the entity has
neither the intention nor the need to end its operations in the
foreseeable future.
34 FINANCIAL STATEMENTS AND
THE REPORTING ENTITY

Reporting entity
• A reporting entity is one that is required, or chooses, to
prepare financial statements, and is not necessarily a legal
entity. It can be a single entity or a group or combination of
two or more entities.
 BASIC ELEMENTS
Elements of Financial Statements

Asset A resource controlled by the entity as a

result of past events and from which
future economic benefits are expected to
Liability flow to the entity.

Equity

Income

Expenses
 BASIC ELEMENTS
Elements of Financial Statements

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

Income

Expenses
 BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

The residual interest in the assets of the

Equity
entity after deducting all its liabilities.

Income

Expenses
 BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

Equity Increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of
Income
liabilities that result in increases in equity,
other than those relating to contributions
Expenses from equity participants.
 BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

Equity Decreases in economic benefits during the

accounting period in the form of outflows
Income or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
Expenses
equity participants.
 40
ELEMENTS OF FINANCIAL STATEMENTS
41 ASSET

• Asset is “a present economic resource controlled

by the entity as a result of past events. An
economic resource is a right that has the
potential to produce economic benefits.” (Conceptual
Framework 4.3 & 4.4)
42 THREE ASPECTS IN THE DEFINITION
OF AN ASSET

1. Right – asset refers to a right, and not necessarily to a physical object,

e.g., the right to use, sell, lease or transfer a building.
2. Potential to produce economic benefits – the right has a potential
to produce economic benefits for the entity that are beyond the
benefits available to all others. Such potential need not be certain or
even likely – what is important is that the right already exists and that,
in at least one circumstance, it would produce economic benefits for
the entity.
3. Control – means the entity has the exclusive right over the benefits of
an asset and the ability to prevent others from accessing those benefits.
43 LIABILITY

• Liability is “a present obligation of the entity to

transfer an economic resource as a result of past
events.” (Conceptual Framework 4.26)
 44
THREE ASPECTS IN THE DEFINITION OF A
LIABILITY

1. Obligation – An obligation is “a duty or responsibility that an entity has

no practical ability to avoid.” (CF 4.29) An obligation can be either legal
obligation or constructive obligation.

2. Transfer of an economic resource – the obligation has the

potential to require the transfer of an economic resource to
another party. Such potential need not be certain or even likely –
what is important is that the obligation already exists and that, in
at least one circumstance, it would require the transfer of an
economic resource.
 THREE ASPECTS …… LIABILITY
45 (CONTINUATION)

3. Present obligation as a result of past events – A present obligation

exists as a result of past events if:
a. the entity has already obtained economic benefits or taken an action;
and
b. as a consequence, the entity will or may have to transfer an economic
resource that it would not otherwise have had to transfer.
(Conceptual Framework 4.43)
46 EQUITY

• “Equity is the residual interest in the assets of the entity

after deducting all its liabilities.” (Conceptual Framework 4.63)
• Equity equals Assets minus Liabilities
47 INCOME AND EXPENSES

• Income
Income is “increases in assets, or decreases in liabilities, that result
in increases in equity, other than those relating to contributions
from holders of equity claims.” (Conceptual Framework 4.68)

• Expenses
Expenses are “decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those relating to
distributions to holders of equity claims.” (Conceptual Framework 4.69)
 RECOGNITION, MEASUREMENT, AND
DISCLOSURE CONCEPTS

These concepts explain how companies should recognize,

measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual
ACCOUNTING POLICIES

Economic Entity – company keeps its activity separate from its

owners and other business unit.

Going Concern - company to last long enough to fulfill objectives

and commitments.

Monetary Unit - money is the common denominator.

Periodicity - company can divide its economic activities into time

periods.

Accrual Basis of Accounting – transactions are recorded in the

periods in which the events occur.
50
RECOGNITION
The recognition process
• Recognition is the process of including in the statement of
financial position or the statement(s) of financial
performance an item that meets the definition of one of the
financial statement elements (i.e., asset, liability, equity,
income or expense). This involves recording the item in
words and in monetary amount and including that amount
in the totals of either of those statements.
51
RECOGNITION
Recognition criteria
• An item is recognized if:
a. it meets the definition of an asset, liability, equity,
income or expense; and
b. recognizing it would provide useful information, i.e.,
relevant and faithfully represented information.
52 MEASUREMENT BASES

1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
53 HISTORICAL COST

• The historical cost of:

a. an asset is the consideration paid to acquire the asset plus
transaction costs.
b. a liability is the consideration received to incur the liability
minus transaction costs.
• Historical cost is updated over time to depict the following:
 Depreciation, amortization, or impairment of assets
 Collections or payments that extinguish part or all of the asset
or liability
 Unwinding of discount or premium when the asset or liability is
measured at amortized cost
54 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.”
(Conceptual Framework 6.12)
55 MEASUREMENT OF EQUITY

• Total equity is not measured directly. It is simply equal to

difference between the total assets and total liabilities.
• Because different measurement bases are used for different
assets and liabilities, total equity cannot be expected to be
equal to the entity’s market value nor the amount that can be
raised from either selling or liquidating the entity.
• Equity is generally positive, although some of its components
can be negative. In some cases, even total equity can be
negative such as when total liabilities exceed total assets.
 56

THANK YOU

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)