Conceptual Framework for

Financial Reporting
BY CPA, CFE, MBA, BA KILIAN T
 Meaning and Status of Conceptual Framework

Meaning Status
• A conceptual framework is a • The Conceptual Framework is not
system of concepts and principles an IFRS and so does not overrule
that underpin the preparation of any individual IFRS.
financial statements. • Nothing in the Conceptual
• These concepts and principles Framework overrides any Standard
should be consistent with one or any requirement in a Standard.
another. • The Conceptual Framework will be
revised from time to time on the
basis of the Board’s experience of
working with it.
 The Purpose of The Conceptual Framework
a) Assist the International Accounting Standards Board (Board) to
develop IFRS Standards (Standards) that are based on consistent
concepts;
b) Assist preparers to develop consistent accounting policies when no
Standard applies to a particular transaction or other event, or when
a Standard allows a choice of accounting policy; and
c) Assist all parties to understand and interpret the Standards.
 Content of The Conceptual Framework
The 2018 revised Conceptual Framework sets out:
1. The objective of general-purpose financial reporting.
2. The qualitative characteristics of useful financial information.
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and de-recognition
6. Measurement bases
7. Presentation and disclosure
8. Concepts of capital and capital maintenance.
1. The Objective of Financial Reporting
• The objective of general-purpose financial reporting is to provide
information to existing and potential investors, lenders and other
creditors that will enable them to make decisions about providing
economic resources to an entity.
• These users seek information regarding:
a) The entity's economic resources e.g. assets
b) Obligations or claims against the entity e.g. liabilities and equity
c) Alterations in the entity's resources and obligations e.g. income and
expenses
 2. Qualitative Characteristics of Useful
Financial Information
Fundamental Qualitative Enhancing Qualitative
Characteristics Characteristics
a) Relevance a) Comparability
b) Faithfully Representation b) Verifiability
c) Timeliness
d) Understandability
a) Relevance
• Financial information is relevant if it is capable of making a difference in
the decisions made by users.
• Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
• Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes.
• Financial information has confirmatory value if it provides feedback
(confirms) about previous predictions.
• The predictive value and confirmatory value of financial information are
interrelated. Information that has predictive value often also has
confirmatory value.
Materiality
• Financial information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the primary users
of general-purpose financial reports make on the basis of those reports,
which provide financial information about a specific reporting entity.
• In other words, materiality is an entity-specific aspect of relevance based
on the nature or magnitude, or both, of the items to which the information
relates in the context of an individual entity’s financial report.
• Consequently, the Board cannot specify a uniform quantitative threshold
for materiality or predetermine what could be material in a particular
situation.
b) Faithful Representation
• To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the substance of the
phenomena that it purports to represent.
• In many circumstances, the substance of an economic phenomenon and its
legal form are the same. If they are not the same, providing information
only about the legal form would not faithfully represent the economic
phenomenon.
• To be a perfectly faithful representation, information should be;
➢Complete (to include all information necessary for a user to understand)
➢Neutral (without bias in the selection of financial information)
➢Free from error (no errors or omissions)
Enhancing Qualitative Characteristics
a) Comparability: investors should be able to compare an entity’s
financial information year-on-year, and one entity’s financial
information with another.
b) Verifiability: knowledgeable users should be able to agree that a
particular depiction of a transaction offers a faithful representation.
c) Understandability: information should be presented as clearly and
concisely as possible.
d) Timeliness: information should be available to decision-makers in
time to be capable of influencing their decisions. The older the
information is the less useful it is.
The Cost Constraint
• It is important that the costs incurred in reporting financial
information are justified by the benefits that the information brings
to its users.
• The benefit of providing the information needs to justify the cost of
providing and using the information.
• When developing IFRS Standards, the Board assesses whether the
benefits of reporting particular information outweigh the costs
involved in providing it.
3. Financial Statements and The Reporting Entity
• The financial information is provided in a complete set of
financial statements which include:
a) A statement of financial position
b) A statement of profit or loss and other comprehensive
income
c) A statement of cash flow
d) A statement of changes in equity
e) Notes, other statements and explanatory material
The Reporting Entity
• A reporting entity is an entity that is required, or chooses to prepare
financial statements.
• A reporting entity can be a single entity or a portion of an entity or
can comprise more than one entity.
Going Concern Assumption
• Financial statements are normally prepared on the assumption that
the reporting entity is a going concern and will continue in operation
for the foreseeable future.
• Hence, it is assumed that the entity has neither the intention nor the
need to enter into liquidation or to cease trading.
• If such intention or need exists, the financial statements may have to
be prepared on a different basis rather than a going concern basis and
the financial statements should describe the basis used.
4. The Elements of Financial Statements
The elements of financial statements defined in the Conceptual Framework are:
a) Asset: A present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce
economic benefits.
b) Liability: A present obligation of the entity to transfer an economic resource as
a result of past events.
c) Equity: The residual interest in the assets of the entity after deducting all its
liabilities.
d) Income: Increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims.
e) Expenses: Decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of
equity claims.
5. Recognition and Derecognition

Recognition Derecognition
• It is the process of capturing for inclusion in the statement of • It is the removal of all or part of a recognized asset or liability
financial position or the statement of financial performance from an entity’s statement of financial position.
an item that meets the definition of one of the elements of
financial statements an asset, a liability, equity, income or • Derecognition normally occurs when that item no longer
expenses. meets the definition of an asset or of a liability:
• Only items that meet the definition of an asset, a liability or a) For an asset, derecognition normally occurs when the
equity are recognized in the statement of financial position. entity loses control of all or part of the recognized asset;
and
• Similarly, only items that meet the definition of income or
expenses are recognized in the statement of financial b) For a liability, derecognition normally occurs when the
performance. entity no longer has a present obligation for all or part of
the recognized liability.
• However, not all items meeting these definitions are
recognized. Elements are recognized if recognition provides
users with useful financial information. In other words,
recognition must provide:
a) Relevant information
b) Faithful representation of the asset or liability and of any
resulting income, expenses or changes in equity
6. Measurement
• The conceptual framework refers to a number of measurement bases,
which can be used to different degrees and in varying combinations in
the financial statements.
a) Historical cost: is the value of the costs incurred in acquiring or
creating the asset, comprising the consideration paid to acquire or
create the asset plus transaction costs.
b) Fair value: Fair value is the price that would be received to sell an
asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date.
Selecting a Measurement Base
• The factors to be considered when selecting a measurement basis
are;
a) Relevance and
b) Faithful representation
• This is because the aim is to provide information that is useful to
investors, lenders and other creditors.
• When selecting a measurement basis, the Conceptual Framework
states that relevance is maximized if the following are considered:
a) The characteristics of the asset or liability
b) The ways in which the asset or liability contribute to future cash flows
7. Presentation and Disclosure
• A reporting entity communicates information about its assets,
liabilities, equity, income and expenses by presenting and disclosing
information in its financial statements.
• Effective communication of information in financial statements makes
that information more relevant and contributes to a faithful
representation of an entity’s assets, liabilities, equity, income and
expenses.
• It also enhances the understandability and comparability of
information in financial statements.
8. Concepts of Capital and Capital Maintenance
• It refers to the concept that profits can only be made when the capital
of an organization is restored to, or maintained at the level that it was
at the start of an accounting period.
• Types of capital and capital maintenance are;
a) Financial Capital Maintenance
b) Physical Capital Maintenance
 Types of Capital and Capital Maintenance

a) Financial Capital Maintenance b) Physical Capital Maintenance

Under this concept a profit is Under this concept a profit is
earned only if the financial earned only if the physical
amount of the net assets at the productive capacity (or operating
end of the period exceeds the capability) of the entity at the end
financial amount of net assets at of the period exceeds the physical
the beginning of the period, after productive capacity at the
excluding any distributions to and beginning of the period, after
contributions from owners during excluding any distributions to and
the period. contributions from owners during
the period.
 Commercial Substance OVER Their Legal Form
• Commercial Substance refers to whether a transaction is expected to significantly alter
the future cash flows or service potentials of a business. If a transaction changes the risk,
timing, or amount of future cash flows, it is considered to have commercial substance.
• Legal form of transaction refers to the formal, contractual, or legal structure of a
transaction. It is a way that transactions are legally structure as defined by contracts,
laws and regulations
• Substance over form means the accounting for transaction should reflect the true
economic reality of a transaction, not just its legal appearance. This means that, if the
transaction legal form does not accurately represent its underlying economic activity,
accountants should focus on the substance rather than the legal form.
• Example; If an entity enters a lease agreement but retains significant risks and rewards of
ownership, the transaction should be treated as a finance lease (ownership) rather than
an operation lease (rental) even though the legal form is a lease.
Why Substance Over Form Matters?
• Using substance over form ensures that the financial statements
provide a “true and fair view” of an entity’s financial position and
performance, which is crucial for accurate decision making by
stakeholders.
• Both IFRS and GAAPs emphasize the importance of substance over
form.
The Bases of Accounting
a) Accruals basis of accounting (matching concept); Accruals basis
accounting (accruals accounting, the accruals concept) recognizes
transactions and other events and circumstances in the periods in which
those effects occur, even if the resulting cash receipts and payments
occur in a different period.
b) Cash basis of accounting; Cash basis accounting recognizes transactions
in the periods in which cash receipts and payments occur.
c) Break-up basis of accounting (liquidation basis); In certain situations
when going concern assumption is no longer valid, financial statements
may have to be re-drafted on a break-up basis. Under this basis;
• All assets are stated at the lower of carrying value and their estimated realizable
amounts
• Provision is made for any further estimated liabilities
• All assets and liabilities are classified as current