Conceptual Framework

for Financial Reporting

LEARNING OBJECTIVES
After studying this topic, you should be able to:
1. Describe the usefulness of a 3. Review the basic
conceptual framework and the assumptions of accounting.
objective of financial reporting.
4. Explain the application of the
2. Identify the qualitative basic principles of
characteristics of accounting accounting.
information and the basic
elements of financial
statements.

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 PREVIEW

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 LEARNING OBJECTIVE 1
Conceptual Framework Describe the usefulness of a
conceptual framework and the
objective of financial reporting.

Conceptual Framework establishes the concepts that

underlie financial reporting.

Need for a Conceptual Framework

► Rule-making should build on and relate to an established
body of concepts.

► Enables IASB to issue more useful and consistent

pronouncements over time.

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 Conceptual Framework

Development of a Conceptual Framework

Presently, the Conceptual Framework is comprises of the following.
• Chapter 1: The Objective of General Purpose Financial Reporting
• Chapter 2: The Reporting Entity (not yet issued)
• Chapter 3: Qualitative Characteristics of Useful Financial
Information
• Chapter 4: The Framework, comprised of the following:
1. Underlying assumption—the going concern assumption;
2. The elements of financial statements;
3. Recognition of the elements of financial statements;
4. Measurement of the elements of financial statements; and
5. Concepts of capital and capital maintenance.
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 Conceptual Framework

Overview of the Conceptual Framework

Three levels:
 First Level = Objectives of Financial Reporting

 Second Level = Qualitative Characteristics and

Elements of Financial Statements

 Third Level = Recognition, Measurement, and

Disclosure Concepts.

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 ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third level
3. Monetary unit 3. Expense recognition The "how"—
4. Periodicity 4. Full disclosure implementation
5. Accrual

QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities
Second level
3. Equity Bridge between
2. Enhancing
4. Income levels 1 and 3
qualities
5. Expenses

OBJECTIVE
Provide information
about the reporting
entity that is useful First level
ILLUSTRATION 2.7 to present and potential
Conceptual Framework for The "why"—purpose
equity investors,
Financial Reporting of accounting
lenders, and other
creditors in their
capacity as capital
2-6 providers.
 Basic Objective

“To provide financial information about the reporting entity

that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.
 Provided by issuing general-purpose financial statements.

 Assumption is that users need reasonable knowledge of

business and financial accounting matters to understand
the information.

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 LEARNING OBJECTIVE 2
Fundamental Concepts Identify the qualitative
characteristics of accounting
information and the elements
Qualitative Characteristics of financial statements.

of Accounting Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.

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 Qualitative Characteristics

ILLUSTRATION 2.2
Hierarchy of Accounting
Qualities

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 Relevance

ILLUSTRATION 2.7
Conceptual Framework for
Financial Reporting

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 Qualitative Characteristics

Fundamental Quality—Relevance

To be relevant, accounting information must be capable of making

a difference in a decision.

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 Qualitative Characteristics

Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to

predictive processes used by investors to form their own expectations
about the future.
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 Qualitative Characteristics

Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.

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 Qualitative Characteristics

Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
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 Faithful Representation

ILLUSTRATION 2.7
Conceptual Framework for
Financial Reporting

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 Qualitative Characteristics

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.

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 Qualitative Characteristics

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.

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 Qualitative Characteristics

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor

one set of interested parties over another.

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 Qualitative Characteristics

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

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 Qualitative Characteristics

Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.

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 Qualitative Characteristics

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.

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 Qualitative Characteristics

Enhancing Qualities

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.

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 Qualitative Characteristics

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.

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 Basic Elements

ILLUSTRATION 2.7
Conceptual Framework for
Financial Reporting

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 Basic Elements
Elements of Financial Statements

Asset A resource controlled by the entity as a

result of past events and from which
future economic benefits are expected to
Liability flow to the entity.

Equity

Income

Expenses
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 Basic Elements
Elements of Financial Statements

Asset
A present obligation of the entity arising
from past events, the settlement of which
Liability
is expected to result in an outflow from the
entity of resources embodying economic
Equity benefits.

Income

Expenses
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 Basic Elements
Elements of Financial Statements

Asset

Liability

The residual interest in the assets of the

Equity
entity after deducting all its liabilities.

Income

Expenses
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 Basic Elements
Elements of Financial Statements

Asset

Liability

Equity Increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of
Income
liabilities that result in increases in equity,
other than those relating to contributions
Expenses from equity participants.
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 Basic Elements
Elements of Financial Statements

Asset

Liability

Equity Decreases in economic benefits during the

accounting period in the form of outflows
Income or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
Expenses
equity participants.
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 Basic Elements
Exercise 2.4: Identify the qualitative characteristic(s) to be used
given the information provided. Characteristics
(a) Qualitative characteristic being Relevance
displayed when companies in the Faithful representation
same industry are using the same Predictive value
accounting principles.
Confirmatory value
(b) Quality of information that confirms Neutrality
users’ earlier expectations.
Materiality
(c) Imperative for providing comparisons Timeliness
of a company from period to period.
Verifiability
(d) Ignores the economic consequences Understandability
of a standard or rule. Comparability
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 Basic Elements
Exercise 2.4: Identify the qualitative characteristic(s) to be used
given the information provided. Characteristics
(e) Requires a high degree of consensus Relevance
among individuals on a given Faithful representation
measurement. Predictive value
(f) Predictive value is an ingredient of this Confirmatory value
fundamental quality of information. Neutrality
(g) Four qualitative characteristics that Materiality
enhance both relevance and faithful Timeliness
representation.
Verifiability
(h) An item is not reported because its Understandability
effect on income would not change a Comparability
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decision.
LO 2
 Basic Elements
Exercise 2.4: Identify the qualitative characteristic(s) to be used
given the information provided. Characteristics
(i) Neutrality is a key ingredient of this Relevance
fundamental quality of accounting Faithful representation
information. Predictive value
(j) Two fundamental qualities that make Confirmatory value
accounting information useful for Neutrality
decision-making purposes.
Materiality
(k) Issuance of interim reports is an Timeliness
example of what enhancing
Verifiability
ingredient?
Understandability
Comparability
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