CHAPTER 3
CONCEPTUAL FRAMEWORK
QUALITATIVE CHARACTERISTICS
QUALITATIVE CHARACTERISTICS
• are the qualities or attributes that make financial
accounting information useful to the users
• the objective is to ensure that the information is useful to
the users in making economic decisions
• classified into two: fundamental qualitative
characteristics and enhancing qualitative characteristics
APPLICATION OF QUALITATIVE CHARACTERISTICS
1. identify an economic phenomenon that has the potential
to be useful
2. identify the type of information about the phenomenon
that would be most relevant and can be faithfully
represented
3. determine whether the information is available
a. FUNDAMENTAL QUALITATIVE CHARACTERISTICS
• relate to the content or substance of financial
information
• information must be both relevant and faithfully
represented if it is to be useful
1. RELEVANCE
• capacity of the information to influence a
decision
• financial information must be capable of making
a difference in the decisions made by users
• financial information should be related or
pertinent to the economic decision
INGREDIENTS OF RELEVANCE
1.1 PREDICTIVE VALUE
• if financial information can be used as an input
to processes epmloyed by users to predict future
outcome
• can help users to increase the likelihood of
correctly or accurately predicting or forecasting
outcome of events
1.2 CONFIRMATORY VALUE
• if financial information provides feedback about
previous evaluations
• enables users confirm or correct earlier
expectations
MATERIALITY
• also known as doctrine of convenience
• practical rule in accounting which dictates that strict
adherence to GAAP is not required when the items are not
significant enough to affect the evalutaion, decision and
fairness of the financial statements
• subquality of relevance based on the nature or
magnitude or both of the items to shich the information
relates
"The relevance of information is affected by its nature and
materiality."
MATERIALITY OF AN ITEM
• depends on relative size rather than absolute size
• what is material for one entity may be immaterial for
another
• no strict or uniform rule for determining whether an
item is material or not
• this is dependent on good judgment, professional
expertise and common sense
"An item is material if knowledge of it would affect or
influence the decision of the informed users of the
financial statements"
FACTORS OF MATERIALITY
a. SIZE OF AN ITEM
• relation to the total of the group of which the
item belongs is taken into account
b. NATURE OF AN ITEM
• may be inherently material because by its very
nature it affects economic decision
2. FAITHFUL REPRESENTATION
• means that financial reports represent economic
phenomena or transactions in words and number
• descriptions and figures must match what really
existed or happened
• the actual effects of the transactions shall be
properly accounted for and reported in the financial
statements
INGREDIENTS OF FAITHFUL REPRESENTATION
2.1 COMPLETENESS
• requires relevant information should be
presented in a way they facilitates understanding
and avoids erroneous implication
• result of the adequate disclosure standard or the
principle of full disclosure
• a complete depiction includes all the necessary
information for a user to understand it
STANDARD OF ADEQUATE DISCLOSURE
• means that all significant and relevant information
leading to the preparation of financial statements shall be
clearly reported
• disclosure of any financial facts significant enough to
influence the judgment of informed users
NOTES TO FINANCIAL STATEMENTS
• provide narrative description or disaggregation of the
items presented in the financial statements and
information about items that do not qualify for recognition
• the purpose of the notes is to provide the necessary
disclosures required by the PFRS
2.2 NEUTRALITY
• without bias in the preparation or presentation
of financial information
• financial statements must be free from bias
• financial information should not favor one party
to the detriment of another party
• information is directed to the common needs of
many users, and not to the particular needs of
specific users
 • synonymous with the all-encompassing principle
of fairness
"to be neutral is to be fair"
PRUDENCE
• exercise of care and caution when dealing with the
uncertainties in the measurement process such that assets
or income are not overstated and liabilities or expenses
are not understated
"neutrality is synonymous with prudence"
CONSERVATISM
• means that when alternatives exist, the alternative which
has the least effect on equity should be chosen
• in case of doubt, record any loss and do not record any
gain
a. CONTINGENT LOSS
• recognized as provision if the loss is probable and
the amount can be reliably measured
b. CONTINGENT GAIN
• not recognized but disclose only
2.3 FREE FROM ERROR
• means there are no errors or omissions the
description of the phenomenon or transaction
• the amount is described clearly and accurately
as an estimate
MEASUREMENT UNCERTAINTY
• arises when monetary amounts in financial reports
cannot be observed directly and must instead be estimated
• can affect faithful representation if the level of
uncertainty in providing an estimate is high
SUBSTANCE OVER FORM
• transactions and events are accounted in accordance
with their substance and reality and not merely their legal
form
• not considered as a separate component because it
would be redundant
b. ENHANCING QUALITATIVE CHARACTERISTICS
• relate to the presentation or form of the financial
information
• intended to increase the usefulness of financial
information that is relevant and faithfully presented
• includes verifiability, comparability, understandability
and timeliness (VCUT)
1. VERIFIABILITY
• means that different knowledgeable and
independent observers could reach consensus,
although not necessarily complete agreement, that
a particular depiction is a faithful representation
• verifiability implies consensus
• financial information is verifiable in the sense
that it is supported by evidence
• helps assure users that information represents
the economic phenomenon or transaction it
purports to represent
TYPES OF VERIFICATION
1.1 DIRECT VERIFICATION
• verifying an amount or other representation
through direct observation
1.2 INDIRECT VERIFICATION
• means checking the inputs to a model,
formula or other technique and recalculating
the inputs using the same methodology
2. COMPARABILITY
• the ability to bring together for the purpose of
noting points of likeness and difference
• enables users to identify and understand
similarities and dissimilarities among items
• for information to be comparable, like things
must look alike and different things must look
different
• uniform application of accounting method
between and across entities in the same industry
2.1 COMPARABILITY WITHIN AN ENTITY
• the quality of information that allows
comparisons within a single entity through
time or from one accounting period to the
next
• also known as horizontal comparability or
intracomparability
2.2 COMPARABILITY BETWEEN AND ACROSS
ENTITIES
• the quality of information that allows
comparisons between two or more entities
engaged in the same industry
• also known as dimensional comparability or
intercomparability
CONSISTENCY
• not the same as comparability
• refers to the use of the same method for the same item,
either from period to period within an entity or in a single
period across entities
• uniform application of accounting method from period to
period within an entity
“comparability is the goal and consistency helps to
achieve that goal”
3. UNDERSTANDABILITY
• requires that financial information must be
comprehensible or intelligible if it is to be most
useful
• classifying, characterizing and presenting
information “clearly and concisely” makes it
understandable
• financial statements must be readily
understandable by users
• financial reports are prepared for users who
have a reasonable knowledge of business
4. TIMELINESS
• financial information must be available or
communicated early enough when a decision is to
be made
• the older the information, the less useful
 • what happened in the past would become the
basis of what would happen in the future
“timeliness enhances truism that without
knowledge of the past, the basis for prediction
will usually be lacking and without interest in
the future, knowledge of the past is sterile”

COST CONSTRAINT ON USEFUL INFORMATION

• COST- a pervasive constraint on the information that can
be provided by financial reporting
• consideration of the cost incurred in generating financial
information against the benefit to be obtained from having
the information
• the evaluation of cost constraint is substantially a
judgmental process
“the benefit derived from the information should exceed the
cost incurred in obtaining the information”