CONCEPTUAL FRAMEWORK

LEARNING OUTCOMES
• LO1: Describe the structure and purpose of Conceptual
Framework for Financial Reporting 2018
• LO2: Understand the objective of general-purpose financial
reporting
• LO3: Describe qualitative characteristics of useful financial
information
• LO4: Discuss the role of general-purpose financial statements
and the concept of reporting entity

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LEARNING OUTCOMES
• LO5: Describe the elements of financial statements
• LO6: Understand processes of recognition and derecognition
• LO7: Describe different measurement bases
• LO8: Discuss the presentation and disclosure objectives and
principles
• LO9: Describe concepts of capital and capital maintenance

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THE STRUCTURE AND PURPOSE
OF CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
2018
THE STRUCTURE OF CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING 2018

Conceptual Framework for Financial Reporting 2018 (the 2018 framework) consists of eight chapters
as follows:
1. The Objective of General-Purpose Financial Reporting
2. Qualitative Characteristics of Useful Financial Information
3. Financial Statements and the Reporting Entity
4. The Elements of Financial Statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of Capital and Capital Maintenance
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THE PURPOSE OF CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING 2018

The purpose of the 2018 framework is to:

a) assist the IASB to develop standards which are based on consistent concepts;
b) assist preparers to develop consistent accounting policies when no standard applies to a
particular transaction or other event; and
c) assist all parties to understand and interpret the standards.

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THE OBJECTIVE OF
GENERAL-PURPOSE
FINANCIAL REPORTING
THE OBJECTIVE OF GENERAL-PURPOSE
FINANCIAL REPORTING

To provide financial information about the reporting entity that is

useful to existing and potential investors, lenders and other
creditors in making decisions relating to providing resources to
the entity.

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QUALITATIVE
CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION

The fundamental qualitative characteristics are:

• Relevant: financial information can make a difference in decision
making. Information can make a difference if it has predictive value,
confirmatory value or both.
• Faithful representation: is achieved when information is complete,
neutral and free from error.

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QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION

The enhancing qualitative characteristics are:

• Comparability: enables users to identify similarities in, and differences
between items.
• Verifiability: helps to assure users that information represents faithfully the
economic phenomena which it purports to represent.
• Timeliness: means that the information is provided to users in time to be
capable of influencing their decisions.
• Understandability: is classifying, characterising and presenting information
clearly and concisely.

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FINANCIAL STATEMENTS AND
THE REPORTING ENTITY
FINANCIAL STATEMENTS

General-purpose financial statements consist of a statement of

financial position (recognising assets, liabilities and equity), a
statement of financial performance which may be a single statement
or two statements (recognising income and expenses), and other
statements and notes which present information about recognised
elements (assets, liabilities, equity, income and expenses),
unrecognised elements, cash flows, contributions from and
distributions to equity holders, and methods, assumptions and
judgements used in estimating the amounts presented or disclosed.
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REPORTING ENTITY

A reporting entity is an entity which is required, or chooses, to

prepare general-purpose financial statements. It notes that a
reporting entity is not necessarily a legal entity, and could
comprise a portion of an entity, or two or more entities.

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THE ELEMENTS OF FINANCIAL
STATEMENTS
THE ELEMENTS OF FINANCIAL STATEMENTS

• An asset is defined as a present economic resource controlled by the entity as a result of

past events. An economic resource is defined as a right that has the potential to produce
economic benefits.
• A liability is defined as a present obligation of the entity to transfer an economic
resource as a result of past events.
• Equity is defined as the residual interest in the assets of the entity after deducting all its
liabilities.
• Income is defined as increases in assets, or decreases in liabilities, that result in increases
in equity, other than those relating to contributions from holders of equity claims.
• Expenses are defined as decreases in assets, or increases in liabilities, that result in
decreases in equity, other than those relating to distributions to holders of equity claims.

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RECOGNITION AND
DERECOGNITION
RECOGNITION

• Recognition is the process of capturing for inclusion in the

statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the
elements of financial statements—an asset, a liability, equity, income
or expenses.
• An item so recognised is represented in one of the statements by
words and a monetary amount. The amount at which an item is
included in the statement of financial position is referred to as its
“carrying amount.”

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DERECOGNITION

• Derecognition is the removal of all or part of an asset or liability

from an entity’s statement of financial position. For an asset,
derecognition normally occurs when the entity loses control of
all or part of a recognised asset. For a liability, derecognition
normally occurs when the entity no longer has a present
obligation for all or part of the recognised liability.

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MEASUREMENT
MEASUREMENT BASES

• Measurement bases are categorised as either historic cost or

current values.
• Four measurement bases are described in the 2018 framework,
being historical cost, fair value, value in use (for assets) or
fulfilment value (for liabilities), and current cost.

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MEASUREMENT BASES - HISTORICAL COST

• Historical cost provides financial information about assets,

liabilities and their related income and expenses derived
essentially from the price of the transaction or other event
which gave rise to them.
• Changes in value of the asset or liability over time are not
reflected, except to the extent that an asset has become
impaired or a liability has become onerous.

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MEASUREMENT BASES - FAIR VALUE

• Fair value is defined as the price that would be received to sell

an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date.
• It can be determined directly by observing prices in an active
market or indirectly using measurement techniques such as
cash flow forecasting.
• The fair value of an asset or liability is not affected by
transaction costs.

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MEASUREMENT BASES - VALUE IN USE (OF ASSETS) AND
FULFILMENT VALUE (OF LIABILITIES)

• Value in use is defined as the present value of the cash flows, or other economic benefits, that an
entity expects to derive from the use of an asset and from its ultimate disposal.
• Fulfilment value is the present value of the cash, or other economic resources, that an entity
expects to be obliged to transfer as it fulfils a liability, including any amounts that the entity expects
to be obliged to transfer to other parties besides the liability counterparty to enable it to fulfil the
liability.
• Because value in use and fulfilment value are based on future cash flows, they do not include
transaction costs incurred on acquiring an asset or taking on a liability. However, they do include
the present value of any transaction costs the entity expects to incur in ultimately disposing of the
asset or fulfilling the liability.
• They are based on entity-specific assumptions, rather than assumptions made by market
participants.
• They cannot be observed directly and hence are always derived indirectly via cash flow-based
measurement techniques.

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MEASUREMENT BASES - CURRENT COST

• The current cost of an asset is the cost of an equivalent asset at the measurement date including
the consideration that would be paid at the measurement date plus the transaction costs that
would be incurred at that date. The current cost of a liability is the consideration that would be
received for an equivalent liability at the measurement date minus the transaction costs that would
be incurred at that date.
• Current cost can be observed directly (for example, if there is an active market in assets of similar
age and condition to the asset in question) but where this is not possible (for example, markets
deal only in new assets) it would be necessary to derive current cost indirectly by adjusting the
price of a new asset to reflect the age and condition of the asset in question.
• Current cost has the advantage over historical cost in that current cost reflects prices in force at the
time of consumption or fulfilment. Where price changes are significant, margins based on current
cost may be more useful in predicting future margins than those based on historical cost.

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MEASUREMENT BASES - SELECTION OF A MEASUREMENT
BASIS

• For the information provided by a particular measurement basis to be useful to the users of the
financial statements, it must be relevant, and it must faithfully represent what it purports to
represent.
• Factors to consider when selecting a measurement basis:
• Cost
• Characteristics of the asset or liability being measured. For example, where the value of an asset or liability is
susceptible to market factors or other risks, its historical cost might differ significantly from its current value.
Historical cost may therefore not provide relevant information to users of the financial statements if they attach
importance to changes in value.
• Contribution to future cash flows
• Measurement inconsistency
• Measurement uncertainty
• Enhancing qualitative characteristics

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PRESENTATION AND
DISCLOSURE
PRESENTATION AND DISCLOSURE AS COMMUNICATION
TOOLS

• An entity communicates information about its assets, liabilities, equity,

income and expenses by presenting and disclosing information in its
financial statements.
• Effective communication in this way makes the information more relevant
and contributes to a faithful representation of the entity’s assets, liabilities,
equity, income and expenses.
• Effective communication is achieved by focusing on presentation and
disclosure objectives and principles rather than rules, classifying
information in a way which groups similar items and separates dissimilar
items, and aggregating information in such a way that it is not obscured
either by unnecessary detail or excessive aggregation.

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PRESENTATION AND DISCLOSURE OBJECTIVES AND
PRINCIPLES

When the IASB develops presentation and disclosure

requirements in standards, it is necessary to achieve a balance
between giving entities the flexibility to provide relevant
information that faithfully represents the entity’s assets, liabilities,
equity, income and expenses, and requiring information which is
comparable, both from period to period for reporting entities
and in a single period across entities.

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CONCEPTS OF CAPITAL AND
CAPITAL MAINTENANCE
CONCEPTS OF CAPITAL

• There are two concepts of capital.

• The most common concept is the financial concept, under which
capital is synonymous with the net assets or equity of the entity.
• Under the alternative concept—the physical concept of capital—capital
is regarded as the productive capacity of the entity.

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CONCEPTS OF CAPITAL MAINTENANCE AND THE
DETERMINATION OF PROFIT

• The two concepts of capital maintenance described above give rise to

two corresponding concepts of capital maintenance.
• Under financial capital maintenance, a profit is only earned if the monetary amount
of the entity’s net assets at the end of the reporting period exceeds the monetary
amount of its net assets at the beginning of that period, after excluding any
distributions to and contributions from owners (in other words, holders of equity
claims) during the period.
• Under physical capital maintenance, a profit is only earned if the physical productive
capacity of the entity (or the resources or funds needed to achieve that capacity) at
the end of the reporting period exceeds the physical productive capacity at the
beginning of the period, after excluding any distributions to and contributions from
owners.

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THANK YOU