CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARS (NOTE 2)

CONCEPTUAL FRAMEWORK - Set A. Completeness

outs concepts that underlie the preparing and B. Neutrality
presentation of financial statements for C. Free from error
external users. 3. Comparability
 Conceptual Framework is not a PFRS. 4. Verifiability
When there is a conflict between them, 5. Timeliness
PFRS will prevail. 6. Understandability
 In the absence of a standard, management
shall consider the conceptual framework ELEMENTS OF FINANCIAL
in making its judgement in developing and STATEMENTS :
applying an accounting policy that results in Financial Position :
information that is relevant and reliable. 1. Asset - Resource controlled by the
 Conceptual framework is concerned with entity as a result of past events from
general purpose financial statements. which future economic benefits to flow
the entity.
2. Liability - Present obligation of the
OBJECTIVE OF GENERAL-PURPOSE entity arising from past events. Is
FINANCIAL REPORTING : expected to result in an outflow from
 To provide financial information about the the entity of resources.
reporting entity that is useful to existing. 3. Equity - Assets less liabilities.
 To show the result of stewardship of Performance :
management. 1. Income - Encompasses both (A)
 Forms the foundation of the conceptual revenues and (B) gains
framework. 2. Expense - Encompasses both (B)
expenses and (losses)
USER AND THEIR NEEDS :
RECOGNITION - Process of
 Primary Users - General purpose financial
incorporating in the balance sheet or
reports are directed :
income statement an item that meets the
A. Existing and potential investors.
definition of an element and satisfies the
B. Lenders and other creditors.
recognition criteria.
 Only the common needs of primary users are
met by the financial statements.

 An item is recognized if all of the following

are satisfied :
A. The item meets the definition of an
element;
QUALITATIVE CHARACTERISTICS
B. It is probable that any future
I. Fundamental Qualitative Characteristics
economic benefit associated with the
1. Relevance
item will flow to or from the entity;
A. Predictive Value
and
B. Feed Back Value
C. The item has a cost or value that can
 Materiality – Entity-specific aspect of
be measured with reliability.
relevance.
2. Faithful representation
EXPENSE RECOGNITION PRINCIPLES :
 CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARS (NOTE 2)

1. Direct association or matching

2. Systematic and rational allocation
3. Immediate recognition

MEASUREMENT BASES :
A. Historical Cost
B. Current Cost
C. Realizable Value (Settlement Value)
D. Present Value

CONCEPTS OF CAPITAL AND CAPITAL

MAINTENANCE
 Financial Concept of Capital - Regarded
as the invested money or invested
purchasing power.
 Capital is synonymous with equity or net
assets.
 Physical Concept of Capital - Regarded as
the entity's productive capacity, e.g., units
of output per day.

LEARNING OBJECTIVES :
1. State the basic purpose, authoritative status,
and scope of the Conceptual Framework.
 Conceptual framework is a preparation and
presentation of financial statements for the
external users.
 In the absence of the standard, the
management shall consider the conceptual
framework in making its judgment.
 Conceptual framework is concerned with
general purpose financial statement.

2. State the objective of financial reporting.

 The objectives of financial reporting are the

following :
A. To provide information about the
reporting entity that is useful/worth
existing.
 CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARS (NOTE 2)

B. To show the stewardship of the

management.
 The objectives of general purpose financial
reporting forms the foundation of conceptual
framework.

3. Identify the primary users of financial

statements.
 The primary users of financial statements
are the following :
A. The existing investors and potential
investors.
B. Lenders and other creditors.

4. Explain briefly the qualitative characteristics

of useful information and how they are applied
in financial reporting.
 Qualitive characteristics are the tributes that
your financial statements should have, to
have an information that is reliable and
useful to the users.
 They are applied by making your financial
stametn :
A. Relevant
B. Had Faithful Representation
C. Comparable
D. Verifiable
E. Timeliness
F. Understandable
5. Define the elements of financial statements
and state their recognition criteria.
ELEMENTS OF FINANCIAL STATEMENTS :
 Asset
 Liability
 Equity
 Income
 Expense