Conceptual Framework and Accounting

Standards
Mr. Clieford Perez, CPA, CMITAP, MBM
Conceptual Framework
for Financial Reporting
Conceptual Framework at a glance

The International Accounting Standards Board (Board) issued the

revised Conceptual Framework for Financial Reporting
(Conceptual Framework), a comprehensive set of concepts for
financial reporting, in March 2018. The Board views the
Conceptual Framework as a practical tool to help it develop
Standards. Hence, the Conceptual Framework includes concepts
that help the Board develop Standards and also discusses the
factors the Board needs to consider in making judgments when
application of the concepts does not lead to a single answer.

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Conceptual Framework at a glance
Purpose:
▪ to assist the Board to develop IFRS Standards (Standards) based on
consistent concepts, resulting in financial information that is useful to
investors, lenders and other creditors
▪ to assist preparers of financial reports to develop consistent accounting
policies for transactions or other events when no Standard applies or a
Standard allows a choice of accounting policies
▪ to assist all parties to understand and interpret Standards

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 Conceptual Framework at a glance
Previous
Priority, Filling

 issued in 1989 and partly revised in 2010

Conceptual
Gaps, Updating,
Clarifying
Framework

 useful, but incomplete and needed improvement

Re
vis
ed
Co for example,
nc • guidance on measurement, presentation and
ep disclosure
tu
al • the definitions of an asset and a liability
Fr • the role of measurement uncertainty
a
m
ew
or
k  a comprehensive set of concepts for financial
reporting

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Chap. 1 - The objective of financial reporting
 To provide financial information that is useful to users in making
decisions relating to providing resources to the entity

Financial Reporting is the provision of financial information about an

entity to external users that is useful to them in making economic
decisions and for assessing the effectiveness of the entity’s
management. However, financial reporting encompasses not only
financial statements but also other information such as financial
highlights, summary of important financial figures, analysis of
financial statements and significant ratios.
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*Primary vs. Other users
Chap. 1 - The objective of financial reporting
The Board clarified why information used in assessing
stewardship is needed to achieve the objective of financial
reporting.
Users of financial reports need information to help them assess
management’s stewardship. The Conceptual Framework explicitly
discusses this need as well as the need for information that helps
users assess the prospects for future net cash inflows to the entity.

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Chap. 2 - Qualitative characteristics of useful financial information

For information to be useful it must both be relevant and provide a

faithful representation of what it purports to represent. Relevance
and faithful representation are the fundamental qualitative
characteristics of useful financial information, and the guiding
concepts that apply throughout the revised Conceptual Framework.

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Chap. 2 - Qualitative characteristics of useful financial information

Fundamental Qualitative Characteristics

Relevance Faithful representation

• information is relevant if it is • information must faithfully
capable of making a difference to represent the substance of what it
the decisions made by users purports to represent
• financial information is capable of • a faithful representation is, to the
making a difference in decisions if maximum extent possible,
it has predictive value or complete, neutral and free from
confirmatory value error
• a faithful representation is affected
by level of measurement
uncertainty
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Chap. 2 - Qualitative characteristics of useful financial information

Ingredients of Relevance
• Predictive Value
• Confirmatory Value
• Materiality* (Doctrine of Convenience)
- Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence the economic decisions
that primary users of general purpose FSs make on the basis of
those statements which provide financial information about a
specific reporting entity.
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*Size/Magnitude and Nature
Chap. 2 - Qualitative characteristics of useful financial information

Ingredients of Faithful
Representation
• Completeness
• Neutrality*
• Free from Error

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*Concept of Conservatism/Prudence
Chap. 2 - Qualitative characteristics of useful financial information

Enhancing Qualitative Characteristics (VCUT)

• these four qualitative characteristics enhance the
usefulness of information
• but they cannot make non-useful information useful

• Comparability
• Verifiability
• Timeliness
• Understandability
Cost constraint - the benefit of providing the information needs to justify the 12
cost of providing and using the information
Chap. 3 - Financial statements and the reporting entity
Types of Financial Statements
 Consolidated financial statements - provide information about assets,
liabilities, equity, income and expenses of both the parent and its
subsidiaries as a single reporting entity
 Unconsolidated financial statements - provide information about assets,
liabilities, equity, income and expenses of the parent only
 Combined financial statements - provide information about assets,
liabilities, equity, income and expenses of two or more entities that are not
all linked by a parent-subsidiary relationship
Financial statements - a particular form of financial reports that provide
information about the reporting entity’s assets, liabilities, equity, income
and expenses 13
Chap. 3 - Financial statements and the reporting entity
Reporting entity
▪ an entity that is required, or chooses, to prepare financial
statements
▪ not necessarily a legal entity—could be a portion of an entity or
comprise more than one entity

Reporting period is the period when FSs are prepared for general
purpose financial reporting
1. Interim FS
2. Annual FS 14
Chap. 3 - Financial statements and the reporting entity
Underlying Assumption
Accounting assumptions are the basic notions or fundamental premises
on which the accounting process is based. These are also known as
postulates.
 Accounting Entity
 Going Concern
 Time Period
 Monetary Unit
- Quantifiability
- Stability of Peso 15
Chap. 4 - The elements of financial statements
Revised definition of an 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

Main changes in the definition of an asset:

• separate definition of an economic resource—to clarify that an asset is the economic
resource, not the ultimate inflow of economic benefits
• deletion of ‘expected flow’—it does not need to be certain, or even likely, that economic
benefits will arise
• a low probability of economic benefits might affect recognition decisions and the
measurement of the asset

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Chap. 4 - The elements of financial statements
Revised definition of an liability
A present obligation of the entity to transfer an economic resource as a result of past
events
An obligation is a duty or responsibility that the entity has no practical ability to
avoid
Main changes in the definition of an liability:
• separate definition of an economic resource—to clarify that a liability is the obligation to
transfer the economic resource, not the ultimate outflow of economic benefits
• deletion of ‘expected flow’—with the same implications as set out above for an asset
• introduction of the ‘no practical ability to avoid’ criterion to the definition of obligation

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Chap. 4 - The elements of financial statements
Revised definition of income
Increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity
claims
Revised definition of expenses
Decreases in assets, or increases in liabilities, that result in decreases in
equity, other than those relating to distributions to holders of equity claims
Although income and expenses are defined in terms of changes in assets and
liabilities, information about income and expenses is just as important as
information about assets and liabilities.

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Chap. 5 - Recognition and Derecognition

Recognition
The process of capturing for inclusion in the statement of
financial position or the statement(s) of financial
performance an item that meets the definition of an asset, a
liability, equity, income or expenses. Recognition is
appropriate if it results in both relevant information about
assets, liabilities, equity, income and expenses and a faithful
representation of those items, because the aim is to provide
information that is useful to investors, lenders and other
creditors. 19
Chap. 5 - Recognition and Derecognition

Revenue Recognition
Income shall be recognized when earned

▪ Goods
▪ Services

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Chap. 5 - Recognition and Derecognition

Expense Recognition
Expense shall be recognized when incurred.

Matching Principle:
▪ Associating Cause and Effect
▪ Systematic Rational Allocation
▪ Immediate Recognition
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Chap. 5 - Recognition and Derecognition

Derecognition
The removal of all or part of a recognised asset or liability from an entity’s
statement of financial position.

Derecognition normally occurs

For an asset For a liability

when the entity loses control of all or part of when the entity no longer has a
the recognised asset present obligation for all or part of the
recognised liability
Derecognition aims to faithfully represent both:
• any assets and liabilities retained after the transaction that led to the derecognition
• the change in the entity’s assets and liabilities as a result of that transaction
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Chap. 6 – Measurement
Historical cost measurement bases
 historical cost provides information derived, at least in part, from
the price of the transaction or other event that gave rise to the item
being measured
 historical cost of assets is reduced if they become impaired and
historical cost of liabilities is increased if they become onerous
 one way to apply a historical cost measurement basis to financial
assets and financial liabilities is to measure them at amortised cost

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Chap. 6 – Measurement
Current value measurement bases
current value provides information updated to reflect conditions at the measurement
date
 current value measurement bases include:
fair value - 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
value in use (for assets) / fulfilment value (for liabilities) - reflects entity-specific
current expectations about the amount, timing and uncertainty of future cash
flows
current cost - reflects the current amount that would be paid to acquire an equivalent
asset or received to take on an equivalent liability 24
Chap. 6 – Measurement

Selecting a measurement basis

In selecting a measurement basis, it is necessary to consider the nature
of the information in both the statement of financial position and the
statement(s) of financial performance. The relative importance of each
factor to be considered depends upon the facts and circumstances of
individual cases. Consideration of the factors and the cost constraint is
likely to result in the selection of different measurement bases for
different assets, liabilities, income and expenses.

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Chap. 7 – Presentation and Disclosure

Information about assets, liabilities, equity, income and

expenses is communicated through presentation and
disclosure in the financial statements. Effective
communication of information in financial statements
makes that information more relevant and contributes to a
faithful representation of an entity’s assets, liabilities,
equity, income and expenses.

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Concepts of Capital
The financial performance of an entity is determined using two
approaches, namely transaction approach and capital
maintenance approach.
Capital Maintenance – means that the net income occurs only after the
capital used from the beginning of the period is maintained.
▪ Financial Capital – based on historical cost
▪ Physical Capital – measured at current cost

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Multiple Choice Questions
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