CHAPTER TWO

CONCEPTUAL FRAMEWORK: Objective of Financial Reporting

CONCEPTUAL FRAMEWORK Authoritative Status of Conceptual Framework

- summary of the terms and concepts that If there is a standard or an interpretation that
underlie the preparation and presentation specifically applies to a transaction, the standard
of financial statements for external users. or interpretation overrides the Conceptual
- concepts for general purpose financial Framework.
accounting
- attempt to provide overall theoretical In the absence of a standard or an interpretation
foundation for accounting that specifically applies to a transaction,
- intended to guide standard setters, management shall consider the applicability of
preparers and users of financial the Conceptual Framework in developing and
information in the preparation and applying an accounting policy that results in
presentation of statements information that is relevant and reliable.
- underlying theory for the development of Conceptual framework is not an International
accounting standards and revision of Financial Reporting Standard.
previously issued accounting standards.
- will be used in the future standard setting IFRS shall prevail over the conceptual
decision but no changes are made to the framework
current IFRS.

Users of Financial Information

Conceptual Framework for Financial
Reporting Primary Users
- complete, comprehensive and single - to whom general purpose financial
document promulgated by the reports are primarily directed
International Standards Board - can not require reporting entities to
provide information directly to them and
therefor must rely on general purpose
Provides the foundation for standards that:
financial reports for how much of the
(1) contribute to transparency by enhancing financial information is needed.
international comparability and quality of - examples:
financial information (1) Existing and Potential Investors
(2) strengthen accountability by reducing - concerned with the risk inherent in
information gap between the providers of and return provided by their
capital and the people to whom they investments
have entrusted their money - enables them to assess the ability
(3) contribute to economic efficiency by of the entity to pay dividends
helping investors to identify opportunities (2) Lenders and Creditors
and risks across the world - enables them to determine whether
their loans, interests thereon and
other amounts owing to them will be
Purposes of Revised Conceptual Framework paid when due
(1) To assist the International Accounting Other Users
Standards Board to develop IFRS
Standards based on consistent concepts - may find the general purpose financial
(2) To assist the preparers of financial reports useful but the reports are not
statements directed to them primarily
(3) To assist preparers of financial - examples:
statements to develop accounting policy (1) Employees
when a Standard allows a choice of an - infos about the stability and
accounting policy profitability of the entity
(4) To assist all parties to understand and - interested if there are retirement
interpret the IFRS Standards benefits, employment opportunities
(2) Customers
 - about the continuance of an entity creditors which compose the primary
especially when they have long-term user group.
involvement with the firm - those who provide resources for the
(3) Government and their Agencies entity
- interested in allocation of resources - management
and activities of the entity
- regulate activities, determine Specific Objectives of Financial Reporting
taxation policies and as a basis for The overall objective of financial reporting is to
national income and similar stats provide information useful for decision-making.
(4) Public
- entities make substantial Conceptual Framework places more emphasis
contribution to the local economy in on the importance of providing information
many ways including the number of needed to assess the management stewardship
people they employ and their of the entity’s economic resources.
patronage of local suppliers
a. To provide information useful in making
- infos about the trend and range of
decisions about providing resources to
its activities
the entity.
Scope of Revised Conceptual Framework b. To provide information useful in
assessing the cash flow prospects of the
(1) Objective of financial reporting entity.
(2) Qualitative characteristics of useful c. To provide information about entity
financial information resources, claims and changes in
(3) Financial statements and reporting entity resource and claims.
(4) Elements of financial statements
(5) Recognition and derecognition
(6) Measurement
Economic Decisions
(7) Preparation and disclosure
(8) Concepts of capital and capital
maintenance
Assessing Cash Flow Prospects

OBJECTIVES OF FINANCIAL REPORTING - for investors, on buying, selling, or

holding equity instruments depends on
The overall objective of financial reporting is to the returns that they expect from an
provide financial information about the reporting investment, dividends
entity that is useful to existing and potential - for creditors or lenders, on providing or
investors, lenders and other creditors in making settling loans and other forms of credit
decisions about providing resources to the depend on the principal and interest
entity. payments or other returns they expect
- financial reports should provide
The objective of financial reporting us the “why”,
information useful in assessing the
purpose or goal of accounting.
amount, timing, and uncertainty of
Financial Reporting prospects for future net cash inflows to
the entity.
- provision of financial information about
an entity to external users that is useful Economic Resources and Claims
to them in making economic decisions
General purpose financial reports
and for assessing the effectiveness of
the entity’s management. - provide info about the financial position
- encompasses not only financial of a reporting entity
statements but also other information
(financial highlights, summary of Financial Position
important financial figures, analysis of - information about the entity’s economic
financial statements and significant resources and the claims against the
ratios) reporting entity.
- includes non-financial information such - comprises the assets, liabilities, and
as description of major products and a equity at a particular moment in time.
listing of corporate officers and directors.
Note:
Target Users
- directed primarily to the existing and
potential investors, lenders and other
 Economic resources are the assets and the - predicting the future returns on resources
claims are the liabilities and equity of an
entity Information about financial performance
during a period
- assessing the entity’s ability to generate
- can be used to assess the entity’s future cash inflows from operations.
liquidity, solvency, and the need for
additional financing.

Liquidity – availability of cash in the near

future to cover currently maturing Accrual Accounting
obligations.
- used to measure financial performance
Solvency – availability of cash over a long - effects of transactions and other events
term to meet financial commitments when are recognized when they occur not
they fall due. when cash is paid or received
Information about priorities and payment - income recognized when earned, not
requirements of existing claims can help when received
users to predict how future cash flows will be - expense recognized when incurred, not
distributed among those with a claim against when paid
the reporting entity. - provides better basis for assessing past
and future performances than cash basis

Changes in Economic Resources and Claims

Limitations of Financial Reporting
General Purpose Financial Reports
(1) do not and cannot provide all the
- also provide information about the effects information that users need.
of transactions and other events that (2) not designed to show the entity’s value
change the economic resources & claims but to provide info to help users to
(results from financial performance and estimate the value of the entity.
from other events or transactions, such (3) intended to provide common information
as issuing debt or equity instruments) to users and cannot accommodate every
request for information.
The financial performance of an entity (4) based on estimates and judgement
comprises revenue, expenses and net income rather than depiction
or loss for a period of time.
- level of income earned through effective
and efficient use of resources Management Stewardship
Results of Operations - info about how efficiently and effectively
management has discharged its
- financial performance of an entity responsibility to use the entity’s sources
- portrayed in the income statement helps asses the resource’s stewardship
- helps in predicting how management will
use resources in the future
Usefulness of Financial Performance - useful for assessing the entity’s
prospects for future net cash flows
Information about financial performance
- example: management can decide not to
- helps understand the return that the dispose or sell investments when prices
entity has produced on economic are declining in order to avoid realized
resources losses.

Information about the return produced

- provides an indication of how well
management has discharged its
responsibilities to make efficient and
effective use of entity’s resources
Information about past financial performance