Week 001 Financial Statements and Conceptual Framework For Financial Reporting

Week 001
Financial Statements and

Conceptual Framework
for Financial Reporting
Week 001: Financial Statements and Conceptual Framework for Financial Reporting
Objectives
• Describe the usefulness and scope of conceptual
framework
• Understand the objective of conceptual framework
• Identify the qualitative characteristics of useful

accounting information
Source:
https://cdn.lynda.com/course/441605/441605-
636269220092757522-16x9.jpg
Date of access:
10/5/2017
Objectives
• Identify the fundamental and enhancing qualitative Insert for every slide at least one
characteristics photo related to the concept being
discussed in the slide. Dedicate this
space for the image.
The format of the photo should be

“.jpg” or “.png”.
At the bottom of the photo, indicate

the complete details of the source
of the image. If it is from the
Source:
Internet, indicate the complete URL
https://cdn.lynda.com/course/441605/441605-
and date of access.
636269220092757522-16x9.jpg
Date of access:
10/5/2017
Course Outline
1.1. Conceptual framework for financial reporting and
its purposes
1.2. Scope of the framework
1.3. Main objective of conceptual framework
1.4. Qualitative characteristics of useful financial

information
Source:
https://www.accountingweb.com/sites/default/files/st
yles/banner/public/financial_statement_ivsigns.jpg?i
tok=ylGeWfhT
Date of access:
10/5/2017
Course Outline
1.5. Fundamental characteristics
1.6. Enhancing characteristics
Source:
https://www.accountingweb.com/sites/default/files/st
yles/banner/public/financial_statement_ivsigns.jpg?i
tok=ylGeWfhT
Date of access:
10/5/2017
Conceptual Framework for Financial Reporting and its Purposes

- theoretical principles provide the basis for both the
development of new reporting practices and the
evaluation of existing ones
- form the theoretical basis for determining which

events should be accounted for, how they should be
measured and how they should be communicated
Source:
https://www.youngclausco.com/static/images/busine
ss-financial-statements.jpg
Date of access:
10/6/2017

The purpose of Conceptual Framework is:
• to assist the Board in the development of future
PFRSs and in its review of existing PFRSs
• to assist the Board in promoting harmonization of

regulations, accounting standards and
procedures relating to financial statements
Source:
Date of access:
10/6/2017

• to assist national standard-setting bodies in
developing national standards
• to assist preparers of financial statements in

applying PFRSs and in dealing with topics that
have yet to form the subject of an PFRS
Source:
Date of access:
10/6/2017

• to assist auditors in forming an opinion on
whether financial statements comply with PFRSs
• to provide those who are interested in the work

of the IASB with information about its approach
to the formulation of PFRSs
Source:
Date of access:
10/6/2017

- It is not a standard and hence does not define
standards for any particular measurement or
disclosure issue
- In any case where there is conflict between

Conceptual Framework and PFRS, the requirements
of PFRS prevail over the Conceptual Framework
Source:
Date of access:
10/6/2017
Scope of the Framework

The Conceptual Framework deals with:
• the objective of financial reporting
• the qualitative characteristics of useful financial

information
Source:
Date of access:
10/6/2017
Scope of the Framework

The Conceptual Framework deals with:
• the definition, recognition and measurement of the
elements from which financial statements are
constructed
• concepts of capital and capital maintenance
Source:
Date of access:
10/6/2017
Main objective of conceptual framework

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.
- Decisions involve buying selling or holding equity

and debt instruments, and providing or settling loans
Source:
Date of access:
10/6/2017

Target Users
- financial reporting is directed primarily to the
existing and potential investors, lenders and other
creditors which compose the primary user group
- primary users of financial information are the parties

that provide resources to the entity
Source: http://cdn.alleywatch.com/wp-
content/uploads/2015/10/investors.jpg
Date of access:
10/11/2017

Specific objectives of financial reporting
• To provide information useful in making
decisions about providing resources to the entity
• To provide information useful in assessing the

prospects of the future net cash flows to the
entity
Source:
Date of access:
10/6/2017

Specific objectives of financial reporting
• To provide information about entity resources,
claims and changes in resources and claims
Source:
Date of access:
10/6/2017

Economic decisions
- Existing and potential investors
• whether to buy, sell or hold equity instruments
- Existing and potential lenders and other creditors

• whether to provide or settle loans and other
forms of credit
Source:
https://userscontent2.emaze.com/images/1f578dd1-
c532-412a-b672-
753f8e0b53b2/9d7a86f5da2f3b9f2cb3275be9723e9
2.png
Date of access:
10/11/2017

Assessing future cash flows
- Existing and potential investors
• depends on the returns they expect from an
investment, for example, dividends
- Existing and potential lenders and other creditors

• depends on the principal and interest payments
Source:
Date of access:
10/6/2017

Economic resources and claims
- Information about financial position can help users
to assess the entity’s liquidity, solvency and the need
for additional financing
- Liquidity – short term availability of cash
- Solvency – long term availability of cash
Source:
Date of access:
10/6/2017

Change in economic resources and claims
- Changes in economic resources and claims result
from the entity’s financial performance and from
other events or transactions
Source:
Date of access:
10/6/2017

Accrual accounting
- depicts the effects of transactions and other events
and circumstances on an entity’s economic resources
and claims in the periods in which those effects occur
even if the resulting cash receipts and payments
occur in a different period.
Source:
Date of access:
10/6/2017
Qualitative characteristics of useful financial information
• Fundamental qualitative characteristics

a. Relevance
b. Faithful representation
• Enhancing qualitative characteristics
a. Comparability
b. Understandability
Source:
https://blogs.cfainstitute.org/marketintegrity/files/201
4/01/Financial-Reporting3.png
Date of access:
10/7/2017
Qualitative characteristics of useful financial information
c. Verifiability
d. Timeliness
Source:
Date of access:
10/7/2017
Fundamental qualitative characteristics
Relevance
- capacity of information to influence a decision
- information that does not bear on an economic

decision is useless
Source:
Date of access:
10/7/2017
Ingredients of relevance
- predictive value
• information help users to predict future outcome
- confirmatory value
• information provides feedback about previous
evaluations
Source:
Date of access:
10/7/2017
Materiality
- doctrine of convenience
- company-specific aspect of relevance
- Information is material if omitting it or misstating it

could influence decisions that users make on the
basis of the reported financial information
Source:
Date of access:
10/7/2017
Faithful representation
- actual effects of the transactions shall be properly
account for and reporting in the financial statements
- faithful representation is used instead of the term

“reliability” under the New Conceptual Framework
Source:
Date of access:
10/7/2017
Ingredients of faithful representation

- Completeness
• adequate disclosure standard or principle of full
disclosure
- Neutrality
• “without bias”
Source:
Date of access:
10/7/2017
Ingredients of faithful representation

- Free from errors
• does not mean perfectly accurate in all respects,
i.e. estimates.
Source:
Date of access:
10/7/2017
Enhancing qualitative characteristics
Comparability
- ability to bring together for the purpose of noting
points of likeness and difference
- horizontal comparability/intracomparability
- dimensional comparability/intercomparability
Source:
Date of access:
10/7/2017
Comparability
- implicit in the qualitative characteristic of
comparability is the principle of consistency
Source:
Date of access:
10/7/2017
Understandability
- Requires that financial information must be
comprehensible or intelligible if it is to be most useful
- relevant and faithfully represented information may

prove useless if it is not understood by users
Source:
Date of access:
10/7/2017
Verifiability
- verifiability implies consensus
- financial information is verifiable in the sense that it is

supported by evidence
Source:
Date of access:
10/7/2017
Verifiability
- direct verification means verifying an amount or other
representation through direct observation
- indirect verification means checking the inputs to

model, formula or other technique and recalculating
the inputs using the same methodology
Source:
Date of access:
10/7/2017
Timeliness
- Relevant and faithfully represented financial
information furnished after a decision is made is
useless or of no value
- “the older the information, the less useful”
Source:
Date of access:
10/7/2017
In summary:
Conceptual Framework forms theoretical principles that
provide the basis for both the development of new
reporting practices and the evaluation of existing ones
It is not a standard and hence does not define standards

for any particular measurement or disclosure issue
In any case where there is conflict between Conceptual

Framework and PFRS, the requirements of PFRS prevail
over the Conceptual Framework Source:
Date of access:
10/7/2017

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Week 001

Financial Statements and

• Understand the objective of conceptual framework

• Identify the qualitative characteristics of useful

The format of the photo should be

At the bottom of the photo, indicate

1.2. Scope of the framework

1.3. Main objective of conceptual framework

1.4. Qualitative characteristics of useful financial

1.6. Enhancing characteristics

Conceptual Framework for Financial Reporting and its Purposes

- form the theoretical basis for determining which

Conceptual Framework for Financial Reporting and its Purposes

• to assist the Board in promoting harmonization of

Conceptual Framework for Financial Reporting and its Purposes

• to assist preparers of financial statements in

Conceptual Framework for Financial Reporting and its Purposes

• to provide those who are interested in the work

Conceptual Framework for Financial Reporting and its Purposes

- In any case where there is conflict between

Scope of the Framework

• the qualitative characteristics of useful financial

Scope of the Framework

• concepts of capital and capital maintenance

Main objective of conceptual framework

- Decisions involve buying selling or holding equity

Main objective of conceptual framework

- primary users of financial information are the parties

Main objective of conceptual framework

• To provide information useful in assessing the

Main objective of conceptual framework

Main objective of conceptual framework

- Existing and potential lenders and other creditors

Main objective of conceptual framework

- Existing and potential lenders and other creditors

Main objective of conceptual framework

- Liquidity – short term availability of cash

- Solvency – long term availability of cash

Main objective of conceptual framework

Main objective of conceptual framework

Qualitative characteristics of useful financial information

• Fundamental qualitative characteristics

Qualitative characteristics of useful financial information

Fundamental qualitative characteristics

- information that does not bear on an economic

Fundamental qualitative characteristics

Fundamental qualitative characteristics

- company-specific aspect of relevance

- Information is material if omitting it or misstating it

Fundamental qualitative characteristics

- faithful representation is used instead of the term

Fundamental qualitative characteristics

Ingredients of faithful representation

Fundamental qualitative characteristics

Ingredients of faithful representation

Enhancing qualitative characteristics

Enhancing qualitative characteristics

Enhancing qualitative characteristics

- relevant and faithfully represented information may

Enhancing qualitative characteristics

- financial information is verifiable in the sense that it is

Enhancing qualitative characteristics