CONCEPTUAL FRAMEWORK
Contribute to economic efficiency
- describes objectives and concepts of
general purpose financial reporting
- not a Standard; does not override any
Standard
-may be revised from time to time but does
not automatically lead to changes to the
Standards
- establishes the concepts that underlie the
estimates, judgments, and models which
GPFS base on
3 main purposes:
1. Assist IAS Board to develop IFRS
standards basing on consistent
concepts
2. Assist preparers to develop
consistent accounting policies when
no Standard applies to an event, or
when Standard allows a choice of
accounting policy
3. Assist all parties to understand
and interpret the Standards.
The Conceptual Framework provides the
foundation for Standards that:
1. Contribute to transparency by
enhancing the int’l comparability and
quality of financial information,
enabling investors and other market
participants to make informed
economic decisions.
2. Strengthen accountability by
reducing the information gap
between the providers of capital and
the people to whom they have
entrusted their money. As a source
of globally comparable information,
those Standards are also of vital
importance to regulators around the
world.
3.
by helping investors to identify
opportunities and risks across the
world, thus improving capital
allocation. For businesses, the use
of a single, trusted accounting
language derived from Standards
based on the Conceptual
Framework lowers the cost of capital
and reduces international reporting
costs.
Board & IFRS Foundation
- may sometimes depart from CF; but
explains the departure in the “Basis for
Conclusions” in that Standard
- Mission of IFRS Foundation: to develop
Standards that bring transparency,
accountability, and efficiency to financial
markets around the world.
- Board’s work serves public interest by
fostering trust, growth, and long-term
financial stability in the global economy.
CHAPTER 1 – THE OBJECTIVE OF
GENERAL PURPOSE FINANCIAL
REPORTING
Objective: to provide financial information
about the reporting entity that is useful to
existing and potential investors, lenders,
and other creditors (primary users of
GPFS) in making decisions relating to
providing resources to the entity.
- Decisions depend on (1) assessment of
amount, timing and uncertainty of or the
prospects for future net cash inflows to the
entity and (2) assessment of management’s
stewardship of the entity’s economic
resources.
- GPFS do not show the value of a reporting
entity but assist primary users in estimating
the value of the entity. Uses accrual basis of
accounting
- Management does not rely on GPFS since
they get their financial information internally
GPFS provide:
1. Entity’s financial position (info
about its economic resources and
claims against it)
2. Effects of transactions and other
events that change an entity’s
economic resources and claims
CHAPTER 2 – QUALITATIVE
CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
Fundamental qualitative characteristics:
1. Relevance
- info must be capable of making a
difference in the decisions made by users. It
must have predictive value (when it can be
used as an input to processes employed by
users to predict future outcomes) and
confirmatory value (when it provides
feedback about previous evaluations)
Materiality
- an entity-specific aspect of relevance
based on the nature or magnitude, or both,
of the items to which the info relates in the
context of an entity’s FS
- Info is considered material if omitting or
misstating it could influence decisions that
the primary users of GPFS make on the
basis of the reports
2. Faithful Representation
- Info must faithfully represent the
substance of the phenomena that it purports
to represent.
3 characteristics of faithfully represented
information:
a. Complete - depiction includes all
necessary info for a user to understand the
phenomenon being depicted
b. Neutral – depiction is without bias in the
selection and presentation of financial info.
c. Free from Error – there are no errors or
omissions in the description of the
phenomenon and the process used in
acquiring the information
*Prudence – supports neutrality; the
exercise of caution when making judgments
under conditions of uncertainty
Most efficient and effective process for
applying the fundamental qualitative
characteristics:
1. Identify an economic phenomenon.
2. Identify the type of information about
that phenomenon that would be
most relevant.
3. Determine whether that info is
available and whether it can provide
a faithful representation of the
economic phenomenon.
Enhancing qualitative characteristics:
1. Comparability - helps users identify and
understand similarities and differences
among items; consistency (using the same
methods for the same items) helps achieve
comparability
2. Verifiability – different knowledgeable
and independent observers could reach
consensus that a particular depiction is a
faithful representation;
Direct Verification vs. Indirect Verification
- direct observation -checking the inputs/formula
3. Timeliness – having information
available to decision-makers in time to be
capable of influencing their decision
4. Understandability – To classify,
characterise and present information clearly
and concisely
Cost Constraint
- Reporting financial information imposes
cost, and it is important that the benefits
justify the costs
CHAPTER 3 – FINANCIAL STATEMENTS
AND THE REPORTING ENTITY
Objective: to provide financial information
about the reporting entity’s assets, liabilities,
equity, income, and expenses that is useful
to users of financial statements.
Reporting period – financial statements
should be prepared for a specified period of
time and provide info about (1) assets,
liabilities, and equity that existed at the end
or during the period and (2) income and
expenses for the reporting period
Perspective of the FS – POV of the entity
Going concern assumption – reporting entity
will continue in operation for the foreseeable
future
KINDS OF REPORTING ENTITY
1. Single entity
2. Parent – subsidiary
- consolidated = parent + subsidiary
- unconsolidated = parent alone
3. Two or more entities that are not
linked by a parent-subsidiary
relationship = combined FS
CHAPTER 4 – THE ELEMENTS OF
FINANCIAL STATEMENTS
ASSET = a present economic resource
controlled by the entity as a result of past
events
Requisites for an asset to exist:
1. Entity has the right over an
economic resource
2. Economic resource has the potential
to produce economic benefits
3. Entity has control over the economic
resource
Economic resource is a RIGHT that has the
potential to produce economic benefits.
Right = can arise from (1) an obligation of
another party (A/R, deliveries, etc) and (2)
those that do not need an obligation of
another party (PPE, intellectual rights, etc)
*An entity cannot have a right to obtain
economic benefits from itself
Potential to produce economic benefits =
for potential to exist, it does not need to be
certain or likely.
Control = entity has the present ability to
direct the use of the economic resource and
obtain the economic benefits that may flow
from it
LIABILITY = a present obligation of the
entity to transfer an economic resource as a
result of past events
Requisites for a liability to exist:
1. The entity has an obligation
2. The obligation is to transfer an
economic resource
3. Obligation is a present obligation
that exists as a result of past events
Obligation = duty or responsibility that an
entity has no practical ability to avoid
Transfer of an economic resource =
potential does not need to be certain or
likely; can be conditional
Present obligation as a result of past
events = exists only if (1) the entity has
already obtained economic benefits or taken
an action and; (2) as a consequence, the
entity will or may have to transfer and
economic resource that it would not
otherwise have to transfer
Unit of account = the right or obligation to
which recognition criteria and measurement
concepts are applied
Executory contracts = a contract or a
portion of a contract that is equally
unperformed; establishes a combined right
and obligation; Hence, should be
recognized as a single asset (if the terms of
the exchange are currently favourable) or as
a liability (if the terms of the exchange are
currently unfavourable)
EQUITY = the residual interest in the assets
of the entity after deducting all its liabilities;
claims against the entity but do not meet the
definition of a liability
INCOME = increase in assets or decrease
in liabilities that result in increases in equity
other than those relating to contributions
from holders of equity claims
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
CHAPTER 5 – RECOGNITION AND
DERECOGNITION
Recognition = the process of capturing for
inclusion in the SFP or IS an item that
meets the definition of one of the elements
of financial statements
Carrying amount = the amount at which an
asset, a liability, or equity is recognized in
the statement of financial position
An asset or liability is recognized only if it
provides information that is useful, ie with:
1. Relevant information about the
asset/liability and about any resulting
income, expenses, or changes in
equity
2. A faithful representation of the asset
or liability and any resulting income,
expenses or changes in equity
Relevance is affected by existence
uncertainty and low probability of an inflow
or outflow of economic benefits
Faithful representation is affected by
measurement uncertainty, presentation and
disclosure of related information.
Derecognition = the removal of all or part
of a recognized asset or liability from an
entity’s SFP; occurs when that item no
longer meets the definition of an asset or
liability.
= READ YOUR PDF ON THIS PART!!! =
CHAPTER 6 – MEASUREMENT
Historical Cost – the value of the costs
incurred in acquiring or creating the asset,
plus consideration paid plus transaction
costs. This cost does not reflect changes in
values (except if asset has impairment or
liability becomes onerous)
HC of an asset is updated over time to
depict (if applicable):
1. Consumption of part or all of the
economic resource that constitutes the
asset (depreciation and amortisation)
2. Payments received that extinguish part or
the entire asset (receivables)
3. Effect of events that cause part or all of
the historical cost to be no longer
recoverable (impairment)
4. Accrual of interest to reflect any financing
component of the asset
HC of a liability is updated over time to
depict (if applicable):
1. Fulfilment of part or entire liability
2. Effect of events that increase the value of
the obligation to transfer assets such that
the liability becomes onerous
3. Accrual of interest to reflect any financing
component of the liability
Amortised Cost = an HC measurement
basis; reflects estimates of future cash
flows, discounted at a rate determined at
initial recognition
Current Value – reflects monetary info of the
assets, liabilities, and related income &
expenses at the measurement date
Bases:
1. Fair value – the price that would be
received to sell an asset, or paid to transfer
a liability between MARKET participants;
determined by observing prices in an active
market or indirectly using cash-flow-based
measurement techniques
2. Value in Use – the present value of the
cash flows, and other economic benefits
that an entity expects to derive from the use
of an asset and from its ultimate disposal.
Fulfilment value – present value of cash, or
other economic resources, that an entity
expects to be obliged to transfer as it fulfils
a liability
BOTH are entity-specific assumptions.
3. Current Cost – IF ASSET: the cost of an
equivalent asset at the measurement date,
comprising the consideration that would be
paid at the measurement date plus
transaction costs that would be incurred at
that date. IF LIABILITY: the consideration
that would be received for an equivalent
liability at measurement date minus
transaction costs that would be incurred on
that date.
Current cost – an entry value; reflects prices
in the market in which the entity would
acquire the asset/incur the liability
FACTORS TO CONSIDER WHEN
SELECTING A MEASUREMENT BASIS:
1. Relevance which is affected by:
a. Characteristics of asset/liability
b. How A/L contributes to future CF
2. Faithful representation
3. Enhancing qualitative characteristics
4. Cost constraint
READ CON FRAME PAGES 67-71
Measurement of Equity = E = A – L
Read Cash-flow-based MT (Page 72-73)
CHAPTER 7 – PRESENTATION AND
DISCLOSURE
CHAPTER 8 – CONCEPTS OF CAPITAL
AND CAPITAL MAINTENANCE
Read nalang oy, mubo rani promiiise!!!
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