FRAMEWORK FOR THE

PRESENTATION OF FINANCIAL
STATEMENTS
 MODULE OBJECTIVES
 Understand the purposes of the Framework
 Understand the main objective of the financial statements.
 Understand the authoritative status of the Framework in the
development of accounting policies.
 Discuss the qualitative characteristics of accounting
information presented in the financial statements.
 Define each of the elements of the financial statements,
understand the criteria for their recognition and identify the
bases for their measurement.
 Understand the concepts of capital and the concepts of
capital maintenance
 The Conceptual Framework sets out the
preparation and presentation
concepts that underlie the
of financial statements for external users.
Note:
The Framework is not an accounting standard. It sets out the
conceptual principles for the preparation and presentation of
financial statements. None of the principles in the framework
overrides any accounting standards
 The Conceptual Framework is NOT
a PFRS, nor does it override any PFRS. In case of conflict,
the PFRS prevails over the Framework.
 PURPOSES OF THE FRAMEWORK

a. Assist the International Accounting Standards Board

(IASB) in developing IFRS Standards based on consistent
concepts.
b. Assist preparers of FS to develop consistent accounting
policy when no standard applies to a particular
transaction or other event or where an issue is not yet
addressed by an IFRS.
c. Assist preparers of FS to develop accounting policy
when a standard allows a choice of an accounting
policy.
d. Assist all parties to understand and interpret the IFRS
standards.
 SCOPE OF THE REVISED CONCEPTUAL
FRAMEWORK

a. Objective of Financial Statements

b. Qualitative characteristics of accounting information
c. Financial statements and reporting entity
d. Elements of the financial statements
e. Recognition and derecognition
f. Measurement
g. Presentation and disclosure
h. Concepts of capital and concepts of capital
maintenance
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 about providing
resources to the entity.
USERS OF FINANCIAL STATEMENTS
Providers of
Financial External
Information User Groups
Investors
Creditors
Profit-oriented Relevant Employees
companies
Labor unions
Not-for-profit Customers
entities Financial Suppliers
Information Government
Households agencies
Financial
intermediaries
 USERS OF FINANCIAL STATEMENTS

 Investors (existing and potential),

 Lenders,
 suppliers and other trade creditors,
 employees,
 customers
 Governments and their agencies
 public
PRIMARY USER GROUP – INVESTORS, LENDERS
OTHER CREDITORS

 User decisions involve:

 The buying, selling or holding of equity or debt instruments;
 Providing or settling loans or other forms of credit;
 Voting, or otherwise influencing managements actions.
 USERS OF FINANCIAL STATEMENTS

 Investors (existing and potential),

 Lenders,
 suppliers and other trade creditors,
 employees,
 customers
 Governments and their agencies
 public
 USERS OF FINANCIAL STATEMENTS

 Investors (existing and potential),

 Lenders,
 suppliers and other trade creditors,
 employees,
 customers
 Governments and their agencies
 public
 USERS OF FINANCIAL STATEMENTS

 The primary users of general purpose financial

reporting are present and potential investors,
lenders and other creditors, who use that
information to make decisions about buying, selling
or holding equity or debt instruments, providing or
settling loans or other forms of credit, or exercising
rights to vote on, or otherwise influence,
management’s actions that affect the use of the
entity’s economic resources.
 USERS OF FINANCIAL STATEMENTS

The IFRS Framework notes that other parties, including

prudential and market regulators, may find general
purpose financial reports useful. However, these are not
considered a primary user and general purpose financial
reports are not primarily directed to regulators or other
parties.
Management has the primary
responsibility for the preparation and
presentation of FS.
Ethics in Accounting
 For financial information to be useful, it should
possess the fundamental decision-specific
qualities of relevance and faithful
representation.
 Management may be under pressure to report
desired results and ignore or bend existing
rules.
Role of the Auditor

Auditors serve as independent

intermediaries to help insure that
management has appropriately applied
PFRS in preparing the company’s
financial statements.
 OBJECTIVE OF FINANCIAL STATEMENTS

TO PROVIDE INFORMATION ABOUT AN ENTITY’S

a. Financial position
b. Performance
c. Changes in financial position
d. Other necessary information
 OBJECTIVE OF FINANCIAL STATEMENTS

TO PROVIDE INFORMATION ABOUT AN ENTITY’S

a. Financial position
 Economic resources and claims
 Information about the nature and amounts of a reporting entity's economic
resources and claims assists users to assess that entity's financial strengths
and weaknesses; to assess liquidity and solvency, and its need and ability
to obtain financing. Information about the claims and payment
requirements assists users to predict how future cash flows will be
distributed among those with a claim on the reporting entity.
 OBJECTIVE OF FINANCIAL STATEMENTS

Changes in economic resources and claims

 Changes in a reporting entity's economic resources and claims
result from that entity's performance and from other events
or transactions such as issuing debt or equity instruments.
Users need to be able to distinguish between both of these
changes.
 OBJECTIVE OF FINANCIAL STATEMENTS

 Financial performance reflected by accrual accounting

 Information about a reporting entity's financial performance
during a period, representing changes in economic resources
and claims other than those obtained directly from investors
and creditors, is useful in assessing the entity's past and future
ability to generate net cash inflows. Such information may also
indicate the extent to which general economic events have
changed the entity's ability to generate future cash inflows.
 The changes in an entity's economic resources and claims are
presented in the statement of comprehensive income.
 OBJECTIVE OF FINANCIAL STATEMENTS

Financial performance reflected by past cash flows

 Information about a reporting entity's cash flows during the
reporting period also assists users to assess the entity's ability
to generate future net cash inflows and to assess
management’s stewardship of the entity’s economic resources.
This information indicates how the entity obtains and spends
cash, including information about its borrowing and repayment
of debt, cash dividends to shareholders, etc. [1.20]
 The changes in the entity's cash flows are presented in the
statement of cash flows.
 OBJECTIVE OF FINANCIAL STATEMENTS

Changes in economic resources and claims not resulting from

financial performance
 Information about changes in an entity's economic resources
and claims resulting from events and transactions other than
financial performance, such as the issue of equity instruments
or distributions of cash or other assets to shareholders is
necessary to complete the picture of the total change in the
entity's economic resources and claims.
 The changes in an entity's economic resources and claims not
resulting from financial performance is presented in the
statement of changes in equity.
 OBJECTIVE OF FINANCIAL STATEMENTS

Information about use of the entity’s economic resources

 Information about the use of the entity's economic resources
also indicates how efficiently and effectively the reporting
entity’s management has used these resources in its
stewardship of those resources. Such information is also useful
for predicting how efficiently and effectively management will
use the entity’s economic resources in future periods and,
hence, what the prospects for future net cash inflows are.
 UNDERLYING ASSUMPTIONS

 ACCRUAL BASIS

 GOING CONCERN
 UNDERLYING ASSUMPTIONS
 ACCRUAL BASIS
Income and expenses and the related assets and liabilities are recognized in the time period
to which they relate, not necessarily when cash is received or paid. The financial statements
prepared on the accrual basis are considered to be more relevant and more reliable because
the accrual basis financial statements help the users predict the timing of cash inflow and
cash outflow, and they reflect more appropriately the financial performance of the
enterprise. The accrual basis serves as the primary concept for all yearend adjusting entries.

 GOING CONCERN
The preparers (management) of the enterprise, have the responsibility to evaluate the ability
of the enterprise to continue as a going concern, for a period of at least, but not limited to,
twelve months. If there are circumstances or uncertainties that cast doubt on the ability of
the enterprise to continue as a going concern, that fact shall be disclosed in the notes to the
financial statements. Whenever the financial statements are not prepared on the going
concern basis, the basis for the measurement of the financial statement elements must be
disclosed.
Cash versus Accrual Accounting
Cash Basis Accounting
Revenue is recognized when cash is received.
Expenses are recognized when cash is paid.

OR
OR
OR
OR

Accrual Accounting
Revenue is recognized when earned.
Expenses are recognized when incurred.
The Conceptual Framework
Objective
To provide financial information
that is useful to capital providers.

Fundamental and
Enhancing Recognition and
Qualitative Elements Measurement
Characteristics Concepts

Financial
Constraints Statements
Qualitative Characteristics of
Accounting Information
Decision usefulness

Relevance Faithful representation

Predictive Confirmatory Free from

Completeness Neutrality
value value material error

Comparability
Verifiability Timeliness Understandability
(Consistency)
Practical Boundaries (Constraints) to Achieving
Desired Qualitative Characteristics

Cost Materiality
Effectiveness
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION

 Relevance
 Faithful representation
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION

Relevance
 Relevant financial information is capable of making a difference in the
decisions made by users. Financial information is capable of making a
difference in decisions if it has predictive value, confirmatory value, or both.
The predictive value and confirmatory value of financial information are
interrelated. [2.6-2.10]
 Materiality is an entity-specific aspect of relevance based on the nature or
magnitude (or both) of the items to which the information relates in the
context of an individual entity's financial report. [2.11]
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION

Faithful representation
 A faithful representation seeks to maximise the underlying characteristics of
completeness, neutrality and freedom from error. [2.13]
 A neutral depiction is supported by the exercise of prudence. Prudence is the
exercise of caution when making judgements under conditions of
uncertainty. [2.16]
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL INFORMATION

Applying the fundamental qualitative characteristics

 Information must be both relevant and faithfully represented if it
is to be useful. [2.20]
QUALITATIVE CHARACTERISTICS
OF FINANCIAL INFORMATION

Relevant financial information is

provided primarily through financial
statements and related disclosure notes.
 Statement of Financial Position
 Profit and Loss Statement
 Statement of Cash Flows
 Statement of Shareholders’ Equity
Investment-Credit Decisions ─ A Cash
Flow Perspective
Shareholders Creditors
Receive Receive
Cash Cash

1. Dividends 1. Interest
2. Sale of Stock 2. Loan Repayment

Accounting information should help investors

and creditors evaluate the amount, timing,
and uncertainty of the enterprise’s future
cash flows.
ENHANCING QUALITATIVE
CHARACTERISTICS
 COMPARABILITY,
 VERIFIABILITY,
 TIMELINESS,
 UNDERSTANDABILITY
are qualitative characteristics that enhance the usefulness
of information that is relevant and faithfully represented.
ENHANCING QUALITATIVE
CHARACTERISTICS
Comparability
 Information about a reporting entity is more 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. Comparability enables users to identify and understand
similarities in, and differences among, items. [2.24-2.25]
ENHANCING QUALITATIVE
CHARACTERISTICS
Verifiability
 Verifiability helps to assure users that information
represents faithfully the economic phenomena it purports
to represent. Verifiability means that different
knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement,
that a particular depiction is a faithful representation.
[2.30]
ENHANCING QUALITATIVE
CHARACTERISTICS
Timeliness
 Timeliness means that information is available to
decision-makers in time to be capable of influencing their
decisions. [2.33]
ENHANCING QUALITATIVE
CHARACTERISTICS
Understandability
 Classifying, characterizing and presenting information
clearly and concisely makes it understandable.
 Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities
and who review and analyze the information with diligence.
[2.34-2.36]
ENHANCING QUALITATIVE
CHARACTERISTICS
Applying the enhancing qualitative characteristics
 Enhancing qualitative characteristics should be maximized
to the extent necessary. However, enhancing qualitative
characteristics (either individually or collectively) cannot
render information useful if that information is irrelevant
or not represented faithfully. [2.37]
ENHANCING QUALITATIVE
CHARACTERISTICS
The cost constraint on useful financial reporting
 Cost is a pervasive constraint on the information that can
be provided by general purpose financial reporting.
Reporting such information imposes costs and those costs
should be justified by the benefits of reporting that
information. [2.39, 2.43]
FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
Objective and scope of financial statements
 The objective of financial statements is to provide information
about an entity's assets, liabilities, equity, income and expenses
that is useful to financial statements users in assessing the
prospects for future net cash inflows to the entity and in assessing
management's stewardship of the entity's resources. [3.2]
 This information is provided in the statement of financial position
and the statement(s) of financial performance as well as in other
statements and notes. [3.3]
FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
Reporting period-
 ANNUAL
 INTERIM
 Financial statements are prepared for a specified period of time and
provide comparative information and under certain circumstances
forward-looking information. [3.4-3.6]
FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
Perspective adopted in financial statements and going concern
assumption
 Financial statements provide information about transactions and other
events viewed from the perspective of the reporting entity as a whole
and are normally prepared on the assumption that the reporting entity
is a going concern and will continue in operation for the foreseeable
future. [3.8-3.9]
FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
The reporting entity
A reporting entity is an entity that is required, or chooses, to prepare financial
statements. It can be a single entity or a portion of an entity or can comprise
more than one entity. A reporting entity is not necessarily a legal entity. [3.10]
(corporation, partnership, sole proprietorship, parent alone/subsidiaries, a
reportable segment of an entity)

Consolidated and unconsolidated financial statements

 ELEMENTS
OF FINANCIAL STATEMENTS
 ELEMENTS OF FINANCIAL POSITION
 Assets
 Liabilities
 Equity

 ELEMENTS OF PERFORMANCE
 Income
 Expenses
The Statement of Financial position

Reports a company’s financial position on a particular date.

Limitations: Usefulness:
• The balance sheet does not • The balance sheet describes
portray the market value of many of the resources a
the entity as a going company has for generating
future cash flows.
concern nor its liquidation
value. • It provides liquidity
information useful in
• Resources such as employee assessing a company’s
skills and reputation are not ability to pay its current
recorded in the balance obligations.
sheet. • It provides long-term
solvency information
relating to the riskiness of a
company with regard to the
amount of liabilities in its
capital structure.
Classifications

Claims against
resources (Liabilities)

Remaining claims
Resources accruing to owners
(Assets) (Shareholders’ Equity)
 ASSET

▪ Economic resource controlled by the enterprise

▪ Arise from past actions
▪ Probable future inflow of economic benefits
 LIABILITY

▪ Present obligation
▪ Arises from a past event
▪ Outflow of resources embodying economic benefits
 EQUITY

▪ Residual interest in the assets of the enterprise

▪ Equals the total assets – total liabilities
 INCOME

 Increase in economic benefits

 Increase in equity
 Excludes those that relate to contributions from the
equity participants
 Encompass both revenue and gains
 EXPENSES

 Decreases in economic benefits

 Decrease in assets or increase in liabilities
 Exclude those that relate to distributions to equity participants
 Encompass both expenses and losses
Elements of Financial Statements
Elements of Financial Statements
 RECOGNITION

The process of incorporating on the face of the financial statements

an element of FS.

Satisfies the following criteria for recognition: [F 4.37 and F

4.38]
 It is probable that any future economic benefit associated
with the item will flow to or from the entity; and
 The item's cost or value can be measured with reliability.
 RECOGNITION

 Based on these general criteria:

 An asset is recognized in the balance sheet when it is probable
that the future economic benefits will flow to the entity and the
asset has a cost or value that can be measured reliably. [F 4.44]
 A liability is recognized in the balance sheet when it is probable
that an outflow of resources embodying economic benefits will
result from the settlement of a present obligation and the
amount at which the settlement will take place can be measured
reliably. [F 4.46]
Recognition and Measurement Concepts

Recognition 1. Definition
Process of admitting 2. Measurability
information into the basic 3. Relevance
financial statements 4. Reliability

Measurement involves both the choice of a unit

of measure and the choice of an attribute to be
measured.
 RECOGNITION

Based on these general criteria:

 Income is recognized in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably. This means, in effect, that recognition
of income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable). [F 4.47]
 Expenses are recognized when a decrease in future economic benefits related to
a decrease in an asset or an increase of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of expenses occurs
simultaneously with the recognition of an increase in liabilities or a decrease in
assets (for example, the accrual of employee entitlements or the depreciation of
equipment). [F 4.49]
 RECOGNITION CRITERIA

(1) It is probable that any future economic benefit

associated with the item will flow to or from the
enterprise; and
(2) The item’s cost or value can be measured with
reliability.
RECOGNITION AND DERECOGNITION
 MEASUREMENT BASES

a. historical cost (most common)

b. current cost
c. net realizable (settlement) value
d. present value
 MEASUREMENT BASES

a. historical cost (most common)

b. current cost
c. net realizable (settlement) value
d. present value
 What is the appropriate measurement basis?

A. Cash
B. Receivables
C. Inventories
D. Property, Plant and Equipment
E. Trading Securities
F. Available for Sale Securities
G. Non-current financial liabilities
 CONCEPTS OF CAPITAL

 FINANCIAL CAPITAL - capital is the net assets or

equity of the entity.

 PHYSICAL CAPITAL MAINTENANCE – capital is the

productive capacity of the entity. (ex. Units of
output)
 CONCEPTS OF CAPITAL MAINTENANCE
 FINANCIAL CAPITAL MAINTENANCE –
PROFIT IS THE CHANGE IN MONEY AMOUNT OF NET ASSETS AFTER MAKING
ADJUSTMENTS TO TRANSACTIONS WITH OWNERS.
 PHYSICAL CAPITAL MAINTENANCE -

PROFIT IS THE CHANGE IN PHYSICAL PRODUCTIVE CAPACITY OF

THE ENTITY (OR FUNDS CONVERTED TO PHYSICAL CAPACITY)
AFTER MAKING ADJUSTMENTS TO TRANSACTIONS WITH
OWNERS.
END