CONCEPTUAL FRAMEWORK

The conceptual framework is the underlying theory for the development and revision of accounting standards; summary
of the terms and concepts that underlie the preparation and presentation of general-purpose FS.
⮚ To assist the IASB in the development of standards

⮚ To assist financial statement preparers when no standard applies to a transaction or allows a choice of
treatment
⮚ To assist all parties in understanding and interpreting standards

Note: The Conceptual Framework is not a standard. It is considered only when there is no accounting standard.

Hierarchy
1. PFRS
2. PAS
3. Conceptual Framework
4. Other GAAP

Underlying Assumptions
● Going Concern (Continuity Assumption) – the only recognized assumption by conceptual framework; entity is
viewed as continuing in operation indefinitely in the absence of evidence to the contrary (e.g., current and non-
current classification, accrual of income and expenses, depreciation of PPE)
● Accrual Principle – income (expense) is recognized when earned (incurred) rather than when received (paid)

● Accounting Entity Concept – entity is viewed separately from its owners

● Time Period Principle – life of the entity is divided into series of reporting periods

● Monetary Unit Principle – accounting information should be stated in a common measurement basis; purchasing
power of peso is regarded as constant

Objective of Financial Reporting

● To provide financial information that is useful for making decisions about providing resources to the entity

Users of Financial Information

● Primary Users ● Other Users
o Investors – risk & return of investment o Employees – stability & profitability
o Lenders and other Creditors – liquidity o Customers – continuity
& solvency o Government – regulatory
o General Public – various

Limitations of Financial Reporting

● Do not and cannot provide all of the information

● Not designed to show the value of an entity, only helps users estimate the value

● Cannot accommodate every request for information

 ● Based on estimates and judgements rather than exact depiction

Qualitative Characteristics of Useful Financial Information

1. Fundamental – relate to the content or substance; makes the information useful
a. Relevance – capacity to affect decision; has one or both
i. Predictive Value – predicts future outcomes
ii. Confirmatory Value – confirm or correct earlier expectations
Note: Materiality is also an aspect of relevance. Strict adherence to accounting standards is not required
when the items are not significant enough (relative size or nature).
b. Faithful Representation – reports should match what really existed
i. Completeness – all information necessary must be included and clearly stated
ii. Neutrality – should not favor one party to the detriment of another party
Note: Keep in mind also the concept of prudence/conservatism.
iii. Free from Error – does not necessarily mean perfectly accurate
Note: Keep in mind also the concept of substance over form (e.g., zero interest bonds), and
conservatism.
2. Enhancing Qualitative Characteristics (VCUT) – increases the usefulness of financial information
a. Verifiability – observers could reach consensus, not necessarily complete agreement
b. Comparability – understand similarities and differences among items; not synonymous to uniformity
i. Consistency – use of the same methods for the same items, either within a company (focus) or
across companies
c. Understandability – presented in a form that users understand, although complex matters cannot be
eliminated
d. Timeliness – information available in time to be capable of influencing decisions
Note: It is important that costs are justified by the benefits of reporting information also known as Cost-Benefit
Consideration

Financial Statements and the Reporting Entity

Reporting Period – at least annually; also provide comparative information for at least one preceding period
Perspective – reporting entity
Reporting Entity – entity that is required or chooses to prepare FS; not necessarily a legal entity
Types of FS:
● Consolidated – both the parent and its subsidiaries

● Unconsolidated – parent company only

● Combined – two or more entities that are not linked

Elements of Financial Statements – quantitative information reported in FS

● Financial Position
o Asset – present economic resource (right that has the potential to produce economic benefits)
controlled by the entity as a result of past events
▪ Rights that correspond to an obligation

▪ Rights that do not correspond

▪ Rights established by contract/legislation

Note: Tangibility, ownership, and expenditure are not essential characteristics of assets.
 o Liability – present obligation (duty that entity has no practical ability to avoid) of an entity to transfer
economic resource as a result of past events
▪ Legal – consequence of a binding contract or statutory requirement

▪ Constructive – normal business practice or custom

Note: Identification of payee and certainty of settlement are not essential characteristics of
liabilities.
o Equity – residual interest; aka as net assets; no recognition principle
● Financial Performance – matching principle for recognition
o Income – increase in assets or decrease in liabilities
Types:
▪ Revenue – from ordinary course of business

▪ Gains – other than ordinary course of business

Classification:
▪ P/L – general rule

▪ OCI

● Unrealized G/L on financial asset measured @FVOCI

● Unrealized G/L from derivative contracts as cash flow hedge

● Translation G/L

● Revaluation surplus

● Remeasurements of defined benefit plan/Actuarial G/L

o Expense – increase in liabilities or decrease in assets
▪ Regular – from ordinary course of business

▪ Loss – other than ordinary course of business

Recognition
⮚ Process of capturing for inclusion

⮚ Only items that meet definition of elements and provides useful information are recognized

Derecognition
⮚ Removal of all or part of recognized element

⮚ Results from transfer of control

⮚ For asset, when entity loses control

⮚ For liability, when entity no longer has a present obligation

⮚ Results to income/expense

⮚ Not all transfer requires derecognition

Measurement
⮚ Process of quantifying the elements

⮚ Bases:
o Historical Cost – entry price including transaction costs; most commonly adopted in preparing FS
o Current Value – updated to reflect conditions as of the measurement date
▪ Fair Value – observed directly using market price in an active market; not an entity-specific
measurement
▪ Value in Use/Fulfillment Value – if FV cannot be directly measured, this method is used or simply
the present value of cash flows
▪ Current Cost – consideration that would be paid/received plus/minus transaction costs

⮚ IASB did not mandate a single measurement basis

Presentation and Disclosure

⮚ Achieved by classification (sorting) and aggregation (adding together) of elements

⮚ Offsetting is generally not appropriate

Concepts of Capital and Capital Maintenance

Financial Concept Physical Concept

Concept of Capital Synonymous with the net assets or Regarded as the productive capacity
equity of the entity; adopted by most of the entity
entities

Concept of Capital Maintenance Profit is earned if net assets, beg. Profit is earned if physical productive
exceed net assets, end. capacity, beg. exceed physical
productive capacity, end.

Measurement Basis Does not require the use of a Requires the adoption of current cost
particular basis basis

Capital Maintenance Approach

Net Changes in Equity xx
Less: Adtl Investment by Owners xx
Add: Withdrawals and Distributions to Owners xx
Comprehensive Income xx
Less: Other Comprehensive Income xx
Add: Other Comprehensive Loss xx
Profit or Loss / Net Income xx