Conceptual

Framework and
Accounting
Standards
ATTY. ROWEL T. DE LEON, CPA
 02
Conceptual Framework
Purpose of the Conceptual Framework (CF)
 Assist the IASB in developing Standards that are based on consistent concepts;

 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.

 Assist all parties in understanding and interpreting the Standards.

Important Note:
 Conceptual Framework is NOT a standard. If
there is a conflict between a Standard and the
Conceptual Framework, the requirement of the
Standard will prevail.
Scope of CF
 Concerned with the general-purpose financial reporting.
 Provides concepts that underlie general purpose financial reporting with regard to 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
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance.
 Objective of Financial
Reporting
 To provide financial information about the
reporting entity that is useful to existing
and potential investors, lenders, and other
creditors in making decisions about
providing resources to the entity.
 Primary Users of FR

1. Existing and Potential Investors; and

2. Lenders and other creditors

 Decisions about providing
resources to the entity
 Buying, selling or holding investments;

 Providing or settling loans and other forms

of credit; or

 Exercising voting or similar rights that

could influence management’s actions
relating to the use of the entity’s economic
resources.
 Decision = Return

 Expectations about returns depend on the

assessment of the entity’s (i) prospects for
future net cash inflows and (ii)
management stewardship

 To make the above assessment, the

following is considered:

1. Financial position

2. Changes in economic resources and

claims.

Collectively called as Economic Phenomena

Economic resources and claims (purpose)
 Helps Users in assessing the following:

1. Liquidity and solvency

2. Needs for additional financing and how successful it is likely to be in obtaining that financing; and

3. Management’s stewardship on the use of economic resources.

Changes in economic resources (results from)

1. Financial Performance (income and expenses); and

2. Other events and transactions.

 Financial Performance help users assess the entity’s ability to produce return from its economic
resources.

 Information based on accrual accounting provides a better basis for assessing an entity’s financial
performance than information based solely on cash receipts and payments made during the period
Qualitative Characteristics
 Identifies the type of information that is likely to be most useful to the primary users in making
decisions using an entity’s financial report.

 Applies to information in the FS as well as to financial information provided in other ways.

 Classified into:

1. Fundamental qualitative characteristics (Relevance and Faithful representation)

2. Enhancing qualitative characteristics (Comparability, Verifiability, Timeliness,

Understandability)
 FQC - RELEVANCE

 Can make a difference in the decisions of

users.

 It has :

1. Predictive Value – predictions for future

outcomes.

2. Confirmatory Value – confirming

previous predictions.
 Materiality

 If omitting, misstating, or obscuring it

could reasonably be expected to influence
decisions that the primary users of a specific
reporting entity’s general purpose FS make
on the basis of those FS.

 Entity specific. It depends on the facts and

circumstances surrounding a specific entity.

 It is a matter of judgment.
Materiality Process

1. Identify information that has the potential to be material

2. Assess whether the information identified is, in fact, material.

3. Organize Information within the draft financial statements in a way that communicates
the information clearly and concisely to primary users

4. Review the draft FS to determine whether all material information has been identified.
 FQC - Faithful
Represenation
 Means the information provides a true,
correct, and complete depiction of the
economic phenomena that it purports to
represent.

 Substance over form.

Characteristics of Faithful Representation

1. Completeness – All necessary information must be provided. (i.e. name of the item,
numerical description, etc.)

2. Neutrality - Presentation without bias. The information must not be manipulated.

3. Free from error – There must be no error in the description and in the process by
which the information is selected and applied.
 EQC - Comparbility

 Information is comparable if it helps users

identify similarities and differences
between sets of information:

 Comparison may be done through:

1. Single entity but in different periods

(intra-comparability)

2. Different entities in a single period (inter-

comparability)
 EQC: Verifiability

 Information is verifiable if different users

could reach a general agreement as to what
the information purports to represent.

 It can be:

1. Direct – This involves direct observation.

2. Indirect - This involves checking inputs to

a model or formula and recalculating the
outputs using the same methodology.
 EQC: Timeliness

 Information must be available to users in

time to be able to influence their decisions.
 EQC: Understandability

 Information must be presented in a clear and

concise manner.
Applying the EQC

 EQC enhances the usefulness of information that is both relevant and faithfully
represented.

 EQC should be maximized to the extent possible.

 However, entities should consider the cost constraints since providing information
entails cost and this could only be justified by the benefits expected to be derived from
using the information.
Financial Statement Information
 Statement of Financial Position (assets, liabilities, and equity)

 Statement of Financial Performance (for income and expenses)

 Other statement and notes.

 Reporting Period

 FS are prepared for a specified period of

time and provide information that existed at
the end of the reporting period, or during the
period.

 FS also provide comparative information for

at least one preceding reporting period.

 Forward looking information is not included

in the FS unless it relates to a past
information presented in the FS

 As to perspective, FS is prepared from the

perspective of the reporting entity.
 Going Concern assumption

 It means that the entity has neither the

intention nor the need to end its
operations in the foreseeable future.
 The Reporting Entiy

 A reporting entity is one that is required, or

choose, to prepare FS, and is not necessarily
a legal entity.

 It can be a single entity or a group or

combination of two or more entities.
The Element of FS

 Asset

 Liabilities

 Equity

 Income

 Expenses
 Asset

 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.

 Three aspects for consideration (1) Right (2)

Potential to produce economic benefits (3)
Control.
 Rights

 Rights that have the potential to produce

economic benefits include:

(1) Rights the correspond to an obligation of

another party, i.e. right to receive cash

(2) Rights that do not correspond to an

obligation of another party, i.e use of
Intellectual property.
 Rights

 Normally arises from law, contract or

similar means.

 Not all rights are assets since a right

should have the potential to produce for
the entity economic benefits.

 Each right is a separate asset.

 The asset is the set of rights and not the

physical object.
Potential to Produce Economic Benefits

 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.

 An economic resource can produce economic benefits in many ways. (i.e. sale, transfer,
used of assets, etc.)

 The presence or absence of expenditure is not necessary in determining the existence of

an asset.
 Control

 Means the entity has the exclusive right over

the benefits of an asset and the ability to
prevent others from accessing those benefits.

 Does not mean that the entity can ensure that

the resource will produce economic benefits
in all circumstances.

 Links an economic resource to an entity and

indicates the extent to which an entity
should account for that economic resource.
 Control

 Normally stems from legally enforceable

rights (e.g. ownership, legal title).

 Ownership is not always necessary for

control to exist.

 Physical possession is not always necessary

for control to exist.
Liability

 Is a present obligation of the entity to transfer an economic resource as a result of past

events.

 3 important aspects in the definition of liability are (1) Obligation (2) Transfer of
economic resource (3) Present obligation as a result of past events.
 Obligation

 Under the conceptual framework, is a duty

or responsibility that an entity has no
practical ability to avoid.

 It may either be (1) legal, that which results

from a contract, legislation, or by operation
of law or; (2) constructive, that which
results from an entity’s actions that create a
valid expectation on others that the entity
will accept and discharge certain
responsibilities.

 Obligation is always owed to another but it

is not necessary that the identity of the party
is known.
Transfer of an economic resource

 Obligation’s potential to cause a transfer of economic benefits need not be certain, or

even likely. What is important is that the obligation exists and that, in at least one
circumstance, it would require the entity to transfer economic benefits.
Present Obligation as a result of past events

 Occurs if the entity has already obtained economic benefits or taken an action; and

 As a consequence, the entity will or may have to transfer economic resource that it
would not otherwise have had to transfer.
 EQUITY

 Is the Residual Interest in the assets of the

entity after deducting all its liabilities.

 It may be sub-classified in the statement of

financial position (e.g. Share Capital,
Retained Earnings, Reserves, etc.)
 INCOME

 Increases in assets, or decreases in

liabilities, that result in increases in equity,
other than those relating to contributions
from holder’s equity claims.
 EXPENSES

 Are decreases in assets, or increases in

liabilities, that result in decreases in equity,
other than those relating to distribution to
holder’s equity claims.
RECOGNITION AND DERECOGNITION
RECOGNITION PROCESS

 The process of including in an FS an item that meets the definition of one of the
financial elements.

 Involves the recording of the item in words and in monetary amount.

Recognition Criteria:

 If it meets the definition of an asset, liability, equity, income or expense and

 Recognizing it would provide useful information, i.e. relevant and faithfully represented
information.

 The above criteria must be present before an item is recognized.

DERECOGNITION PROCESS

 The opposite of recognition. It is the removal of a previously recognized asset or

liability from the entity’s statement of financial position.

 Occurs when the item no longer meet the definition of an asset or liability.

 On derecognition the entity:

1. Derecognize the assets or liabilities that have expired or have been consumed, and
recognize any resulting income and expenses.

2. Continues to recognize any assets or liabilities retained after derecognition.

Unit of Account

 Is the right or group of rights, the obligation or group of obligations, or the group of
rights and obligations, to which recognition criteria and measurement concepts are
applied.

 It can be an account title, a group of similar assets, or a group of assets and liabilities.
Transfers

 Derecognition is appropriate only if the entity transfers substantial control of a

transferred asset.

 If there is only partial transfer, the entity derecognizes only the transferred component
and continues to recognize the retained component.
MEASUREMENT BASES
● Under the Conceptual
Framework the following are
considered as measurement
bases:

1. Historical Cost
2. Current Value
a. Fair Value
b. Value in use and fulfillment
value
c. Current Cost
 Historical Cost

 For Asset – is the consideration paid to

acquire the asset PLUS transaction costs.

 For Liability – is the consideration received

to incur the liability MINUS transaction
costs.

 Does not reflect changes in value

 CURRENT VALUE

 Measurement reflect changes in values at the

measurement date.

 Not derived from the price of the transaction

or other event that gave rise to the asset or
liability.

 It includes (1) Fair Value (2) Value in use

and fulfillment value for liabilities. (3)
current cost.
 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.

 It is not an entity-specific measurement

rather it considers the perspective of the
market participants.

 FV can be measured directly by observing

prices on active market or indirectly using
measurement techniques.
 VALUE IN USE AND
FULFILLMENT VALUE
 Value in use is the present value of the cash
flows or other economic benefits that an
entity expects to derive from the use of an
asset and from its ultimate disposal.
(ASSET)

 Fulfillment value is the present value of the

cash or other economic resources that an
entity expects to be obliged to transfer as it
fulfills a liability. (LIABILITY)

 Reflect entity-specific assumptions.

 VALUE IN USE AND
FULFILLMENT VALUE
 Are measured directly using cash-flow based
measurement techniques.

 Do not include transaction costs in

acquiring an asset or incurring a liability
but include transaction costs expected to be
incurred on the ultimate disposal of the
asset or fulfillment of the liability.
CURRENT COSTS

 For an Asset – is the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus transaction costs that be
incurred at that date.

 For a Liability – is the consideration that would be received for an equivalent liability at
the measurement date minus the transaction costs that be incurred at that date.
Important Note:
 CURRENT COST AND HISTORICAL COSTS
– ENTRY VALUES

 FAIR VALUE, VALUE IN USE,

FULFILLMENT VALUE – EXIT VALUES
CONSIDERATION WHEN SELECTING MEASUREMENT BASIS

 The nature of the information provided by a particular measurement basis; and

 The qualitative characteristic, the cost constraint, and other factors

More than one measurement basis

 Allowed to in order to provide useful information

 Application is in such a way that:

1. A single measurement basis is used in the statement of financial position and

statements(s) of financial performance; and.

2. Additional information disclosed in the notes for a different measurement basis.

 MEASUREMENT OF EQUITY

 Not measured directly

 Simply the difference in the carrying amount

of the assets and recognized liabilities.

 Total equity cannot be expected to be equal

to the entity’s market value

 Some of equity’s component might be

measured directly (i.e share capital)

 Equity is usually positive.

Presentation and Disclosure objectives and principles

 Strives for a balance between:

1. Giving entities the flexibility to provide relevant and faithfully represented information;
and

2. Requiring information that has both intra-comparability and inter-comparability.

 Entity-specific information is more useful than standardized descriptions, also known as

boilerplate; and

 Duplication of information is usually unnecessary as it can make financial statements

less understandable.
 CLASSIFICATION

 Refers to the sorting of assets, liabilities,

equity, income or expense with similar
nature, function, and measurement basis for
presentation and disclosure purposes.
 OFFSETTING

 Occurs when an asset and liability with

separate unit of account are combined and
only the net amount is presented in the
statement of financial position.

 Generally not appropriate because it

combines dissimilar items.
 CLASSIFICATION OF
EQUITY
 Equity claims with different characteristics
may be classified separately.

 (i.e> share capital, retained earnings, etc.)

 CLASSIFICATION OF
INCOME AND EXPENSES
 Income and expenses are classified and
recognized either in (1) Profit or loss (2)
other comprehensive income.
 AGGREGATION

 The adding together of assets, liabilities,

equity, income, and expenses that have
shared characteristics and are included in the
same classification.

 Summarizes a large volume of detail, thus

making information more useful.
2 CONCEPTS OF CAPITAL

 Financial concept – Capital is regarded as the invested money or invested purchasing

power. Capital is synonymous to equity, net assets, or net worth.

 Physical concept of capital - Capital is regarded as the entity’s productive capacity,

e.g. units of output per day.
2 CONCEPTS OF CAPITAL MAINTENANCE

 Financial Capital Maintenance – Profit is earned if the net assets at the end of the
period exceed the net assets at the beginning period, after excluding distribution to, and
contributions from, owners during the period.

 Physical Capital Maintenance – Profit is earned only if the entity’s productive

capacity at the end of the period exceeds the productive capacity at the beginning of the
period, after excluding distribution to, and contributions from, owners during the
period.