Chapter 2- Conceptual Frameworks

• The Conceptual Framework prescribes the concepts for general purpose financial reporting.
• The Conceptual Framework is concerned with general purpose financial reporting.
• The purpose of the Conceptual Framework is to assist the International Accounting Standards Board (IASB) in developing Standards that are based on consistent concepts, assist prepares in developing consistent accounting policies when no Standard applies to a particular transaction or when a Standard allows a choice of accounting policy, assists all parties in understanding and interpreting the Standards, and is not a standard.
• The Conceptual Framework does not conflict with Standards and if there is a conflict between a Standard and the Conceptual Framework, the requirement of the Standard will prevail.
• The Conceptual Framework provides concepts that underlie general purpose financial reporting with regard to the objective of financial reporting, qualitative characteristics of useful financial information, financial statements and the reporting entity, the elements of financial statements, recognition and derecognition, measurement, presentation and disclosure, concepts of capital and capital maintenance.
• The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
• The primary users of financial statements are existing and potential investors, lenders and other creditors.
• Lenders extend loans.
• Creditors extend other forms of credit.
• General purpose financial reporting deals with providing information that caters to the common needs of the primary users and does not provide all the information needs of primary users.
• Decisions about providing resources to the entity involve decisions on buying, selling, or holding investments, providing or settling loans and other forms of credit, and exercising voting or similar rights that could influence management’s actions relating to the use of the entity’s economic resources.
• Financial Position provides information on economic resources and claims against the reporting entity.
• Changes in economic resources and claims provide information on financial performance and other information that lead to changes in financial position.
• Economic resources and claims help users assess the liquidity and solvency of the entity, its needs for additional financing and the likelihood of its success in obtaining that financing, and management’s stewardship on the use of economic resources.
• Liquidity is the ability to pay short-term obligations.
• Solvency is the ability to meet long-term obligations.
• Changes in economic resources and claims result from financial performance and other events and transactions.
• Financial Performance helps users assess the entity’s ability to produce return from its economic resources.
• Variance in the return is the uncertainty of future cash flows.
• Accrual accounting provides a better basis for assessing an entity’s financial performance than information based solely on cash receipts and payments during the period.
• Changes in past cash flows help users assess the entity’s ability to generate future cash flows by providing users a basis in understanding the entity’s operating, investing, and financing activities, assessing its liquidity or solvency and interpreting other information about its financial performance.
• Information about use of the entity’s economic resources helps users assess the entity’s management’s stewardship.
• Qualitative characteristics identify the type of information that is likely to be most useful to the primary users in making decisions using an entity’s financial report.
• The elements of financial statements are: Financial Position, Financial Performance, Assets, Liabilities, Equity, Income, Expenses.
• Right in financial reporting is an economic resource, an an economic resource is a right that has the potential to produce economic benefits, that includes rights that correspond to an obligation of another party, right to receive cash, goods or services, right to exchange economic resources with another party on favorable terms, right to benefit from an obligation of another party to transfer an economic resource if a specified uncertain future event occurs, rights that do not correspond to an obligation of another party, right to over physical objects, right to use intellectual property.
• Materiality in financial reporting depends on the facts and circumstances surrounding a specific entity.
• Comparability in financial reporting is achieved if information is comparable if it helps users identify similarities and differences between different sets of information that are provided by single entity, but different periods (intra-comparatability), or different entities in a single period (inter-comparability).
• Relevance in financial reporting can make a difference in the decisions of users.
• Timeliness in financial reporting is achieved if information is available to users in time.
• Financial statements and the reporting entity provide information about the entity’s prospects for future net cash inflows; and management’s stewardship over economic resources.
• Consolidated financial statements in financial reporting include the reporting entity and its subsidiaries.
• Materiality process (IDASOR) in financial reporting involves identifying information that has the potential to be material, assessing whether the information is in fact, material, organizing information within the draft financial statements in a way that communicates the information clearly and concisely to primary users, and reviewing the draft FS to determine whether all material information has been identified.
• Asset in financial reporting is an economic resource controlled by the entity as a result of past events.
• Combined financial statements in financial reporting include two or more entities that are not linked by a parent-subsidiary relationship.
• Faithfully represented information has the following characteristics: completeness, neutrality, prudence, accuracy, and timeliness.
• Sometimes an entity controls another entity (parent) and controlled entity (subsidiary) in financial reporting.
• Understandability in financial reporting is achieved if information is presented in a clear and concise manner.
• Consistency in financial reporting is achieved if the use of the same methods for the same items.
• Going concern assumption in financial reporting is prepared on the assumption that the reporting entity is a going concern.
• Verifiability in financial reporting is achieved if different users could reach a general agreement as to what the information purports to represent.