Conceptual Framework
Conceptual Framework
Conceptual Framework
financial statements?
The framework for the Preparation and Presentation of financial statements is promulgated by the
International Accounting Standards Board and adopted by the local Financial Reporting Standards
Council.
The Framework is a summary of the terms and concepts that underlie the preparation and presentation of
financial statement. It is the underlying theory for the development of accounting standards and revision
of previously issued accounting standards.
The Framework is an attempt to provide an overall theoretical foundation for accounting which will
guide standard-setters, preparers and users of financial information in the preparation and presentation of
statements.
in other words, the concepts are the foundation on which financial statements are constructed, and
provide a platform from which accounting standards are developed and revised.
The Framework is concerned with general-purpose financial statements, including consolidated
financial statements.
The financial statements are prepared at least annually and are directed toward the common needs of a
wide range of users.
The Framework is applies to the financial statements of all commercial, industrial and business
reporting entities, whether in the public or private sector.
However, special purpose financial reports, for example, prospectuses and computations prepared for
taxation purposes, are outside the scope of the Framework.
1. Economic resources simply refer to the assets owned by the entity. Information about the economic
resources controlled by the entity and its capacity to modify these resources is useful in predicting the
ability of the entity to generate cash and cash equivalents in the future.
2. Liquidity is the availability of cash in the near future to cover currently maturing obligations.
3. Solvency is the availability of cash over a long term to meet financial commitments when they fall due.
Information about liquidity and solvency is useful in predicting the ability of the entity to comply with
its future financial commitments.
4. Financial structure is the source of financing for the assets of the entity. Financial structure indicates
what amount of assets has been financed by creditors which is the borrowed capital, and how much has
been financed by owners which is the invested or equity capital.
5. Capacity for adaptation is the ability of the entity to use its available cash for unexpected requirements
and investment opportunities.
This may be accomplished by raising cash at a short notice through borrowing and issuance of
securities or by raising cash through disposal of assets without disrupting normal operations.
Capacity for adaptation is also known as financial flexibility.
Thus, the entity theory emphasizes the importance of the income statement. This is explained by the
equation:
Assets = Liabilities + Capital
Proprietary theory - The accounting objective is directed toward proper valuation of assets.Thus,this
theory emphasizes the importance of the balance sheet. It is exemplified by the equation:
Residual equity theory - The accounting objective is also proper valuation of assets. This is applicable
where there are two classes of shareholders, ordinary and preference. Thus, the equation is:
Fund theory -The accounting objective is neither proper income determination nor proper valuation of
assets but the custody and administration of funds.
The objective is directed toward cash flows exemplified by the formula “cash inflows minus cash
outflows equals fund."
Government accounting and fiduciary accounting are examples of the application of this concept.
Investors need information to help them determine whether they should buy, hold or sell. Shareholders
are also interested in information which enables them to assess the ability of the entity to pay dividends.
Employees - Employees are interested in information about the stability and profitability of the entity. The
employees are interested in information which enables them to assess the ability of the entity to provide
remuneration, retirement benefits and employment opportunities.
Lenders - Lenders are interested in information which enables them to determine whether their loans and
interest thereon will be paid when due.
Suppliers and other trade creditors - These users are interested in information which enables them to
determine whether amounts owing to them will be paid on maturity..
Customers - Customers have an interest in information about the continuance of an entity especially when
they have a long-term involvement with or are dependent on the entity.
Government and its agencies - Government and its agencies are interested in the allocation of resources
and therefore the activities of the entity.
These users require information to regulate the activities of the entity, determine taxation policies and as
a basis for national income and similar statistics.
Public - Entities affect members of the public in a variety of ways.
For example, entities make substantial contributions to the local economy in many ways including the
number of people they employ and their patronage of local suppliers.
Financial statements may assist the public by providing information about the trends and recent
developments in the prosperity of the entity and the range of its activities.