CONCEPTUAL FRAMEWORK - CHAPTER 1

OBJECTIVE
 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 relating to providing resources to the entity. Those decisions involve decisions
about:

 Buying, selling or holding equity and debt instruments;

 Providing or settling loans and other forms of credit; or
 Exercising rights to vote on, or otherwise influence, managements actions that affect the use of
the entity’s economic resources.

 To make assessment, existing and potential investors, lenders and other creditors need
information about:
 the economic resources of the entity, claims against the entity and changes in those resources
and claims; and
 How efficiently and effectively the entity’s management and governing board have discharged
their responsibilities to use the entity’s economic resources.

 General purpose financial reports are not designed to show the value of a reporting entity; but
they provide information to help existing and potential investors, lendres and other creditors to
estimate the value of the reporting entity.

 To a large extent, financial reports are based on estimates,judgements, and models rather than
exact depictions. The Conceptual framework establishes the concepts that underlie those
estimates, judgements and models. The conceptual frammework is the skeleton.

 General purpose financial reports provide information about the financial position of a reporting
entity, which is information about the entity’s economic resources and the claims against the
reporting entity.

 Financial freports also provide information about the effect of transactions and other event that
change a reporting entity’s economic resources and claims. Both types of information provide
useful input for decisions relating to providing resources to an entity.

ECONOMIC RESOURCES AND CLAIMS

 Information about the nature and amounts of a reporting entity’s economic resources and
claims can help users to identify the reporting entity’s financial strength and weaknesses.

 That information can help users to assess the reporting entity’s liquididty and solvency, its needs
for additional financing and how successful it is likely to be obtaining that financing.

 That information can also help users to assess management’s stewardship of the entity’s
economic resources.

CHANGES IN ECONOMIC RESOURCES AND CLAIMS

 Changes in a reporting entity’s economic resources and claims result from that entity’s financial
performance and from other events or transactions such as issuing debt or equity instruments.

 Information about a reporting entity’s financal performance helps users to understand the
return that the entity has produced on its economic resources. Information about the return the
entity has produced can help users to assess management’s stewardship of the entity’s
economic resources.

FINACIAL PERFORMANCE REFLECTED BY ACCRUAL ACCOUNTING

 Accrual accounting depicts the effect of transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in a different period.

FINACIAL PERFORMANCE REFLECTED BY PAST CASH FLOWS

 Information about a reporting entity’s cash flows during a period also helps users to assess the
entity’s ability to generate future net cash inflows and to assess management’s stewardship of
the economic resources.
 That information indicates how reporting entity obtain and spend cash, including information
about its borrowing and repayment of debt, cash dividends or other cash distributions to
investors, and other factors that may affect the entity’s liquidity or solvency.

CHANGES IN ECONOMIC RESOURCES AND CLAIMS NOT RESULTING FROM FINANCIAL PERFORMANCE
 A reporting entity’s economic resources and claims may also change for reason other than
financial performance, such as issuing debt or equity instruments. Information about this type of
change is necessary to give users a complete understanding of why the reporting entity’s
economic resources and claims changed and the implications of those changes for its future
financal performance.

INFORMATION ABOUT USE OF THE ENTITY’S ECONOMIC RESOURCES

 Information about how efficiently and effectively the reporting entity’s management has
discharged its responsibilities to use the entity’s economic resources help users to assess
management’s stewardship of those resources. Such information is also useful for predicting
how efficiently and effectively management will use the entity’s economic resources in future
periods.
 Example of management’s responsibilities to use the entity’s economic resources include
protecting those resources from unfavorable effects of economic factors, such as price and
technological changes, and ensuring that the entity complies with applicable laws, regulations
and contractual provisions.
 CONCEPTUAL FRAMEWORK - CHAPTER 2
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

Fundamental Qualitative Characteristics

- the fundamental qualitative characteristics are relevance and faithful representation.

Relevance
 Relevant financial information is capable of making a difference in the decisions made by users.
Information may be capable of making a difference in a decision even if some users choose not
to take advantage of it or are already aware of it from other sources.
 Financial information is capable of making difference in decisions if it has predictive value,
confirmatory value or both.
 Financial information has a predictive value if it can be used as an input to processes employed
by users to predict future outcome. Financial information need not be a pediction or forecast to
have predictive value. Financial information with predictive value is employed by users in making
their own predictions.
 Financial information has confirmatory value if it provides feedback about (confirms or
changes)previous evaluations.
 Materiality - information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial reports
make on the basis of those reports, which provide financial information about a specific
reporting entity.

Faithful Representation
To be useful, information must not only represent relevant phenomena, but it must also faithfully
represent the substance of the phenomena that it purpots to represent.
In many circumstances, the substance of an economic phenomenon and its legal form are the same. If
they are not the same, providing information only about the legal form would not faithfully
represent the economic phenomenon.
To be a perfectly faithful representation, a depiction would have three characterstics. It would be
complete, neutral, and free from error.
A complete depiction includes all information necessary for a user to understand the phenomenon
being depicted, including all necessary description and explanation. For example, a complete
depiction of a group of assets would include, at a minimum, a description of the nature of the assets
in the group, a numerical depiction of all of the assets in the group, and a description of what the
numerical depiction represents (for example, historical cost or fair value).
A neutral depiction is without bias in the selection or representation of financial information. A
neutral depiction is not slanted, weighted, de- emphasized, or otherwise manipulated to increase the
probability that financial information will be received favorably or unfavorably by users.
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making
judgements under conditions of uncertainty. The exercise of prudence means that the assets and
income are not overstated and liabilities are not understated.
Free from error means there are no errors or omissions in the description of the phenomenon, and
the process used to produce the reported information has been selected and applied with no errors in
the process. In this context, free from error does not mean perfectly accurate in all respects.

Enhancing Qualitative Characteristics

Comparability, verifiability, timeliness, and understandability are qualitative characteristics that
enhance the usefulness of information that both is relevant and provides a faithful repressentation of
what it purpots to represent.

Comparability
Information about a reporting entity is more useful if it can be compared with similar information
about other entities
(intercomparability) and with similar information about the same entity for another period or another
date (intracomparability).

Comparability is the qualitative characteristics that enables users to identify and understand
similarities in, and differences among, items. Unlike the other qualitative characteristics,
comparability does not relate to a single item. A comparison requires at laest two items.

Consistency, although related to comprability is not the same. Consistency refers to the use of the
same method for the same items, either from period to perid within a reporting entity or in a single
period across entities. Comparability is the goal; consistency helps to achieve the goal.

Verifiability
It means that different knowledgeable and independent observers could reach concensus, although
not necessarily complete agreeement, that a particular depiction is a faithful representation.
Verification can be direct or indirect. Direct verification means verifying an amount or other
representation though direct observation, for example, by counting cash.
Indirect verification means checking the inputs to model, formula or other technique and
recalculating the outputs using the same methodology. An example is veryfying the carrying amount
of inventory using the same cost flow assumption (for example, using the first-in, first-out method).

Timeliness
It means having information available to decision-makers in time to be capable of influencing their
decisions. Generally, the older the information is the less useful it is. However, some information may
continue to be timely long after the end of a reporting period because, for example, some users may
need to identify and assess trends.

Understandability
Classifying, characterizing and presenting information clearly and concisely makes it uderstandability.
Some phenomena are inherently complex and cannot be made easy to understand. Excluding
information about those phenomena from financial reports might make the information in those
financial reports easier to understand. However those reports would be incomplete and therefore
possibly misleading.
Financial reports are prepared for users who have a reasonable knowledgeof business and economics
activities and who review and analyze the information diligently . At times, even well-informed and
diligent users may need to seek the aid of an adviser to understand information about complex
economic phenomena.

THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING

Cost is a pervasive constraint on the information that can be provided by financial reporting.
Reporting financial information imposes costs, and it is important that those cost are justified by the
benefits of reporting that information. There are several types of costs and benefits to consider.
CHAPTER 3

FINANCIAL STATEMENTS
Financial statements provide information about economic resources of the reporting entity, and
changes in those resources and claims, that meet the definition of the elements of financial
statements.

OBJECTIVE AND SCOPE 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 prospect for future net cash inflows to the reporting entity and in assessing
management’s stewardship of the entity’s economic resources.

Where do we find those information?

Statement of Financial Position, by recognizing assets, liabilities, and equity.
Statement(s) of Financial Performance, by recognizing income and expenses.
Other Statements and notes, by presenting and disclosing information about:
 Recognized assset,liabilities, equity,income, and expenses including information about their
nature and about the risk arising from those recognized assets and liabilities;
 Assets and liabilities that have not been recognized (see including information about their nature
and about the risks arising from them;
 Cash flows;
 Contributions from holders of equity claims and distributions to them; and
 The methods,assumptions and judgement used in estimating the amounts presented or
disclosed, and changes in those methods, assumptions and judgements.

REPORTING PERIOD
 Financial statements are prepaid for a specified period of time and provide information about:
 Assets and liabilities-- including unrecognized assets and liabilities-- and equity that existed at
the end of the reporting period, or during the reporting period; and
 Income and expenses for the 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.
 Financial statements include information about transactions and other events that have
occurred after the end of the reporting period if providing that information is necessary to meet
the objective of financial statements.

PERSPECTIVE ADOPTED IN FINANCIAL STATEMENTS

Financial statements provide information about the transactions and other events viewed from the
perspective of the reporting entity as a whole, not from the perspective of any particular group of the
entity’s existing or potential investors, lenders or other creditors.

GOING CONCERN ASSUMPTION

Financial statements are normally prepared on the assumption that the reporting entity is going
concern and will continue in operation for the foreseeable future.
Hence, 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.

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 or a portion of an entity or can compromise more than one entity. A
reporting entity is not a necessary a legal entity.
Sometimes one entity (parent) has a control over another entity (subsidiary).

If a reporting entity compromises both the parents and its subsidiaries, the reporting entity’s financial
statements are reffered to as a consolidated financial statements.
If a reporting entity is the parent alone, the reporting entity’s financial statements are reffered to as
unconsolidated financial statements.
If a reporting entity compromises two or more entities that are not linked by parent-subsidiary
relationshp, the reporting entity’s financial statement are referred to as combined financial
statements.

CONSOLIDATED AND UNCONSOLIDATED FS

Consolidated financial stattements provide information about the assets, liabilities, equity, income
and expenses of both the parent and its subsidiaries as a single reporting entity.
Consolidated financial statements are not designed to provide separate information about the assets,
liabilities, equity, income, and expenses of any particular subsidiary. A subsidiary’s own financial
statements are designed to provide that information.
Uncosolidated financial statements are designed to provide information about the parent’s assets,
liabilities, equity, income and expenses, and not about those of its subsidiaries.
Another way to provide information about some or all assets, liabilities, equity,income, and expenses
of the parent alone is in consolidated financial statements, in the notes.

CHAPTER 4
THE ELEMENTS OF FINANCIAL STATEMENTS

The element of financial statements define in the Conceptual framework are:

Assets, liabilirties, equity, which relate to a reporting entity’s financial position; and
Income and expenses, which relate to a reporting entity’s financial performance.

Economic Resource- ASSET

A present economic resource controlled by the entity as a result of past events. An economic
resorce is a right to produce economic benefits.

Potential to produce benefits:

An economic resource is a right that has the potential to produce economic benefits. For that
potential to exist, it does not need to be certain, or even likely, that the right will produce economic
benefits. It is only necessary that the right already exists and that, in at laest one circumstance, it
would produce for the entity economic benefits beyond those available to all other parties.

Claims- LIABLITIES AND EQUITY

Liabilities
A present obligation of the entity to transfer an economic resource as a result of past events.
Equity
The residual interest in assets of the entity after deducting all of its liabilities.
Changes in economic resources and claims, reflecting financial performance- INCOME AND EXPENSES
Income
Increase in assets , or decrease in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.
Expenses
Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims.

Other changes in economic resources and cllaims (NO NAME)

1. Contributions from holders of equity claims, and distributions to them.
2. Exchanges of assets or liabilities that do not result in increases or decreases in equity.
CHAPTER 5
RECOGNITION AND DERECOGNITION

Recognition process
 Recognition is the process of capturing for inclusion in the statement of finacial position or the
statement(s) of financial performance an item that meets the definition of one of the elements
of financial statements- an assets, a liability, equity, income or expenses.
 Recognition involves depicting the item in one of those statements- either alone or in
aggregation with other items- in words and by a monetary amount, and including that amount in
one or more totals in that statement.
 The amount at which an asset, a liability or equity is recognized in the statement of financial
position is referred to as its ‘carrying amount’.

 Recognition links the element, the statement of financial position and the statements of financial
performances as follows:
 In the statement of financial position at the beginning and end of the reeporting period, total
assets minus total liabilities equal total equity; and
 Recognized changes in equity during the period compromise:
a) Income minus expenses recognized in the statement(s) of financial performance; plus
b) Contributions from holders of equity claims, minus distributions toholders of equity claims.

RECOGNITION CRITERIA
 Only items that meet the definition of an ssset, a liability or equity are recognized in the
statement of financial position.
 Similarly, only items that meet the definition of income and expenses are recognized in the
statement(s) of financial performance.

DERECOGNITION
 Derecognition is the removal of all part of a recognized asset or liability from an entity’s
statement of financial statement.
 Derecognition normally occurs when that item no longer meets the definition of an asset or of a
liability:
 For an aset, derecognition normally occurs when the entity losses control of all part of the
recognized asset; and
 For a liability, derecognition normally occurs when the entity no longer has a present obligation
for all or part of the recognized liability.

CHAPTER 6
MEASUREMENT

HISTORICAL COST
 It 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.
 Unlike current value, historical cost does not reflect changes in values, except to the extent that
those changes relate to mpairment of an asset or a liability becoming onerous.
 The historical cost of an asset when it is required or created is the value of the cost incurred in
acquiring or creating the asset, comporimising the consideration paid to acquire or create the
asset plus transaction costs. The historical cost of 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.

CURRENT VALUE
 It is measure orovide monetary information about assets, liabilities and related income and
expenses, using information updated to reflect conditions at the measurement date. Because of
the updating, current values of asset and liabilities reflect changes, since the previous
measurement date, in estimates of csh flow and other factors reflected in those current values.
 Unlike historical cost, current value of an asset or liability is not derived, even in part, from the
price of the transaction or other event that gave rise to the asset or liability.

Current Value measurement bases includes:

 Fair value
 Value in use for assets and fulfilment for liabilities
 Current cost

FAIR VALUE
 It 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.
 Fair value reflects the perspective of market participants- participants in a market to which the
entity has access. The asset or liability is measured using the same assumptions that market
participants would use when pricing the asset or liability if those market participants act in their
economic best interest.