The Conceptual

The
Framework for
Framework Financial Reporting
Rina A. Abner, CPA, MBA, MSA
BS Accountancy
College of Business and Management
Partido State University
January 15, 2020
OUTLINE
▪ INTRODUCTION
o Purpose and status
o Scope
▪ CHAPTERS
o The objective of general purpose financial
reporting
o The reporting entity (to be added)
o Qualitative characteristics of useful financial
information
o The Framework (1989): the remaining text

2
 FR
The
Framework

INTRODUCTION
❑ Financial statements are prepared and presented
for external users by many entities around the
world.
Who are these external users?
▪ Investors
▪ Creditors
▪ Suppliers
▪ Customers
▪ Government and its agencies
▪ Public
3
 FR
The
Framework

INTRODUCTION
❑ Various reasons may lead to differences in
accounting:
▪ various definitions of the elements of financial
statements (FS)
▪ different criteria for the recognition of items in FS
▪ different bases of measurement
▪ different scopes of financial statements and
disclosures
4
 FR
The
Framework

INTRODUCTION
❑ The IASB believes that harmonizing the differences
in accounting meets the common needs of most
users of FS.
❑ Thus, the conceptual framework has been
developed.

5
 FR
The
Framework

PURPOSE AND STATUS

❑ Conceptual Framework sets out the concepts
that underlie the preparation and
presentation of financial statements for
external users.

6
 FR
The
Framework

PURPOSE AND STATUS

The purpose of the Conceptual Framework is:
a) to assist the Board in the development of future IFRSs
and in its review of existing IFRSs;
b) to assist the Board in promoting harmonization of
regulations, accounting standards and procedures
relating to the presentation of financial statements by
providing a basis for reducing the number of alternative
accounting treatments permitted by IFRSs;
c) to assist national standard-setting bodies in developing
national standards;
7
 FR
The
Framework

PURPOSE AND STATUS

The purpose of the Conceptual Framework is:
d) to assist preparers of financial statements in applying
IFRSs and in dealing with topics that have yet to form the
subject of an IFRS;
e) to assist auditors in forming an opinion on whether
financial statements comply with IFRSs;
f) to assist users of financial statements in interpreting the
information contained in financial statements prepared
in compliance with IFRSs; and
g) to provide those who are interested in the work of the
IASB with information about its approach to the
formulation of IFRSs. 8
 FR
The
Framework

PURPOSE AND STATUS

❑ This Conceptual Framework is not an IFRS and
hence does not define standards for any particular
measurement or disclosure issue.
❑ Nothing in the Conceptual Framework overrides any
specific IFRS.
❑ In case there is a conflict between the Conceptual
Framework and IFRS, the IFRS prevails.

9
 FR
The
Framework

SCOPE
The Conceptual Framework deals with:
(a) the objective of financial reporting;
(b) the qualitative characteristics of useful financial
information;
(c) the definition, recognition and measurement of
the elements from which financial statements are
constructed; and
(d) concepts of capital and capital maintenance.

10
CHAPTER 1
THE OBJECTIVE OF GENERAL
PURPOSE FINANCIAL
REPORTING

11
 FR
The
Framework

Objective of general purpose

financial reporting
“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.”

12
 FR
The
Framework

To a large extent, financial reports are

based on estimates, judgements and
models rather than exact depictions.

The Conceptual Framework establishes

the concepts that underlie those
estimates, judgements and models.

13
 FR
The
Framework

General purpose financial

statements provide:
❑ information about the financial position of
the reporting entity, and
❑ effects of transactions and other events
that change a reporting entity’s economic
resources and claims.

14
 FR
The
Framework

General purpose financial

statements help:
❑ helps users assess reporting entity’s
liquidity and solvency.
❑ helps users to understand the return that
the entity has produced on its economic
resources.

15
 FR
The
Framework

General purpose financial

statements:
❑ is prepared under accrual accounting which
depicts the effects of transactions and
other events and circumstances on a
reporting 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.
16
 FR
The
Framework

General purpose financial

statements:
❑ also helps users to assess the entity’s
ability to generate future net cash inflows.
❑ also provides information on the changes
in economic resources and claims not
resulting from financial performance.

17
 FR
The
Framework

General purpose financial

statements:
❑ also helps users to assess the entity’s
ability to generate future net cash inflows.
❑ also provides information on the changes
in economic resources and claims not
resulting from financial performance.

18
CHAPTER 2
THE REPORTING ENTITY
(to be added)

19
CHAPTERS 3 - 4
QUALITATIVE CHARACTERISTICS OF
USEFUL FINANCIAL INFORMATION
and
THE FRAMEWORK (1989): THE
REMAINING TEXT

20
 FR
The
Framework

Overview of the Conceptual Framework

Three levels:
First Level = Basic objective

Second Level = Qualitative characteristics and

elements of financial statements

Third Level = Recognition, measurement, and

disclosure concepts

21
 ASSUMPTIONS PRINCIPLES CONSTRAINTS

FR
The
1. Economic entity 1. Measurement 1. Cost Framework

2. Going concern 2. Revenue recognition 2. Materiality

3. Monetary unit 3. Expense recognition
Third
level
4. Periodicity 4. Full disclosure
5. Accrual

QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity
qualities 4. Income
5. Expenses
Illustration 1
Framework for Financial
Reporting OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
22
 FR
The
Framework

First Level: Basic Objective

OBJECTIVE
“To provide financial information about the reporting
entity that is useful to present and potential equity
investors, lenders, and other creditors in making
decisions in their capacity as capital providers.”

➢ Provided by issuing general-purpose financial statements.

➢ Assumption is that users have reasonable knowledge of business
and financial accounting matters to understand the information.

23
 FR
The
Framework

Second Level: Fundamental Concepts

Qualitative Characteristics of Accounting

Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more
useful) information from inferior (less useful)
information for decision-making purposes.

24
 FR
The
Framework

Second Level: Fundamental Concepts

Illustration 2
Hierarchy of Accounting
Qualities

25
 FR
The
Framework

Second Level: Fundamental Concepts

Fundamental Quality - Relevance

Relevance is one of the two fundamental qualities that
make accounting information useful for decision-
making.

26
 FR
The
Framework

Second Level: Fundamental Concepts

Fundamental Quality – Faithful Representation

Faithful representation means that the numbers and
descriptions match what really existed or happened.

27
 FR
The
Framework

Second Level: Fundamental Concepts

Enhancing Qualities
Distinguish more-useful information from less-useful
information.

28
 ASSUMPTIONS PRINCIPLES CONSTRAINTS

FR
The
1. Economic entity 1. Measurement 1. Cost Framework

2. Going concern 2. Revenue recognition 2. Materiality

3. Monetary unit 3. Expense recognition Third
4. Periodicity
Basic Elements
4. Full disclosure
level

5. Accrual

QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity
qualities 4. Income
5. Expenses
Illustration 3
Framework for Financial
Reporting OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
29
 FR
The
Framework

Second Level: Basic Elements

30
 FR
The
Framework

Third Level: Recognition, Measurement, and

Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition 2. Materiality
Illustration 2-7
3. Monetary unit 3. Expense recognition Framework for
Financial Reporting
4. Periodicity 4. Full disclosure
5. Accrual

31
 FR
The
Framework
Third Level: Assumptions

Basic Assumptions
Economic Entity – company keeps its activity separate from its
owners and other business unit.

Going Concern - company to last long enough to fulfill

objectives and commitments.

Monetary Unit - money is the common denominator.

Periodicity - company can divide its economic activities into time
periods.

Accrual Basis of Accounting – transactions are recorded in

the periods in which the events occur.
32
 FR
The
Framework

Third Level: Principles

Principles
Measurement
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
Fair value is “the amount for which an asset could be exchanged, a
liability settled, or an equity instrument granted could be exchanged,
between knowledgeable, willing parties in an arm’s length
transaction.”

IASB has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and financial
liabilities.
33
 FR
The
Framework

Third Level: Principles

Revenue Recognition - revenue is to be recognized when

it is probable that future economic benefits will flow to the
company and reliable measurement of the amount of revenue
is possible.

Illustration 2-3
Timing of Revenue
Recognition

34
 FR
The
Framework

Third Level: Principles

Expense Recognition - outflows or “using up” of assets

or incurring of liabilities (or a combination of both) during a
period as a result of delivering or producing goods and/or
Illustration 2-4
rendering services. Expense Recognition

“Let the expense follow the revenues.”

35
 FR
The
Framework

Third Level: Principles

Full Disclosure – providing information that is of sufficient

importance to influence the judgment and decisions of an
informed user.

Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information

36
 FR
The
Framework

Third Level: Constraints

Constraints

Cost – the cost of providing the information must be weighed

against the benefits that can be derived from using it.

Materiality - an item is material if its inclusion or omission

would influence or change the judgment of a reasonable
person.

37
 FR
The
Framework

Summary of
the Structure

38
 The Thank You.
Framework Rina A. Abner
+639 46 052 1088
rina.abner@parsu.edu.ph
 References:

Harmon, C. (2011). Conceptual framework

for financial reporting. John Wiley & Sons,
Inc. All.
IASB. (2014). The Conceptual Framework for
Financial Reporting. International
Financial Reporting Standards.