CONCEPTUAL

FRAMEWORK FOR
FINANCIAL REPORTING
BKAR 1013
CHAPTER 1
Learning Outcomes
On completion of this subject, the student should be able to:

• Explain the role of the professional accountant

• Explain the (Revised) Conceptual Framework for financial
Reporting
 OUTLINE
• The roles of professional accountant
• Introduction to the [Revised] Conceptual Framework for
Financial Reporting (2018)
• Understanding of objectives of financial reporting
• Qualitative characteristics of accounting
information
• Elements of financial statements
• Recognition, derecognition and measurement
concepts
• Disclosure and presentation of financial
statements
 The Roles of Professional Accountant
• The Roles of Professional Accountant
- professional accountants in businesses have the task of defending the quality of
financial reporting right at the source where the numbers and figures are produced!
- Accountancy professionals in business assist with corporate strategy, provide advice
and help businesses to reduce costs, improve their top line and mitigate risks.
- professional accountants provide independent assurance to management that the
organization’s risk management, governance and internal control processes are
operating effectively.
- They also offer advice on areas for enhancements. In the public sector, professional
accountants in government shape fiscal policies that had far-reaching impacts on the
lives of many.
- Accountants in academia are tasked with the important role of imparting the
knowledge, skills and ethical underpinnings of the profession to the next generation.

Source:
https://www.ifac.org/news-events/2013-10/roles-and-importance-professional-accountants-business
Basics of accounting and sources of
regulation

 Double Entry system of recording transaction:

– Debits, Credits

 Sources of acc. regulation at international level:

– International Accounting Standards Board (IASB)
• International Financial Reporting Standards (IFRS / IAS)

 Sources of acc. regulation at national level:

– Legislation – countries have their own laws and regulations
– Accounting standards – national accounting standards (e.g. Malaysia
Accounting Standards Board)
– Stock exchange regulations – Securities Commission Malaysia
Legislation and Guidelines
5
International Accounting
Standards Board (IASB)
• The IASB develops & publishes international accounting standards (IFRS
/ IAS).
• The IASB works with national accounting standard setters to move
toward global convergence.
• To date, nearly 100 countries have converged (require or allow IFRS) or
are on the path to convergence.

6
SITUATION
• The Hard Rock Mining Company has just completed the 1 year of operations at
its new strip mine, the Lonesome Doe. Hard Rock spent $10 million for the land
and $20 million in preparing the site for mining operations. The mine is expected
to operate for 20 years. Hard Rock is subject to environmental statutes requiring
it to restore the Lonesome Doe mine site on completion of mining operations.
Based on its experience and industry data, as well as current technology, Hard
Rock forecasts that restoration will cost about $10 million when it is undertaken.
Of those costs, about $4 million is for restoring the topsoil that was removed in
preparing the site for mining operations (prior to opening the mine); the rest is
directly proportional to the depth of the mine, which in turn is directly
proportional to the amount of ore extracted.

• Should Hard Rock recognize a liability for site restoration in conjunction with the
opening of the Lonesome Doe Mine? If so, what is the amount of that liability?
2.After Hard Rock has operated the Lonesome Doe Mine for five years, new
technology is introduced that reduces Hard Rock’s estimated future restoration
costs to $7 million, $3 million of which relates to restoring the topsoil. How
should Hard Rock account for this change in its estimated future liability?
Conceptual Framework in a
nutshell
•The CF consists of a set of agreed fundamental concepts /
principles, which is a basis of financial accounting and which
provides a theoretical ground for the development of
standards:
•“It is a coherent system of concepts that flow from an
objective. The objective of financial reporting is the foundation
of the framework. The other concepts provide guidance on
identifying the boundaries of financial reporting; selecting the
transactions, other events and circumstances to be
represented; how they should be recognized and measured;
8
and how they should be summarised and communicated in
the financial reports” IASB (2008)
 Purposes of the Conceptual
Framework
•The primary purpose of the CF is to provide the IASB with
concepts and principles to inform the standard setters when
they develop standards so that they use consistent concepts
in various standards
•The secondary purpose is to provide guidance to
management when deciding how to report on transactions
for which there is no relevant IFRS /IAS develop accounting
policies when there are no standards
•The CF also assists other parties to understand and interpret
existing IFRSs or interpretation specifically applies to a
particular transaction /event 9
Formal status of the Conceptual
Framework
• Not an IFRS / IAS in and of itself and nothing in
the framework overrides a specific accounting
standard.
• IASB notes that there may be cases where the
framework is in conflict with a specific standard
and, in these cases, the standard would override
the framework.
• Where there is no specific standard, the
framework should govern the accounting.
History of the Conceptual Framework
1989 Framework 2010 Framework

Objective
Objective

Qualitative 2018 Revised

characteristics
Qualitative Conceptual
characteristics Framework
Elements

Elements Measurement

Effective date: annual

Recognition periods beginning on or
Measurement
after 1 January 2020
In 2010 the IASB issued two chapters of
for preparers who
a revised Conceptual Framework: develop an accounting
Recognition Chapter 1: The objective of general policy based on the
purpose financial reporting Conceptual Framework
Chapter 2: Qualitative 11
Characteristic of useful financial
information
Why the Conceptual Framework
are revised?
The existing Conceptual Framework has proved useful but some
improvements are needed

Gaps Unclear Out of date

For example, it provides For example, it is unclear For example, the existing
very little guidance on what role measurement guidance on when assets
measurement or uncertainty should play in and liabilities should be
presentation and decisions about recognised is out of date.
disclosure. recognition and
measurement.

Revised Conceptual Framework: A comprehensive set of concepts for financial reporting

 The Revised Conceptual Framework 2018
• Framework developed via chapters
• Chapter 1: The objective of general purpose financial
reporting
• Chapter 2: The qualitative characteristics of useful financial
information
• Chapter 3: Financial statements & the reporting entity
• Chapter 4: The elements of financial statements
• Chapter 5: Recognition and derecognition
• Chapter 6: Measurement
• Chapter 7: Presentation and disclosure
• Chapter 8: Concepts of capital & capital maintenance
Chapter 1: Objective of Financial
Reporting
• Objective: Provide financial information about the
reporting entity that is useful to:
• present and potential equity investors,
• lenders, and
• other creditors
• in making decisions about providing /capital resources to
the entity.Those decisions involve buying, selling or holding
equity and debt instruments, and providing or settling
loans and other forms of credit
Chapter 2: Qualitative Characteristics of
Accounting Information
• IASB identified the Qualitative Characteristics of accounting
information that distinguish better (more useful) information
from inferior (less useful) information for decision-making
purposes.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Relevance

• To be relevant, accounting information must be capable of

making a difference in a decision.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Relevance

Financial information has predictive value if it has value as an

input to predictive processes used by investors to form their own
expectations about the future.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and

descriptions match what really existed or happened.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary

for faithful representation is provided.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Faithful Representation

• Neutrality means that a company cannot select information to

favor one set of interested parties over another.
• Prudence means exercise of caution when making
judgements under uncertainty conditions. Prudence support
neutrality of information.
Qualitative Characteristics of Accounting
Information
• Fundamental Quality—Faithful Representation

An information item that is free from error will be a more

accurate (faithful) representation of a financial item.
Qualitative Characteristics of Accounting
Information
• Enhancing Qualitative Characteristics

Information that is measured and reported in a similar manner for

different companies is considered comparable.
Qualitative Characteristics of Accounting
Information
• Enhancing Qualitative Characteristics

Verifiability occurs when independent measurers, using the

same methods, obtain similar results.
Qualitative Characteristics of Accounting
Information
• Enhancing Qualitative Characteristics

Timeliness means having information available to decision-

makers before it loses its capacity to influence decisions.
Qualitative Characteristics of Accounting
Information
• Enhancing Qualitative Characteristics

Understandability is the quality of information that lets

reasonably informed users see its significance.
Qualitative Characteristics of Accounting
Information
• Cost Constraint
• Cost is the constraint that limits the information provided by financial
reporting.
• Companies must weigh the costs of providing the information against
the benefits that can be derived from using it.
• In order to justify requiring a particular measurement or disclosure,
the benefits perceived to be derived from it must exceed the costs
perceived to be associated with it.
• Costs include – costs of collecting, costs of processing information,
costs of verifying information, costs of disseminating information, etc.
• The non-provision of information imposes costs on the users of
financial information as they seek alternative sources of information.
• Rule-making bodies and governmental agencies use cost-benefit
analysis before making final their informational requirements.
Chapter 3: Financial Statements &
Reporting Entity
• General purpose financial reports provide information about the financial
position of a reporting entity, which is information about an entity’s
economic resources and claims against the reporting entity.

• Financial reports also provide information about the effects of

transactions / events that change a reporting entity’s economic resources
/ claims.

• Financial statements are a particular form of financial reports which

provide information about the entity’s assets, liabilities, income and
expenses.
The reporting entity
• A reporting entity is an entity that chooses, or is required,
to prepare general purpose financial statements.
-Financial statements are issued based on going
concern assumption.

• A reporting entity is not necessarily a legal entity. It can

comprise a portion of an entity, or two or more entities.
-may produce “Consolidated FS” or “Group FS”
Chapter 4: The Elements of Financial
Statements
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.
Chapter 4: The Elements of Financial
Statements

A present obligation of the entity

to transfer an economic resource
as a result of past events. An
obligation is a duty of
responsibility that the entity has
no practical ability to avoid
Chapter 4: The Elements of Financial
Statements

The residual interest in the

assets of the entity after
deducting all its liabilities.
Chapter 4: The Elements of Financial
Statements

Increases in assets, or decreases

in liabilities, that result in
increases in equity, other than
those relating to contributions
from holders of equity claims.
Chapter 4: The Elements of Financial
Statements

Decreases in assets, or increases in

liabilities, that result in decreases
in equity, other than those relating
to distributions to holders of
equity claims.
Chapter 5: Recognition and Derecognition

• Recognition: The process of capturing for

inclusion in the statement of financial position or
the statement(s) of financial performance an
item that meets the definition of an asset, a
liability, equity, income or expenses.
Chapter 5: Recognition and Derecognition

Recognition is appropriate if it
results in both relevant
information about assets,
liabilities, equity, income and
expenses and a faithful
representation of those items,
because the aim is to provide
information that is useful to
investors, lenders and other
creditors
Derecognition of Elements of
Financial Statements
• Definition: The removal of all or part of a recognised
asset or liability from an entity’s statement of financial
position.
Chapter 6: Measurement

• Definition: The process of determining the

monetary amounts at which the elements of
financial statements are to be recognised and
carried in the statement of financial position and
statement of profit or loss and other
comprehensive income.
• Measurement should be made based on a specific
measurement basis, categorised as: i)historical
cost and ii) current value
 Measurement Principles
i. Historical Cost
-Reflect the cost of acquiring or creating an asset or taking on
a liability, with both measures being adjusted for transaction
costs.
-Over time, historical cost is further adjusted to reflect for
example the consumption of an asset or the fulfilment of part or
all of a liability. It is described as an entry value.
ii. Current value
-Provide monetary information about elements, using
information updated to reflect conditions at the measurement date.
-Measurement bases may include fair value, value in use,
fulfilment value and current cost.
 Measurement Bases for Current Value
 
Current Value
Measurement Fair value Value in use (for Current cost
bases asset) and fulfilment
value (for liability)
The cost … Reflects a price Reflects the price Reflects the current
that would be that would be amount that would be:
received or paid received/paid to -paid to acquire an
for selling an asset sell/transfer the equivalent asset;
or transferring a asset/liability.
liability from the -received to take on an
perspective of equivalent liability.
market
participants.

Changes in Updated for changes since previous measurement date.

value
Entry or exit Exit value* Exit value Entry value**
value?
*An exit value - reflects the price that a seller would receive in exchange for the sale
of an asset or would pay for the transfer of a liability.
**An entry value -reflects prices in the market in which the entity would acquire the
asset or would incur the liability.
Chapter 7: Presentation and Disclosure

Source: IFRS Conceptual Framework Project Summary, March 2018

RECOGNITION, MEASUREMENT, AND
DISCLOSURE CONCEPTS
• These concepts explain how companies should recognize,
measure, and report financial elements and events.

ASSUMPTIONS PRINCIPLES
1. Economic entity 1. Measurement
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual
RECOGNITION, MEASUREMENT, AND
DISCLOSURE CONCEPTS
Basic Assumptions
• Economic Entity – company keeps its activity separate from its
owners and other business unit.
• Going Concern - company to last long enough to fulfill
objectives and commitments.
• Monetary Unit - money is the common denominator.
• Periodicity - company can divide its economic activities into
time periods.
• Accrual Basis of Accounting – transactions are recorded in the
periods in which the events occur.
Going Concern Assumption
- Financial statements are prepared under the assumption that
the entity will continue to operate for the foreseeable future.
- The entity will continue to operate at least long enough to
carry out its existing commitments.
- The adoption of this assumption has important implication in
accounting – justification used to record using historical cost
basis for non-current assets and for the systematic allocation
cost for depreciation over the useful life of an asset.
- If management intends to liquidate the entity’s operation, the
going concern assumption is set aside and financial
statements are prepared on different basis.
RECOGNITION, MEASUREMENT, AND
DISCLOSURE CONCEPTS
Basic Principles
• Revenue Recognition
 Company has performance obligation to fulfil when it
agrees to perform a service or sell a product to its
customers. Company recognises the revenue when the
performance are satisfied.
• Expense Recognition
 Expenses are recognised in the correct period as the
revenue to which they relate.
• Full Disclosure
Providing information that is sufficient to influence the
judgement and decision of an informed users.
References
• Elliott, B. & Elliott, J. (2017), Financial Accounting and
Reporting (18th e), Harlow, England: Pearson.

• Keiso, D.E., Weygandt, J. J., and Warfield, T. D. (2017),

Intermediate Accounting, IFRS edition, 3rd ed., John Wiley
& Sons Inc., USA.

• Melville, A. (2017), International Financial Reporting: A

Practical Guide. 6thed, Harlow, England: Pearson.

• IFRS Conceptual Framework Project Summary.

End of chapter 1