2 OBJECTIVE OF

FINANCIAL REPORTING

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING IS A

COMPLETE, COMPREHENSIVE AND SINGLE DOCUMENT,
PROMULGATED BY THE INTERNATIONAL ACCOUNTING STANDARD
BOARD.

CONCEPTUAL FRAMEWORK

Contribute to economic
Contribute to transparency Strengthen accountability
efficiency
to assist the IASB to develop IFRS
to help preparers of financial statement to develop
consistent accounting policy
to develop accounting policy when a standard
Purpose
allows a choice of an accounting policy
to understand and interpret IFRS

Primary users Other users

include the existing and potential include the employees,
investors, lenders and other customers, governments, and
creditors. their agencies and the public.

Existing and potential investors are concerned with the risk

inherent in and return provided by their investors.

Lenders and other creditors are interested in information which

enables them to determine whether their loans, interest, thereon and
other amounts will paid when due.

Employees are interested in information about the stability and

profitability of the entity.

Customers have an interest in information about the continuance of

an entity specially when they have a long term involvement and
dependent on the entity.

“To provide financial information about the reporting

entity that is useful to existing and potential investors,
Objective: lenders, and other creditors in making decisions.”

to provide useful information in making decisions.

to provide useful information in assessing cash flows prospects.
to provide information about resources, claims and changes in
resources.

Accrual Accounting
It depicts the effects if transactions and other events and
circumstances on an entity’s economic resources and claims.
Means that income is recognized when earned regardless of when
received and expense is recognized when incurred.
Limitations of Financial Reporting
a. General purpose financial reports do not and cannot provide all the information
that existing and potential investors, lenders, and other creditors.
b. General purpose financial reports are not designed to show the value of an
entity but the reports provide information to help the primary users.
c. General purpose financial reports are intended to provide common information
to users and cannot accommodate every request.
d. Large extent, general purpose financial reports are based on estimate and
judgement rather than expect depiction.

Management Stewardship
--- how efficiently and effectively management has discharged its
responsibilities to use the entitys economic resources.
--- information can be useful for assessing the entity’s prospects for future net
cash flows.
 CHAPTER 3

CONCEPTUAL FRAMEWORK

Qualitative Characteristic

Definition Fundamental Application

1. identify economic
phenomenon has
are the qualities or relevance and
potential to be
attributes that make faithful
useful
financial accounting representation.
2. identify
information useful to content or
phenomenon has
the users. substance of
potential to be
financial
useful
information
3. determine
information
available

MATERIALITY
a practical rule in accounting which dictates strict adherence to GAAP is not
required when the items are not significant enough to affect the evaluations,
decisions, and fairness.
Materiality depends on relative size rather than absolute size.
New Definition in accordance with IASB
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence the economic decisions that primary users of general
purpose financial statement make on the basis of those statements which
provides financial information about specific reporting entity.

Could reasonably be expected to influence Obscuring Information

presentation of financial information not
to influence threshold adds and element readily understood or not clearly
of reasonability of financial information expressed. It may be characterized by
on economic decision. deliberate vagueness, ambiguity, and
obstruseness.

Faithful Representation Standard of adequate disclosure

financial reports represent economic
phenomena or transactions in words all significant and relevant
and numbers. The actual effects of the information leading to the
transactions shall be properly preparation of financial statement.
accounted for.

Comparability Notes to Financial Statements

the ability to bring together for the provide narrative description or

purpose of noting points of likeness and disaggregation of items presented.
difference.

Measurement uncertainty Neutrality

arises when monetary amounts in financial depiction without bias in the preparation or
reports cannot be observed directyl and presentation of financial information.
must instead be estimatied.

Completeness Conservatism
requires that relevant information should when alternatives exist, the alternative
be presented in a way that facilitates which has the least effect on equity should
understanding and avoids erroneous be chosen.
implication.

Prudence Consistency

is the exercise of care and caution when refers to the use of the same method for
dealing with the uncertainties in the the same item, either from period to period
measurement process. within the entity or in a single period.

Understandability
requires financial information must be comprehensible or intelligible it if is to be
most useful.

Timeliness
financial information must be available or communicated early enough when a
decision is to be made

Cost constraint on useful information

a consideration of the cost incurred in generating financial information .

 CHAPTER 4
Financial statement and
reporting entity Underlying
assumption

provide information about economic resources of the

OBJECTIVE entity, claims against the entity and changes in the
economic resources claims.

Statement of financial position, by recognizing assets,

FINANCIAL liabilities, and equity.
Statement of financial performance, by recognizing
INFORMATION income and expenses.
Other statement and notes by presenting and
disclosing information;

Types of Financial Statement

1. CONSOLIDATED FINANCIAL STATEMENT - both the parent and its

subsidiaries
2. UNCOSOLIDATED FINANCIAL STATEMENTS - parent alone
3. COMBINED FINANCIAL STATEMENT - linked by a parent and subsidiary
relationship

REPORTING ENTITY REPORTING PERIOD

an entity that is required or period when financial

chooses to prepare financial statement are prepared for
statement general purpose financial
not necessarily a legal entity statement

UNDERLYING ASSUMPTION GOING CONCERN

continuity assumption means

basic notions or fundamental
that in the absence of
premises on which the
evidence to the contrary, the
accounting process is based.
accounting entity is viewed as
foundation or bedrock of
continuing in operation
accounting
indefinitely.

Accounting Entity
an entity is separable from the
owners, managers, and employees
who constitutes the entity.
a specific organization, which
may be a proprietorship,
partnership, or corporation.

Time Period
accurate report on the financial
position and performance of an
entity cannot be obtained until the
entity is finally dissolved and
liquidated
 chapter 5:
elements of financial
statement

financial financial
position performance
1. Asset 1. Income
elements: 2. Liabilities 2. Exprense
3. Equity

asset

present economic resource and that the

potential economic benefits no longer need
to be expected to flow to the enity

rights
Rights to correspond to an obligation of
another entity
Rights that do not correspond to an
obligation of another entity
Rights established by contract or
legislation

potential to produce
economic benefits
to receive contractual cash flows
to exchange economic resources
to produce cash inflows or avoid cash
outflows
to receive cash by selling the economic
resources
to extinguish a liability

liability

as present obligation of an entity to

transfer an economic resources as a
result of past events.

Obligation - a duty or responsibility that Income - as increases in assets or

an entity has no practical ability to decreases in liabilities that result in
avoid. Obligation can either be legal or increases equity, other than those
constructive relating to contribution from equity

Transfer of an economic resources - Statement of Financial Performance-

to pay cash
to deliver goods or noncash refers to the profit or loss and a
resources statement presenting other
to provide services at some future comprehensive income.
to exchange economic resources all income and expense are included
with another party in profit or loss.
to transfer an economic resource if
specified uncertain future event
 chapter 6
recognition &
measurement
Recognition ---> defines recognition as the process of capturing for inclusion in the
financial statements an item that means the definition of an asset, liability, equity,
expense or income.

Recognition Criteria ---> only items that meet the definition of income or expense
are recognized in the statement of financial performance.

Point of sale ---> with respect to sale of goods in the ordinary course of business the
point of sale is unquestionably the point of income recognition.

Expense Recognition ---> means that expenses are recognized when incurred.

cause and effect association

expense is recognized when the revenue is
already recognized

Systematic and rational allocation

some cost are expensed by simply allocating
them over the periods benefited

Immediate recognition
cost incurred is expensed outright because of uncertainty of
Practices for a Sustainable
future economic benefit or difficulty of reliably associating
certain cost.Future

derecognition
defined as the removal of all or part of a recognized asset or
liabiltiy from the statement of financial position.

measurement historical cost

quantifying in monetary terms the acquisition cost of an asset in the
elements in the financial statement. cost incurred in acquiring or
creating the asset comprising the
consideration paid plus transaction
cost.

fair value value in use

price that would be received to sell present value of the cash that an
an asset in an orderly transactions entity expects to derive from the
between market use of a asset and from the ultimate
disposal

current cost Measurement basis

basis for an asset or a liability and
cost of an equivalent asset at the
for the related income and expense,
measurement date comprising the
it is necessary to consider the
consideration paid and transaction
nature of the information that the
cost
measurement basis will produce