CAF - 1 Introduction to Financial
Accounting
Conceptual Framework
Purpose and status
Purposes of the Conceptual Framework
(a) To assist the Board in the development of future IFRSs and in its review of existing
IFRSs
(b) To assist the Board in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs
(c) To assist national standard-setting bodies in developing national standards
(d) To assist preparers of financial statements in applying IFRSs and in dealing with
topics that have yet to form the subject of an IFRS
(e) To assist auditors in forming an opinion as to whether financial statements comply
with IFRSs
(f) To assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs
(g) To provide those who are interested in the work of the IASB with information about
its approach to the formulation of IFRSs
The Conceptual Framework is not an IFRS and so does not overrule any individual
IFRS. In the (rare) case of conflict between an IFRS and the Conceptual
Framework, the IFRS will prevail.
Scope
The Conceptual Framework deals with:
(a) The objective of financial statements
(b) The qualitative characteristics that determine the usefulness of
information in financial statements
(c) The definition, recognition and measurement of the elements from
which financial statements are constructed
(d) Concepts of capital and capital maintenance
Users and their information needs
Users of accounting information consist of investors, employees, lenders,
suppliers and other trade creditors, customers, government and their agencies
and the public.
The objective of general purpose financial reporting is to provide 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.
These users need information about:
The economic resources of the entity
The claims against the entity
Changes in the entity's economic resources and claims
The Conceptual Framework makes it clear that this information should be
prepared on an accruals basis.
Accruals basis. The effects of transactions and other events are recognised when
they occur (and not as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the financial statements of
the periods to which they relate.
Underlying assumption
Going concern is the (only) underlying assumption in preparing financial statements.
Going concern. The entity is normally viewed as a going concern, that is, as continuing in
operation for the foreseeable future. It is assumed that the entity has neither the
intention nor the necessity of liquidation or of curtailing materially the scale of its
operations.
Qualitative characteristics of useful financial information
The two fundamental qualitative characteristics are relevance and faithful
representation.
Relevance. Relevant information is capable of making a difference in the decisions made
by users. It is capable of making a difference in decisions if it has predictive value,
confirmatory value or both.
The relevance of information is affected by its nature and its materiality.
Faithful representation. Financial reports represent economic phenomena in words and
numbers. To be useful, financial information must not only represent relevant
phenomena but must faithfully represent the phenomena that it purports to represent.
Faithful representation of a transaction is only possible if it is accounted for according
to its substance and economic reality (Substance over form).
To be a faithful representation information must be complete, neutral and free from
error.
Enhancing qualitative characteristics
Comparability is the qualitative characteristic that enables users to identify
and understand similarities in, and differences among, items. Information
about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the
same entity for another period or date.
Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent. It means that different
knowledgeable and independent observers could reach consensus that a
particular depiction is a faithful representation.
Timeliness means having information available to decision-makers in time to
be capable of influencing their decisions. Generally, the older information
is the less useful it is.
Understandability. Classifying, characterising and presenting information
clearly and concisely makes it understandable.
The elements of financial statements
Transactions and other events are grouped together in broad classes and in
this way their financial effects are shown in the financial statements.
These broad classes are the elements of financial statements.
Assets Income
Liabilities Expenses
Equity
Recognition. The process of incorporating in the statement of financial
position or statement of profit or loss and other comprehensive income an
item that meets the definition of an element and satisfies the following
criteria for recognition:
(a) It is probable that any future economic benefit associated with the item
will flow to or from the entity
(b) The item has a cost or value that can be measured with reliability
Measurement of the elements of financial
statements
Measurement. The process of determining the monetary amounts at which
the elements of the financial statements are to be recognised and carried
in the statement of financial position and statement of profit or loss and
other comprehensive income.
A number of different measurement bases are used in financial statements.
They include:
• Historical cost
• Current cost
• Realisable (settlement) value
• Present value of future cash flows
