Chapter Two

Conceptual Framework for Financial Reporting

Course: Accounitng Theory

Course Code: BAAC4204
Specialization: Accounting and Finance
Department of Business Studies
Outcome 1: Define the nature and purpose of conceptual
framework and objectives of financial statements
Contents
• Purpose of conceptual framework
• Objectives of financial statements
• Need for conceptual framework

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Essential Reading (the main textbook)
ACCA – Paper F7 Kaplan/ BPP Financial Reporting

Recommended Reading
ProQuest Resource

Open Educational Resource

https://www.ifrsbox.com/ifrs-conceptual-framework-2018

https://
www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exams-study
-resources/f7/technical-articles/conceptual-framework-need.html

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The meaning of a conceptual
framework
Introduction: there are two main approaches to accounting

A principle-based or conceptual framework approach such as

that used by IASB

A rule-based approach such as that used in US.

Source : ACCA - F7 Financial Reporting 2018 Kaplan Publishing

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What is a conceptual framework?

A conceptual framework is:

• A coherent system of interrelated objectives an

fundamental principles

• A framework which prescribes the nature, function and

limits of financial accounting and financial statements.

Source : ACCA - F7 Financial Reporting 2018 Kaplan Publishing

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Why we have conceptual
framework?
Some accountants have questioned whether a conceptual
framework is necessary in order to produce reliable financial
statements.

Past history of standard setting bodies throughout the world

tells us it is.

In the absence of a conceptual framework, accounting

standards were often produced that had serious defects –
that is:
Source : https 6
://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/conceptual-f
• they were not consistent with each other particularly in
the role of prudence versus accruals/matching

• they were also internally inconsistent and often the effect

of the transaction on the statement of financial position
was considered more important than its effect on income
the statement

• standards were produced on a ‘firefighting’ approach,

often reacting to a corporate scandal or failure, rather
than being proactive in determining best policy.

Source : https://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exam
s-study-resources/f7/technical-articles/conceptual-framework-need.html 7
Some standard setting bodies were biased in their
composition (ie not fairly representative of all user groups)
and this influenced the quality and direction of standards

the same theoretical issues were revisited many times in

successive standards – for example, does a transaction give
rise to an asset (research and development expenditure) or
liability (environmental provisions)?

Source : https://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exam
s-study-resources/f7/technical-articles/conceptual-framework-need.html 8
 The main purpose of the Framework is to:

• Help the IASB in their role of developing future IFRS and in

reviewing the existing IFRSs

• Help the IASB in promoting harmonization by providing a basis for

reducing the number of alternative accounting treatment
permitted by IFRSs

• Help national standard –setting bodies in developing national

• Help those preparing financial statements to apply IFRSs and also

to deal with areas where these is no relevant standard

Source : ACCA - F7 Financial Reporting 2018 Kaplan Publishing

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• Help auditors when they are forming an opinion as to
whether financial statement conform with IFRSs

• Helps users of financial statement which have been

prepared in accordance with IFRSs

• Provide information to other parties that are interested in

the work if IASB about its approach to the formulation of
IFRSs

• assist the preparers of financial statements in the

application of IFRS, which would include dealing with
accounting transaction s for which there is not (yet) an
accounting standard.
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Source : https://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles
/conceptual-framework-need.html
 Conceptual Framework for the Financial Reporting
The Conceptual Framework for the Financial Reporting (let’s title it just
“Framework”) is a basic document that sets objectives and the concepts for
general purpose financial reporting.

Its predecessor, Framework for the preparation and presentation of the

financial statements was issued back in 1989.

Then in 2010, IASB published the new document, Conceptual Framework for
the Financial Reporting, however it was a bit unfinished as a few concepts and
chapters were missing.

The newest and completed Framework published in 2018 comprises 8

chapters

Source : https://www.ifrsbox.com/ifrs-conceptual-framework-2018/
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Source : https://www.ifrsbox.com/ifrs-conceptual-framework-2018/

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Chapter 1 : The objective of general purpose
financial reporting
The main objective of general purpose financial reports is to
provide the financial information about the reporting entity
that is useful to existing and potential:

• Investors,

• Lenders, and

• Other creditors

to help them make various decisions (e.g. about trading with

debt or equity instruments of a reporting entity).
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Chapter 1 is NOT about the financial statements itself –
these are described in Chapter 3.

Instead, Chapter 1 describes more general purpose reports

that should contain the following information about the
reporting entity:

Economic resources and claims (this refers to the financial

position);

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The changes in economic resources and claims resulting
from entity’s financial performance and from other events.

Chapter 1 puts an emphasis on accrual accounting to reflect

the financial performance of an entity. It means that the
events should be reflected in the reports in the periods
when the effects of transactions occur, regardless the
related cash flows.

However, the information about past cash flows is very

important to assess management’s ability to generate future
cash flows.

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Chapter 2: Qualitative characteristics of
useful financial information
In this Chapter, the Framework describes 2 types of
characteristics for financial information to be useful:

Fundamental, and

Enhancing.

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Fundamental qualitative characteristics

Relevance: capable of making a difference in the users’

decisions. The financial information is relevant when it has
predictive value, confirmatory value, or both.
Materiality is closely related to relevance.

Faithful representation: The information is faithfully

represented when it is complete, neutral and free from error.

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Enhancing qualitative characteristics

Comparability: Information should be comparable between

different entities or time periods;

Verifiability: Independent and knowledgeable observers are

able to verify the information;

Timeliness: Information is available in time to influence the

decisions of users;

Understandability: Information shall be classified, presented

clearly and consisely.

 
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Chapter 3: Financial Statements and the
Reporting Entity
Financial Statements

The financial statements should provide the useful

information about the reporting entity:

In the statement of financial position, by recognizing

Assets,

Liabilities,

Equity

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In the statements of financial performance, by recognizing

Income, and

Expenses

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In other statements, by presenting and disclosing information
about

recognized and unrecognized assets, liabilities, equity, income and expenses,

their nature and associated risks;

Cash flows;

Contributions from and distributions to equity holders, and

Methods, assumptions, judgements used, and their changes.

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Source : https://www.ifrsbox.com/ifrs-conceptual-framework-2018/

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Reporting Entity
This is a new concept introduced in 2018.

Although the term “reporting entity” has been used

throughout IFRS for some time, the Framework introduced
it and “made it official” only in 2018.

Reporting entity is an entity who must or chooses to prepare

the financial statements. It can be:

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A single entity – for example, one company;

A portion of an entity – for example, a division of one

company;

More than one entities – for example, a parent and its

subsidiaries reporting as a group.

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As a result, we have a few types of financial statements:

Consolidated: a parent and subsidiaries report as a single

reporting entity;

Unconsolidated: e.g. a parent alone provides reports, or

Combined: e.g. reporting entity comprises two or more

entities not linked by parent-subsidiary relationship.

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Chapter 4: Elements of the financial
statements
This chapter extensively deals with the definitions of
individual elements of the financial statements.

There are five basic elements:

Asset = a present economic resource controlled by the entity

as a result of past events;

Liability = a present obligation of the entity to transfer an

economic resource as a result of past events;

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Equity = the residual interest in the assets of the entity after
deducting all its liabilities;

Income = increases in assets or decreases in liabilities

resulting in increases in equity, other than contributions
from equity holders;

Expenses =decreases in assets or increases in liabilities

resulting in decreases in equity, other than distributions to
equity holders;
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Source : https://www.ifrsbox.com/ifrs-conceptual-framework-2018/

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Chapter 5: Recognition and derecognition

This chapter discusses the recognition and derecognition

process.
Recognition

recognition means including an element of financial

statements in the financial statements.

In other words, if you decide on recognition, you decide on

WHETHER to show this item in the financial statements.

Recognition process links the elements in the financial

statements according to the following formula:
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Source : https://www.ifrsbox.com/ifrs-conceptual-framework-2018/

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The Framework requires recognizing the elements only
when the recognition provides useful information – relevant
with faithful representation.

Then, the Framework discusses the relevance, faithful

representation, cost constraints and other aspects in a
detail.

Derecognition

Derecognition means removal of an asset or liability from the

statement of financial position and normally it happens
when the item no longer meets the definition of an asset or
a liability.

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Chapter 6: Measurement
Measurement means IN WHAT AMOUNT to recognize asset,
liability, piece of equity, income or expense in your financial
statements.

Thus, you need to select the measurement basis, or the

method of quantifying monetary amount for elements in the
financial statements.

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The Framework discusses two basic measurement basis:

Historical cost – this measurement is based on the

transaction price at the time of recognition of the element;

Current value – it measures the element updated to reflect

the conditions at the measurement date. Here, several
methods are included:
• Fair value;

• Value in use;

• Current cost.

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The Framework then gives guidance on how to select the
appropriate measurement basis and what factors to consider
(especially relevance and faithful representation).

The issue here is that the equity is defined as “residual after

deducting liabilities from assets” and therefore total carrying
amount of equity is not measured directly.

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Instead, it is measured exactly by the formula:

Total carrying amount of all assets, less

Total carrying amount of all liabilities.

The Framework points out that it can be appropriate to

measure some components of equity directly (e.g. share
capital), but it is not possible to measure total equity
directly.

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Chapter 7: Presentation and
disclosure
The main aim of presentation and disclosures is to provide
an effective communication tool in the financial statements.

Effective communication of information in the financial

statements requires:

Focus on objectives and principles of presentation and

disclosure, not on the rules;

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Group similar items and separate dissimilar items;

Aggregate information, but do not provide unnecessary

detail or the opposite – excessive aggregation to obscure
the information.

The Framework discusses classification of assets, liabilities,

equity, income and expenses in a greater detail with
describing offsetting, aggregation,
distinguishing between profit or loss and other comprehensi
ve income
and other related areas.

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Chapter 8: Concepts of capital and capital
maintenance
The Framework explains two concepts of capital:

Financial capital – this is synonymous with the net assets or

equity of the entity. Under the financial maintenance
concept, the profit is earned only when the amount of net
assets at the end of the period is greater than the amount of
net assets in the beginning, after excluding contributions
from and distributions to equity holders.

The financial capital maintenance can be measured either in

Nominal monetary units, or

Units of constant purchasing power 38

Physical capital – this is the productive capacity of the entity
based on, for example, units of output per day.

Here the profit is earned if physical productive capacity

increases during the period, after excluding the movements
with equity holders

The main difference between these concepts is how the

entity treats the effects of changes in prices in assets and
liabilities

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Source : https://www.ifrsbox.com/ifrs-conceptual-framework-2018

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You can watch a video with the summary of the Conceptual
Framework here:

https://youtu.be/v56_VJkjAX4

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CONTACT INFORMATION:

Name of the Staff : Sameena Begum

Office: BS050
Email: [email protected]

VERSION HISTORY

Version No Date Approved Changes incorporated

01 Sem. (I) 2019/2020

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