Conceptual Framework and Accounting Standards

• Purpose of Conceptual Framework is to guide IASB when it develops IFRS.
• Conceptual Framework assists:

  1. Preparers: To develop consistent accounting policies when no Standards apply or allows a choice.
  2. Auditors: In forming on opinion whether fs comply with IFRS.
  3. Users: In interpreting the information.
  4. IASB: In promoting harmonization of regulations, accounting standards, and procedures by providing a basis for reducing the number of alternative accounting treatments.
  5. Others: Those who are interested in the work of IASB and information about its approach to the formulation of IFRS.
• Conceptual Framework is the foundation of IFRS, and it is not an IFRS Standard. It does not override any Standard
• Scope of Conceptual Framework deals with:

  1. Objective of General Purpose Financial Reporting.
  2. Qualitative characteristics of useful financial information.
  3. Definition, recognition, and measurement of elements.
  4. Concepts of capital and capital maintenance.
• Objective of GPFR is to provide financial information about the reporting entity that is useful to Primary Users in making decisions about providing resources to the entity.
• Primary Users: Rely on GPFR for much of the information they need. GPFR are directed to them.
• Primary Users Decisions:

  1. Investors: Buying, selling, or holding equity.
  2. Lenders and Creditors: Providing or settling loans and credits.
• Primary Users Assessment:

  1. Prospects for future inflows.
  2. Management's stewardship of the entity's economic resources.
• Primary Users Information Needed:

  1. Entity's economic resources, claims, and changes in those.
  2. How efficient and effective is the management of economic resources.
• Other Users: GPFR are not directed to them primarily.
• Other Users Information Needed:

  1. Employees: Sustainability and profitability, and ability to pay remunerations and employee benefits.
  2. Suppliers: Amounts owed to them will be repaid when due.
  3. Government Agencies: To regulate activities, determine tax policies.
  4. Public: Contributing towards local economy through job creation.
  5. Customers: Continuance of entity, they have long-term involvement or dependency.
• Limitations of GPFR:

  1. Does not provide all information users need.
  2. Not designed to show the value instead it shows estimated value.
  3. Intended to provide common information, it cannot provide every request.
  4. It is based on judgement and estimates rather than exact depiction.
• GPFR provides information about:

  1. Financial Position
  2. Financial Performance
  3. And change in the economic resources and claims
• Financial Position: Information about resources and claims. (Asset, Liability and Equity)
• Financial Position: Useful in identifying strength and weakness helpful in assessing liquidity, solvency and financing needs.
• Financial Performance: Helps understand the return produced from economic resources, an indication of how well its stewardship responsibilities are discharged.
• Financial Performance: Profit or Loss, it shows profitability.
• Financial Performance (Accrual): Provides a better basis for assessing the entity's past and future performance than solely about cash receipt and payment.
• Accrual Accounting: Focuses on the effects of events and transactions when they occur and not when received or paid.
• Financial Performance (Past Cash Flows): Cash flows during the period is useful in the assessment of ability to generate future cash inflows, understand operations, evaluate financing and investing activities, assess liquidity and solvency, and interpret other information about performance.
• Changes in Economic Resources and Claims Gives understanding of why the entity's resources and claims changed and implications of those changes for its future financial performance.
• Fundamental Qualitative Characteristic

  For financial information to be useful, it must be BOTH relevant and faithfully represented.
• Relevance: Capable in making a difference in the decisions if it has predictive value, confirmatory value, OR both.
• Information has predictive value if it can be used to predict future outcomes.
• Information has confirmatory value if it provides feedback about previous evaluations.
• Materiality: It could influence decisions that users make. It is based on the nature or magnitude, or both of the items to which the information relates.
• 3 Characteristics of Faithful Representation:

  1. Complete: Includes all necessary information needed.
  2. Neutral: Without bias.
  3. Free from error: No errors in the process, but it does not mean perfectly accurate.
• "True or False"

  True: Measurement uncertainty does not prevent information from being useful.
• Enhancing Qualitative Characteristics

  Enhances the usefulness of information that is relevant and faithfully represented.
• 4 Enhancing Characteristics

  1. Comparability: It can be compared with similar information about other entities and about the same entity for another period.
  2. Verifiability: Implies consensus. It is supported by evidence.
  3. Timeliness: Information must be available when decision is to be made.
  4. Understandability: Information is clear and concise.
• Materiality highlights 3 aspects:

  1. Could reasonably be expected to influence: limited to primary users.
  2. Obscuring information: presentation of information is not clear or readily understood.
  3. Primary Users
• Materiality is also known as the Doctrine of Convenience.
• Neutrality is supported by Prudence, it is the exercise of care and caution when dealing with uncertainty.
• "True or False"

  True: In case of doubt, record any loss and do not record any gain.
• "True or False"

  True: In conservatism, lower figure is selected or the ones with the least effect on equity.
• Contingent Loss: Recognized as provision it the loss is probable and the amount can be measured reliably.
• Contingent Gain: Not recognized but disclosed.
• Enhancing qualitative characteristics is an iterative process. Sometimes, one enhancing qualitative characteristic may have to be diminished to maximize another qualitative characteristic.
• Cost: A pervasive constraint on information that can be provided by financial reporting.
• Going Concern: Assumption that an entity will continue in operation for the foreseeable future. Hence, assumed it has neither the intention nor the need to liquidate the scale of operations.