Conceptual Framework and Accounting Standards

Conceptual Framework and Accounting Standards
Purpose of the Conceptual Framework

The Conceptual Framework prescribes the concepts for general purpose financial reporting. Its
purpose is to:
a. Assists the International Accounting Standards Board (IASB) in developing standards
that are based on consisting concepts;
b. Assist preparers in developing consistent accounting policies when no Standard applies to
a particular transaction or when a Standard allows choice of accounting policy; and
c. Assist all parties in understanding and interpreting the Standards.
The Conceptual Framework provides the foundation for the development of standards that:
a. Promote transparency by enhancing the international comparability and quality of
financial information.
b. Strengthen accountability by reducing the information gap between providers of capital
and the entity’s management.
c. Contribute to economic efficiency by helping investors to identify opportunities and risk
around the world, thus improving capital allocation. The used of single, trusted
accounting language lowers the cost of capital and reduces international reporting costs.
Status of the Conceptual Framework

The 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.
The authoritative status of the Conceptual Framework is depicted in the hierarchy of
guidance shown below:
Hierarchy of Reporting Standards
1. PFRS’s
2. Judgement
When making the judgement:
 Management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
 Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices
The Hierarchy guidance above means that in the absence of a PFRS that specifically
applies to a transaction, management shall consider the applicability of the Conceptual
Framework in developing and applying an accounting policy that results in useful information.
To meet the objectives of general purpose financial reporting, a Standard sometimes
contains requirements that depart from the conceptual framework. In such cases, the departure is
explained in the ‘Basis of Conclusions’ on that Standard.
The Conceptual Framework may be revised from time to time based on the IASB’s
experience of working with it. However, revisions do not automatically result to changes in the
Standards- not until after the IASB goes through its due process of amending a standard.
Scope of the Conceptual Framework

The conceptual framework is concerned with general purpose financial reporting. General
purpose financial reporting involves the preparation of general purpose financial statements. The
Conceptual Framework provides the concepts that underlie general purpose financial reporting
with regard to the ff:
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
The Objective of Financial Reporting

“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 about providing resources to the entity.”
The objective is the foundation of the Conceptual Framework. All the other aspects of the
conceptual framework revolve around this objective.
Primary Users
The objective of financial reporting refers to the following, so called primary users:
1. Existing and potential investors; and
2. Lenders and other creditors
These users cannot demand information directly from reporting entities and must rely on
general purpose financial reports for much of their financial information needs.
Accordingly, they are the primary users to whom general purpose financial reports are
directed to.
Lenders refers to those who extend loans (e.g., banks), while other creditors refers
to those who extend other forms of credit (e.g., supplier).
The conceptual framework is concerned with general purpose financial reporting.
General purpose financial reporting (or simply ‘financial reporting’) deals with providing
information that caters the common needs of the primary users. Therefore, general
purpose financial reports do not and cannot provide all the information needs of primary
users. These users need to consider other sources for their other information needs (for
example, general economic conditions and expectations, political events and political
climate, and industry and company outlooks.)
The information needs of individual primary users may differ and possibly
conflict. Accordingly, financial reporting aims to provide information that meets the
needs of maximum number of primary users. Focusing on common needs, however, does
not prohibit the provision of additional information that is most useful to a particular
subset of primary users.
Other users such, such as the entity’s management, regulators, and the public may
find general purpose financial reports

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Conceptual Framework and Accounting Standards

Purpose of the Conceptual Framework

Status of the Conceptual Framework

Scope of the Conceptual Framework

The Objective of Financial Reporting

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