Conceptual Framework
LEARNING UNIT: CONCEPTUAL FRAMEWORK
1. UNIT OVERVIEW
The unit deals with the Conceptual Framework, which forms the conceptual
base/framework/foundation for financial reporting in general and IFRSs. The Framework sets
the scene for the financial statements and the elements thereof.
OBJECTIVE OF QUALITATIVE RECOGNITION
FINANCIAL CHARACTERISTICS CRITERIA
REPORTING
• Fundamental • Definition of elements
• Useful information (see below)
• Enhancing
for decision-making • Relevance
• Constraints
• Who are the users? • Faithful representation
• What information?
LIABILITY
ASSET
EQUITY
• Present economic • Present obligation (no
resource (a right practical ability to •E=A–L
with potential avoid) • Income / Expense
economic benefits) • To transfer an • P/L vs OCI
• Control economic resource • Transfer within vs
• Past event • Past (obligating) event reclassification
Process of financial reporting:
Definition Recognition Measurement Presentation Disclosure
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2. UNIT SPECIFIC LEARNING OUTCOMES
At the end of this learning unit, a student should be able to:
• Demonstrate an understanding of the Conceptual Framework, its status and purpose
and when it should be used.
• Demonstrate an understanding of the objectives of general purpose financial reporting
and the information needs of the users of financial statements.
• Demonstrate an understanding and application of the qualitative characteristics of useful
financial information.
• Demonstrate an understanding and application of the financial statements and the
reporting entity.
• Demonstrate an understanding and application of the definitions of elements of financial
statements and their recognition, derecognition and measurement criteria.
• Argue whether items meet the definitions and recognition/derecognition criteria and
whether elements should be recognised in the financial statements and argue
appropriate measurement.
• Identify, recognise, measure, present and disclose elements in the financial statements.
• Answer theoretical questions on the Conceptual Framework.
• Apply the theory in discussion questions.
• Use the Conceptual Framework to solve all accounting problems: entries, classification,
and disclosure.
3. UNIT-SPECIFIC STUDY MATERIAL
3.1. PREPARATION MATERIAL
• Refer to Blackboard for the Preparation material.
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3.3 LECTURER GUIDANCE
• The Conceptual Framework (CF) is still new (issued in 2018) and various other
Standards are not based on the new CF. If a specific Standard applies to a given
transaction/event, you have to apply that Standard (not the CF).
• As a student of financial accounting, you would basically only need to refer to/apply the
CF if:
i. You are instructed by the required section of a question to do so;
ii. You need to propose an accounting treatment for a transaction/event
for which no specific Standard exist (refer to IAS 8.10, 11).
• Financial Reporting (chap 1 of the Conceptual Framework) is much more than just
financial statements. Scrutinise financial statements of listed companies on the internet.
• The objective of financial reporting (chap 2) is to “tell the story”….
• Disclosure is much more than just numbers – also risks and uncertainties – you’ll see
this more and more in IFRSs.
• Study the qualitative characteristics (chap 2) of useful financial information.
• Take note of the cost constraint.
• The most important section deals with the elements of FS (chap 2 – see below) and
recognition and derecognition (chap 2).
• Understand the different measurement bases (chap 6) (table 6.1).
ELEMENTS OF FINANCIAL STATEMENTS
Definitions
• Assets (4.3-4.5), Liabilities (4.26-4.27), Equity (4.63) + Income (4.68), Expense (4.69)
• Important: Definitions of Income and Expenses relate to corresponding item in
Statement of Financial Position (SFP).
Classifications
• Debits: Asset vs Expense – exam technique = first test whether expenditure is asset!
Follow “balance sheet approach”! And remember all assets eventually become an
expense (e.g. depreciation).
• Terminology: “capitalise”/ “capitalisation” = expenditure is treated as asset (not an
expense).
• Credits: Liability vs Equity (and income): Remember equity is the residual (4.63) – thus
equity is always an after-tax amount! First test whether it is liability, if not = equity (also
see IAS 32: Financial Instruments: Presentation).
• Double entry concept: can only recognise income if assets increase, etc. (4.68, 4.69).
Control
• How is control exercised? (4.19 and 4.20).
• Also refer to IFRS 15.33.
Future economic benefits
• Asset: The focus is on the right that contains the ‘potential’ to economic benefits, not the
actual economic benefits (4.17). And economic benefits of assets extent to beyond
current period (i.e. to be an asset) (4.8).
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• Generate inflow or avoid outflow (4.16).
• Liability: It is about the ‘potential’ to transfer an economic resource. It may include an
‘outflow’, but also, for example ‘rebates’ based on sales.
Present obligation as a result of past events
• For liabilities: Obligation is a duty or responsibility that an entity has no practical ability
to avoid (cannot “walk away”) (4.28).
• ‘Legal’ vs ‘constructive obligation’ (4.31).
• Understand difference between the ‘requirements of legislation’ vs ‘legal obligation’
(4.45).
• There has to be ‘obligating event’ in the past (4.43, IAS37.17).
Recognition
• Recognition: Incorporate in financial statements (5.1).
• Double-entry principle (5.4, 5.5).
• Definition of element must first be met (5.1, 5.6), then the two recognition criteria (5.7).
• It is all about the question of “when” to record the transaction.
• Judgement may be needed to determine “relevance” and “faithful representation”.
• Also consider aspects such as: “existence uncertainty” (5.14), “low probability of
economic benefits” (5.15-5.17), depiction of resulting items from recognition (double-
entry) (and “measurement uncertainty”) (5.25(a)), “recognition of related assets and
liabilities” (“recognition inconsistency”)(5.25(b)) and “presentation and disclosure”
(5.25(c)).
• For example, items with a low probability of economic benefits, or existence uncertainty
may typically not prove to provide “relevant information” if recognised. Then, narrative
explanation (disclosure), rather than recognition, may be enough to be relevant.
• Derecognition: Remove the item from financial statements.
• Derecognise transferred component (with related income/expense) (‘profit on sale of
PPE’) (5.28).
• Continue to recognise retained component (if any) (with no related income/expense)
(5.28).
3.4. RELATED PRINCIPLES OF PROFESSIONAL ETHICS
Similar to the Conceptual Framework for Financial Reporting, SAICA’s Code of Professional
Conduct also contain fundamental principles and a conceptual framework. Specific
paragraphs that are important in this context are:
Fundamental principles:
• 110.1 A1 There are five fundamental principles of ethics for professional
accountants:
a) Integrity – to be straightforward and honest in all professional and business
relationships.
b) Objectivity – not to compromise professional or business judgments because of
bias, conflict of interest or undue influence of others.
c) Professional Competence and Due Care – to:
(i) Attain and maintain professional knowledge and skill at the level required to ensure
that a client or employing organisation receives competent professional service,
based on current technical and professional standards and relevant legislation;
and
(ii) Act diligently and in accordance with applicable technical and professional standards.
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d) Confidentiality – to respect the confidentiality of information acquired as a result
of professional and business relationships.
e) Professional Behaviour – to comply with relevant laws and regulations and avoid
any conduct that the professional accountant knows or should know might
discredit the profession.
• R110.2 A professional accountant shall comply with each of the fundamental principles.
• 110.2 A1 The fundamental principles of ethics establish the standard of behaviour
expected of a professional accountant. The conceptual framework establishes the
approach which a professional accountant is required to apply to assist in complying
with those fundamental principles.
The conceptual framework
• 120.1 The circumstances in which professional accountants operate might create
threats to compliance with the fundamental principles. Section 120 sets out
requirements and application material, including a conceptual framework, to assist
professional accountants in complying with the fundamental principles and meeting their
responsibility to act in the public interest. Such requirements and application material
accommodate the wide range of facts and circumstances, including the various
professional activities, interests and relationships, which create threats to compliance
with the fundamental principles. In addition, they deter professional accountants from
concluding that a situation is permitted solely because that situation is not specifically
prohibited by the Code.
• 120.2 The conceptual framework specifies an approach for a professional accountant
to:
a) Identify threats to compliance with the fundamental principles;
b) Evaluate the threats identified; and
c) Address the threats by eliminating or reducing them to an acceptable level.
• R120.3 The professional accountant shall apply the conceptual framework to identify,
evaluate and address threats to compliance with the fundamental principles set out in
Section 110.
• R120.5 When applying the conceptual framework, the professional accountant shall:
a) Exercise professional judgement;
b) Remain alert for new information and to changes in facts and circumstances; and
c) Use the reasonable and informed third party test.
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4. LEARNING AND ASSESSMENT OPPORTUNITIES
The following learning and assessment opportunities will be completed in this unit:
DESCRIPTION OF THEME LEARNING OPPORTUNITIES
Concepts and application of Lectures, class discussions, homework questions,tutorials
Conceptual Framework
4.1 QUESTIONS TO CONSIDER IN THIS UNIT
• Refer to Blackboard for the Preparation material.
4.2 HOMEWORK
