conceptual framework

• The Conceptual Framework provides the foundation for the development of Standards that strengthen accountability by reducing the information gap between providers of capital and the entity's management
• Management shall consider the applicability of the Conceptual Framework when developing and applying accounting policies that result in useful information
• 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
• Purpose of the Conceptual Framework

  • Prescribes the concepts for general purpose financial reporting
  • Assists the International Accounting Standards Board (IASB) in developing Standards based on consistent concepts
  • Assists preparers in developing consistent accounting policies when no Standard applies or when a Standard allows a choice of accounting policy
  • Assists all parties in understanding and interpreting the Standards
• The Conceptual Framework provides the foundation for the development of Standards that promote transparency by enhancing international comparability and quality of financial information
• Learning Objectives

  • State the purpose, status, and scope of the Conceptual Framework
  • State the objective of financial reporting
  • Identify the primary users of financial statements
  • Explain briefly the qualitative characteristics of useful information and how they are applied in financial reporting
  • Define the elements of financial statements and state their recognition criteria and their derecognition
  • State the measurement bases used in financial reporting
• The Conceptual Framework is not a Standard; it provides guidance when no Standard specifically applies
• To meet the objectives of general purpose financial reporting, a Standard sometimes contains requirements that depart from the Conceptual Framework
• Primary users of financial reporting

  • Existing and potential investors
  • Lenders and other creditors
• Reporting entities rely on general purpose financial reports for much of their financial information needs
• In classical economic theory, 'rational' means that economic agents consider the outcome of their choices and recognize the net benefits, selecting the choice with the highest benefits
• Marginal utility

  The additional satisfaction gained from consuming an additional product
• It is a flawed assumption that people usually don't act rationally
• Decisions about providing resources to the entity depend on the expected return and assumptions about resources in the future
• Information on economic resources and claims helps users identify the entity's financial strengths and weaknesses, aiding in assessing liquidity, solvency, and the ability to obtain financing
• Making estimates is required for financial reporting
• Information based on accrual accounting provides a better basis for assessing an entity's financial performance compared to cash receipts alone
• Information on financial performance helps assess the entity's ability to produce returns from its economic resources
• Consumers, producers, workers, and governments are assumed to act rationally in economic theory
• If a firm increases advertising

  Their demand curve shifts right, increasing the equilibrium price and quantity
• The Conceptual Framework establishes concepts underpinning the states and judgments in financial reporting
• Information on the variability of returns helps understand the uncertainty of future cash flows
• General purpose financial reports do not directly show the value of a company, but provide information that helps in timing the sale of an entity
• The Wealth of Nations was written in 1776
• General purpose financial reports provide information on economic resources, claims against the reporting entity, changes in financial performance, and events leading to changes in financial positions
• Information on changes in economic resources and claims results from financial performance, events, and transactions
• Information about the use of the entity's economic resources helps users assess how efficiently and effectively the entity's management has discharged its responsibilities to use the entity's economic resources. This information also helps in predicting how efficiently and effectively the entity's resources will be used in future periods, thus helping in the assessment of the entity's prospects for future net cash inflows
• Situations in impacted profits may indicate financial instability and uncertainty on the entity's ability to generate cash flows from its operations
• The decisions of primary users are based on assessments of the entity's prospects for future net cash and management strategies. To make these assessments, users need information on the entity's financial position, financial performance, other changes in financial position, and utilization of economic resources
• The financial statements will presumably be expected to influence decisions that need information material enough to avoid distorting or obscuring the information provided in financial statements
• Information on past cash flows helps users assess the entity's ability to estimate future cash flows by providing 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
• IFRS Fraction Statement 2 Making Materiality Judgments provides non-mandatory guidance that entities may follow in making materiality judgments. The guidance consists of a four-step process called the "materiality process"
• Step 2 - Assess whether the information identified in Step 1 is, in fact, material
• Relevance is relevant if it can make a difference in the decision of a user. Relevant information has the following: Predictive value - the information can help users in making predictions about future outcomes, Confirmatory value (feedback value) - the information can help users in confirming their previous predictions
• Information based on 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
• Enhancing qualitative characteristics are characteristics that enhance the usefulness of information. They consist of the following: Comparability, Verifiability, Understandability, Timeliness
• Economic measures and claims may change for an entity's financial performance, such as issuing debt or equity instruments. Information on these types of changes is necessary for a complete understanding of the entity's changes in economic scores and claims and the possible impact of those changes on the entity's future financial performance
• Management's responsibilities to use the entity's economic resources include

  • Safeguarding those resources and ensuring the entity's compliance with laws, regulations, and contractual provisions
• Step 1 - Identify information that has the potential to be material. The starting point in making the identification is the requirements of the Standards. However, cost is not a factor when making materiality judgments. The entity also considers the common information needs of its primary users, in addition to those specified in the IFRSs
• The parties of useful financial information are the types of information that are actually used in the primary making decisions using an entity's financial reports. Qualitative characteristics apply to information