CONCEPTUAL FRAMEWORK

FOREWORD
IASB is in the process of updating the
Conceptual Framework.
Framework for the Preparation & Presentation
of Financial Statements (1989)
Conceptual Framework for Financial Reporting
(2010)

INTRODUCTION
Financial statements are prepared and presented
for external users by many international entities.
However, there are visible differences found in
its preparation and presentation.
IASB is committed to narrow these differences
by seeking to harmonize regulations, accounting
standards and procedures in preparing and
presenting financial statements.

WHAT IS THE FRAMEWORK?

The Conceptual Framework sets out the
concepts that underlie the preparation and
presentation of financial statements for external
users.
Provides a theoretical background or general
frame of reference when setting new standards.

PURPOSE
Assists the Board and national standard setting
bodies in developing IFRS and national
standards.
Assists preparers of financial position, auditors
and users in dealing and complying with IFRS.
Provides interested users in the work of the IASB
with information about IFRS formulation.

STATUS
The Framework is not a standard. Thus, it is
overridden by IFRS.
In the absence of a standard, management shall
consider the applicability of the Conceptual
Framework in developing and applying an
accounting policy that results in relevant and
reliable information.
In cases of conflicts, the IFRS prevails over the
Conceptual Framework.

SCOPE
Objective of financial reporting;
Qualitative characteristics of useful financial
information;
Definition, recognition and measurement of the
elements from which financial statements are
constructed; and
Concepts of capital and capital maintenance.

CHAPTER ONE, INTRODUCTION

It is the foundation of the Framework.
Other aspects logically flow from the objective:

Qualitative Characteristics
Elements of Financial Position
Recognition
Presentation and Disclosure

OBJECTIVE OF GENERAL PURPOSE FINANCIAL

REPORTING
The objective of general purpose financial
reporting is to provide information about the
reporting entity that is useful and to existing and
potential investors, lenders, and other creditors
in making useful decisions about providing
resources to the entity.

LIMITATIONS OF FINANCIAL REPORTING

It do not and cannot provide all of the
information that primary users need and they
are not designed to show the value of a reporting
entity. To a large extent, general purpose
financial reports are based on estimate and
judgment rather than exact depiction.

USERS OF FINANCIAL REPORTS

Primary Users
Existing and Potential Investors
Lenders and Other Creditors

Other Users

Employees
Customers
Government and their agencies
General Public

INFORMATION ABOUT A REPORTING ENTITYS ECONOMIC

RESOURCES AND CLAIMS AND CHANGES IN RESOURCES AND CLAIMS

General purpose financial reports provide

information about the financial position and the
effects of transactions and other events that
changes an entitys economic resources and
claims.

ECONOMIC RESOURCES AND CLAIMS

The information about the entitys economic
resources (assets) and claims against the
reporting entity (liabilities and equity) is the
financial position which is prepared at a particular
moment in time.
It can also help users to identify the reporting
entitys financial strengths and weaknesses.
That information can help users to assess the
reporting entitys liquidity, solvency, and the
need for additional financing.

CHANGES IN ECONOMIC RESOURCES AND

CLAIMS
Changes in a reporting entitys economic
resources and claims result from that entitys
financial and from other events or transactions
such as issuing debt or equity.
Certain information are necessary to t give users
a complete understanding of why the entitys
economic resources and claims changed and the
implications of those changes on future financial
performance.

FINANCIAL PERFORMANCE REFLECTED BY

ACCRUAL ACCOUNTING
Information about a reporting entitys economic
resources and claims and changes in its
economic resources and claims during a period
provides a better basis for assessing the entitys
past and future performance than information
solely about cash receipts and payments during
that period.

FINANCIAL PERFORMANCE REFLECTED BY

PAST CASH FLOWS
Information about cash flows helps users
understand a reporting entitys operations,
evaluate its financing and investing activities,
assess its liquidity or solvency and interpret
other information about financial performance.

CHANGES IN ECONOMIC RESOURCES AND CLAIMS NOT RESULTING

FROM
FINANCIAL PERFORMANCE

Information about this type of change is

necessary to give users a complete
understanding of why the reporting entitys
economic resources and claims changed and the
implications of those changes for its future
financial performance.
Equity financing

Chapter 2
TO BE ADDED

CHAPTER 3, QUALITATIVE CHARACTERISTICS

Qualitative characteristics are the qualities or
attributes that make financial information useful
to users.
In deciding which information to include in
financial statements, the objective is to ensure
that the information is useful to the users in
making economic decisions.

FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Relevance
Materiality
Faithful
Representation

ENHANCING QUALITATIVE CHARACTERISTICS

Comparability

Verifiability

Timeliness

Understandability

COST CONSTRAINT
Cost is a pervasive constraint on the information
that can be provided by financial reporting.
Reporting financial information imposes costs and
must be justified by the benefits of financial
reporting.
The rule is the benefit derived from the
information should be over the cost incurred in
obtaining the information.
However, its evaluation is substantially a
judgmental process.

SUMMARY
Status The Framework is not a standard. Thus,
it is overridden by IFRS.