sional Review and Training Center

Conceptual
Framework
(ToA.201)
Leomar R. Cabarles
Reviewer, PRTC

Conceptual
Framework for
Financial Reporting
(2010 Framework or
the IFRS Framework)
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Contents
Purpose and Status of the Framework
The IFRS Framework
Objective of general purpose financial reporting
Qualitative characteristics of useful financial
information
The reporting entity
Underlying assumption
Definition, recognition and measurement of the
elements from which financial statements are
constructed
Concepts of capital and capital maintenance

Purpose of the Framework

Describes the basic concepts that underlie the
preparation and presentation of FSs for external
users
Serves as a guide to the Board in developing future
IFRSs and as a guide to resolving accounting issues
that are not addressed
Considered in making judgment in developing and
applying an accounting policy that results in
information that is relevant and reliable

Purpose of the Framework

The purpose of the Framework is to:
a. assist the FRSC in the development and review
of PFRSs;
b. assist the FRSC in promoting harmonization of
PFRSs;
c. assist preparers in applying PFRSs and in
dealing with topics no dealt with existing PFRS;
d. assist auditors in forming an opinion;
e. assist users in interpreting the information
contained in FSs prepared in conformity with
PFRSs; and
f. provide those who are interested in the work of
FRSC with information about its approach to the
formulation of PFRSs.
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Status of the Framework

Not PFRS and hence does not define standards for
any particular measurement or disclosure issue.
In those cases where there is a conflict, the
requirements of the PFRS prevail over those of the
Framework.

Users and Information Needs

1. Investors Capital and investment
2. Lenders Loans and interest payments
3. Suppliers and other trade creditors Amounts
owing to them will be paid when due
4. Employees Stability and profitability of employers
5. Customers Continuance of an entity
6. Governments and their agencies allocation of
resources, activities of entities and taxation
7. The public Trends, recent developments and the
range of its activities
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Objective of General Purpose Financial

Reporting
The primary users of general purpose financial
reporting are present and potential investors,
lenders and other creditors.
Regulators are not considered primary user
Provides information about a reporting entity's:
economic resources and claims (SFP); and
changes in resources and claims
Financial performance (SCI and SCF)
Not financial performance (SCE)

The Reporting Entity

To be added

Qualitative Characteristics of Useful

Financial Information
Fundamental
characteristics

Enhancing
characteristics

Pervasive
constraint
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Relevance

Faithful
representation

Comparability

Timeliness

Verifiability

Understandability

Cost

Fundamental Qualitative
Characteristics
Relevance
Capable of making a difference in the decisions
made by users, i.e., predictive value,
confirmatory value, or both
Consider materiality
Faithful representation
Financial information must not only be relevant,
it must also represent faithfully the phenomena it
purports to represent.
seeks to maximize the underlying characteristics
of completeness, neutrality and freedom from
error
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Enhancing Qualitative Characteristics

Comparability
Information is useful if it can be compared with a
similar information about other entities and with
similar information about the same entity for
another period or another date.
Enables users to identify and understand
similarities in, and differences among, items.
Verifiability
Helps to assure users that information represents
faithfully the economic phenomena it purports to
represent
Different knowledgeable and independent
observers could reach consensus
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Enhancing Qualitative Characteristics

Timeliness
Means that information is available to decisionmakers in time to be capable of influencing their
decisions.
Understandability
Classifying, characterizing and presenting clearly
and concisely information.
No exclusion of complex transactions, otherwise
financial reports (FRs) will be incomplete and
potentially misleading.
Users assumed a reasonable knowledge of
business and economic activities and, review and
analyze the information with diligence.
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Underlying Assumption
Going concern only.
Thus, the financial statements presume that an
entity will continue in operation indefinitely or, if
that presumption is not valid, disclosure and a
different basis of reporting are required.

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The Elements of Financial Statements

Broad classes grouping of transactions and events
according to their economic characteristics
Measurement of financial position
Assets
Liabilities
Equity
Measurement of performance
Income
Expenses

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Recognition of the Elements of FSs

The process of incorporating in the SFP or IS an
item that meets the definition of an element and
satisfies the criteria for recognition.
failure to recognize items is not rectified by
disclosure
An item that meets the definition of an element
should be recognized if:
it is probable that any future economic benefit
associated with the item will flow to or from the
entity; and
the item has a cost or value that can be
measured with reliability.
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Measurement of the Elements of FSs

The process of determining the monetary amounts
at which the elements of the FSs are to be
recognized and carried in the SFP and SCI (involves
the selection of the basis of measurement.)
They include the following:
Historical cost
Current cost
Realizable (Settlement) value
Present value

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Concepts of Capital and Capital

Maintenance
Concepts of capital
1. Financial concept of capital
Invested money or invested purchasing power,
capital is synonymous with the net assets or
equity of the entity
Most adopted
2. Physical concept of capital
Productive capacity of the entity based on, for
example, units of output per day
Selection depends on needs of users
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Concepts of Capital and Capital

Maintenance
Concepts of Capital Maintenance and the
Determination of Profit
a. Financial capital maintenance. A profit is earned
only if the financial (or money) amount of the
net assets at the end of the period exceeds the
financial (or money) amount of net assets at the
beginning of the period, after excluding any
distributions to, and contributions from, owners
during the period, can be measured in either
nominal monetary units or units of constant
purchasing power.

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Concepts of Capital and Capital

Maintenance
b. Physical capital maintenance. A profit is earned
only if the physical productive capacity (or
operating capability) of the entity (or the
resources or funds needed to achieve that
capacity) at the end of the period exceeds the
physical productive capacity at the beginning of
the period, after excluding any distributions to,
and contributions from, owners during the
period.

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STQ Answers

1.
2.
3.
4.
5.

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D
C
C
A
C

STQ Answers

6.
7.
8.
9.
10.

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B
C
A
A
C

STQ Answers

11.
12.
13.
14.
15.

23

B
C
B
C
A

STQ Answers

16.
17.
18.
19.
20.

24

A
C
C
B
B

STQ Answers

21.
22.
23.
24.
25.

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B
A
C
B
D

STQ Answers

26.
27.
28.
29.
30.

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C
D
D
D
C

 end of ToA.201

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