CONCEPTUAL FRAMEWORK & ACCOUNTING

STANDARDS
Purpose of the Conceptual Framework 3. Financial statements and the
 The Conceptual Framework reporting entity
prescribes the concepts for general 4. The elements of financial
purpose financial reporting. Its statements
purpose is to: 5. Recognition and derecognition
a. assist the International 6. Measurement
Accounting Standards Board 7. Presentation and disclosure
(IASB) in developing Standards 8. Concepts of capital and capital
that are based on consistent maintenance
concepts;
b. assist preparers in developing Objective of general purpose financial
consistent accounting policies reporting
when no Standard applies to a  The objective of general purpose
particular transaction or when a financial reporting is to provide
Standard allows a choice of financial information about the
accounting policy; and reporting entity that is useful to
c. assist all parties in primary users in making decisions
understanding and interpreting about providing resources to the
the Standards. entity.
 The objective of general purpose
Status of the Conceptual Framework financial reporting forms the
 The Conceptual Framework is not foundation of the Conceptual
a PFRS. When there is a conflict Framework.
between the Conceptual
Framework and a PFRS, the PFRS Primary Users
will prevail.  Primary users – are those who
 In the absence of a standard, cannot demand information
management shall consider the directly from reporting entities.
Conceptual Framework in making The primary users are:
its judgment in developing and a. Existing and potential
applying an accounting policy that investors
results in useful information. b. Lenders and other
creditors.
Scope of the Conceptual Framework  Only the common needs of
The Conceptual Framework is concerned primary users are met by the
with general purpose financial reporting. financial statements.
General purpose financial reporting
involves the preparation of general purpose Qualitative Characteristics
financial statements. The Conceptual I. Fundamental qualitative
Framework provides the concepts characteristics
regarding the following: a. Relevance
1. The objective of financial reporting a. Predictive value
2. Qualitative characteristics of b. Feedback value
useful financial information
  Materiality – entity- the phenomenon being depicted
specific aspect of relevance is provided.
b. Faithful representation b. Neutrality – information is
II. Enhancing qualitative selected or presented without
characteristics bias.
1. Comparability c. Free from error – there are no
2. Verifiability errors in the description and in
3. Timeliness the process by which the
4. Understandability information is selected and
applied.
Fundamental vs. Enhancing
 The fundamental qualitative Enhancing Qualitative Characteristics
characteristics are the characteristics 1. Comparability – the information
that make information useful to helps users in identifying similarities
users. and differences between different
 The enhancing qualitative sets of information.
characteristics are the characteristics 2. Verifiability – different users could
that enhance the usefulness of reach consensus as to what the
information information purports to represent.
3. Timeliness – the information is
Relevance available to users in time to be able
 Information is relevant if it can to influence their decisions.
affect the decisions of users. 4. Understandability – users are
 Relevant information has the expected to have:
following: a. reasonable knowledge of business
a. Predictive value – the activities; and
information can be used in b. willingness to analyze the
making predictions information diligently.
b. Confirmatory value – the
information can be used in Financial statements and the Reporting
confirming past predictions entity
 Materiality – is an ‘entity-  Objective and scope of financial
specific’ aspect of relevance. statements - The objective of general
purpose financial statements is to
Faithful Representation provide financial information about
 Faithful representation means the the reporting entity’s assets,
information provides a true, correct liabilities, equity, income and
and complete depiction of what it expenses that is useful in assessing:
purports to represent. a. the entity’s ability to generate
 Faithfully represented information future net cash inflows; and
has the following: b. management’s stewardship over
a. Completeness – all information economic resources.
necessary for users to understand  Reporting period - Financial
statements are prepared for a specific
 period of time (i.e., the reporting all others. Such potential need
period) and include comparative not be certain or even likely –
information for at least one what is important is that the right
preceding reporting period. already exists and that, in at least
 Going concern - Financial one circumstance, it would
statements are normally prepared on produce economic benefits for
the assumption that the reporting the entity.
entity is a going concern, meaning 3. Control – means the entity has
the entity has neither the intention the exclusive right over the
nor the need to end its operations in benefits of an asset and the ability
the foreseeable future. to prevent others from accessing
 Reporting entity - A reporting entity those benefits.
is one that is required, or chooses, to
prepare financial statements, and is Liability
not necessarily a legal entity. It can  Liability is “a present obligation of
be a single entity or a group or the entity to transfer an economic
combination of two or more entities. resource as a result of past events.”
Three aspects in the definition of a
Elements of Financial Statements liability
The elements of financial statements are: 1. Obligation – An obligation is “a
1. Assets duty or responsibility that an
2. Liabilities entity has no practical ability to
3. Equity avoid.” An obligation can be
4. Income either legal obligation or
5. Expenses constructive obligation.
2. Transfer of an economic
Asset resource – the obligation has the
 Asset is “a present economic potential to require the transfer of
resource controlled by the entity as a an economic resource to another
result of past events. An economic party. Such potential need not be
resource is a right that has the certain or even likely – what is
potential to produce economic important is that the obligation
benefits.” already exists and that, in at least
Three aspects in the definition of an one circumstance, it would
asset require the transfer of an
1. Right – asset refers to a right, economic resource.
and not necessarily to a physical 3. Present obligation as a result of
object, e.g., the right to use, sell, past events – A present
lease or transfer a building. obligation exists as a result of
2. Potential to produce economic past events if:
benefits – the right has a a. the entity has already
potential to produce economic obtained economic benefits
benefits for the entity that are or taken an action; and
beyond the benefits available to
 b. as a consequence, the entity to distributions to holders of equity
will or may have to transfer claims.”
an economic resource that it
would not otherwise have had Recognition & Derecognition
to transfer. The recognition process
 Recognition is the process of
Executory contracts including in the statement of
 An executory contract “is a contract financial position or the statement(s)
that is equally unperformed – neither of financial performance an item that
party has fulfilled any of its meets the definition of one of the
obligations, or both parties have financial statement elements (i.e.,
partially fulfilled their obligations to asset, liability, equity, income or
an equal extent.” (CF 4.56) expense). This involves recording
 An executory contract establishes a the item in words and in monetary
combined right and obligation to amount and including that amount in
exchange economic resources. the totals of either of those
 The contract ceases to be executory statements.
when one party performs its
obligation. Recognition criteria
 If the entity performs first, the  An item is recognized if:
entity’s combined right and a. it meets the definition of an asset,
obligation changes to an asset. liability, equity, income or
 If the other party performs first, expense; and
the entity’s combined right and b. recognizing it would provide
obligation changes to a liability. useful information, i.e., relevant
and faithfully represented
Equity information.
 “Equity is the residual interest in Relevance
the assets of the entity after  The recognition of an item may not
deducting all its liabilities.” provide relevant information if, for
 Equity equals Assets minus example:
Liabilities a. it is uncertain whether an asset or
liability exists; or
Income and Expenses b. an asset or liability exists, but the
 Income - Income is “increases in probability of an inflow or
assets, or decreases in liabilities, outflow of economic benefits is
that result in increases in equity, low.
other than those relating to
contributions from holders of However, the presence of one or
equity claims.” both of the foregoing does not
 Expenses - Expenses are automatically lead to the non-recognition of
“decreases in assets, or increases in an item. Other factors should also be
liabilities, that result in decreases considered.
in equity, other than those relating
Faithful representation b. Value in use and fulfilment value
 The level of measurement c. Current cost
uncertainty and other factors can
affect an item’s faithful Historical cost
representation, but not necessarily its  The historical cost of:
relevance. a. an asset is the consideration paid
to acquire the asset plus
Measurement uncertainty transaction costs.
 Measurement uncertainty exists if b. a liability is the consideration
the asset or liability needs to be received to incur the liability
estimated. A high level of minus transaction costs.
measurement uncertainty does not  Historical cost is updated over time
necessarily lead to the non- to depict the following:
recognition of an asset or liability if  Depreciation, amortization, or
the estimate provides relevant impairment of assets
information and is clearly and  Collections or payments that
accurately described and explained. extinguish part or all of the asset
 However, measurement uncertainty or liability
can lead to the non-recognition of an  Unwinding of discount or
asset or a liability if making an premium when the asset or
estimate is exceptionally difficult or liability is measured at amortized
exceptionally subjective. cost

Derecognition Fair value

 Derecognition is the removal of a  Fair value is “the price that would
previously recognized asset or be received to sell an asset, or paid
liability from the entity’s statement to transfer a liability, in an orderly
of financial position. transaction between market
 Derecognition occurs when the item participants at the measurement
ceases to meet the definition of an date.”
asset or liability.
Value in use and fulfilment value
Unit of account  Value in use is “the present value of
 Unit of account is “the right or the the cash flows, or other economic
group of rights, the obligation or the benefits, that an entity expects to
group of obligations, or the group of derive from the use of an asset and
rights and obligations, to which from its ultimate disposal.”
recognition criteria and measurement  Fulfilment value is “the present
concepts are applied.” value of the cash, or other economic
resources, that an entity expects to
Measurement bases be obliged to transfer as it fulfils a
1. Historical cost liability.”
2. Current value
a. Fair value Current cost
  The current cost of: measurement basis may be more
a. an asset is “the cost of an verifiable or more costly to apply
equivalent asset at the than the other measurement
measurement date, comprising bases).
the consideration that would be
paid at the measurement date plus Measurement of Equity
the transaction costs that would  Total equity is not measured directly.
be incurred at that date.” It is simply equal to difference
b. a liability is “the consideration between the total assets and total
that would be received for an liabilities.
equivalent liability at the  Because different measurement
measurement date minus the bases are used for different assets
transaction costs that would be and liabilities, total equity cannot be
incurred at that date.” expected to be equal to the entity’s
market value nor the amount that can
Entry values vs. Exit values be raised from either selling or
 Current cost and historical cost are liquidating the entity.
entry values (i.e., they reflect prices  Equity is generally positive,
in acquiring an asset or incurring a although some of its components can
liability), whereas fair value, value be negative. In some cases, even
in use and fulfilment value are exit total equity can be negative such as
values (i.e., they reflect prices in when total liabilities exceed total
selling or using an asset or assets.
transferring or fulfilling a liability).
Presentation and Disclosure
Considerations when selecting a  Information is communicated
measurement basis through presentation and disclosure
 When selecting a measurement in the financial statements.
basis, it is important to consider the  Effective communication makes
following: information more useful. Effective
a. The nature of information communication requires:
provided by a particular a. focusing on presentation and
measurement basis (e.g., disclosure objectives and
measuring an asset at historical principles rather than on rules.
cost may lead to the subsequent b. classifying information by
recognition of depreciation or grouping similar items and
impairment, while measuring that separating dissimilar items.
asset at fair value would lead to c. aggregating information in a
the subsequent recognition of manner that it is not obscured
gain or loss from changes in fair either by excessive detail or by
value). excessive summarization.
b. The qualitative characteristics,
the cost-constraint, and other Presentation and disclosure objectives
factors (e.g., a particular and principles
  The objectives are specified in the
Standards.
 The principles include:
a. the use of entity-specific
information is more useful that
standardized descriptions, and
b. duplication of information is
usually unnecessary.

Classification
 Classifying means combining
similar items and separating
dissimilar items.
 Offsetting of assets and liabilities is
generally not appropriate.

Classification of income and expenses

 Income and expenses are classified
as recognized either in:
a. profit or loss; or
b. other comprehensive income.

Aggregation
 Aggregation is “the adding together
of assets, liabilities, equity, income
or expenses that have shared
characteristics and are included in
the same classification.”

Concepts of Capital and Capital

Maintenance
 Financial concept of capital –
capital is regarded as the invested
money or invested purchasing
power. Capital is synonymous with
equity, net assets, and net worth.
 Physical concept of capital – capital
is regarded as the entity’s productive
capacity, e.g., units of output per day.