CHAPTER 2 of the Conceptual Framework in developing and applying an

accounting policy that results in information that is relevant and

CONCEPTUAL FRAMEWORK reliable.
Objective of financial reporting
However, it is to be stated that the Conceptual Framework is not an
TECHNICAL KNOWLEDGE International Financial Reporting Standard.
To know the nature of the Revised Conceptual Framework.
To describe the purpose and usefulness of a Conceptual Framework. Nothing in the Conceptual Framework overrides any specific
To understand the authoritative status of a Conceptual Framework. International Financial Reporting Standard.
To understand the objective of financial reporting.
To know the limitations of financial reporting. In case where there is a conflict, the requirements of the International
Financial Reporting Standards shall prevail over the Conceptual
Framework.
CONCEPTUAL FRAMEWORK
Users of financial information
The Conceptual Framework for Financial Reporting is a complete,
comprehensive and single document promulgated by the Under the Conceptual Framework for Financial Reporting, the users
International Accounting Standards Board. of financial information may be classified into two, namely:
a. Primary users
The Conceptual Framework is a summary of the terms and concepts b. Other users
that underlie the preparation and presentation of financial statements
for external users. The primary users include the existing and potential investors,
lenders and other creditors.
In other words, the Conceptual Framework describes the concepts for
general purpose financial reporting. The other users include the employees, customers, governments and
their agencies, and the public.
The Conceptual Framework is an attempt to provide an overall
theoretical foundation for accounting. Primary users

The Conceptual Framework is intended to guide standard setters, The primary users of financial information are the parties to whom
preparers and users of financial information in the preparation and general purpose financial reports are primarily directed.
presentation of statements.
Such primary users cannot require reporting entities to provide
The Conceptual Framework is the underlying theory for the information directly to them and therefore must rely on general
development of accounting standards and revision of previously purpose financial reports for how much of the financial information
issued accounting standards. is needed.

The Conceptual Framework will be used in future standard setting Existing and potential investors
decision but no changes are made to the current IFRS.
Existing and potential investors are concerned with the risk inherent
The Conceptual Framework provides the foundation for Standards in and return provided by their investments.
that:
The investors need information to help them determine whether they
a. Contribute to transparency by enhancing international should buy, hold or sell.
comparability and quality of financial information.
b. Strengthen accountability by reducing information gap between Shareholders are also interested in information which enables them
the providers of capital and the people to whom they have entrusted to assess the ability of the entity to pay dividends.
their money.
c. Contribute to economic efficiency by helping investors to identify Lenders and other creditors
opportunities and risks across the world.
Existing and potential lenders and other creditors are interested in
Purposes of Revised Conceptual Framework information which enables them to determine whether their loans,
interest thereon and other amounts owing to them will be paid when
a. To assist the International Accounting Standards Board to develop due.
IFRS Standards based on consistent concepts.
Other users
b. To assist preparers of financial statements to develop consistent
accounting policy when no Standard applies to a particular By residual definition, other users are users of financial information
transaction or other event or where an issue is not yet addressed by other than the existing and potential investors, lenders and other
an IFRS. creditors.

C. To assist preparers of financial statements to develop accounting Other users are so called because they are parties that may find the
policy when a Standard allows a choice of an accounting policy. general purpose financial reports useful but the reports are not
directed to them primarily.
d. To assist all parties to understand and interpret the IFRS Standards.
Employees
Authoritative status of Conceptual Framework
Employees are interested in information about the stability and
If there is a standard or an interpretation that specifically applies to a profitability of the entity.
transaction, the standard or interpretation overrides the Conceptual
Framework. The employees are interested in information which enables them to
assess the ability of the entity to provide remuneration, retirement
In the absence of a standard or an interpretation that specifically benefits and employment opportunities.
applies to a transaction, management shall consider the applicability
Customers The reason is that existing and potential investors, lenders and other
creditors have the most critical and immediate need for information
Customers have an interest in information about the continuance of in financial reports.
an entity especially when they have a long-term involvement with or
are dependent on the entity. As a matter of fact, the primary users of financial information are the
parties that provide resources to the entity.
Governments and their agencies
Moreover, information that meets the needs of the specified primary
Governments and their agencies are interested in the allocation of users is likely to meet the needs of other users such as employees,
resources and therefore the activities of the entity. customers, governments and their agencies.

These users require information to regulate the activities of the entity, The management of a reporting entity is also interested in financial
determine taxation policies and as a basis for national income and information about the entity.
similar statistics.
However, management need not rely on general purpose financial
Public reports because it is able to obtain or access additional financial
information internally.
Entities affect members of the public in a variety of ways.
Specific objectives of financial reporting
For example, entities make substantial contribution to the local
economy in many ways including the number of people they employ The overall objective of financial reporting is to provide information
and their patronage of local suppliers. useful for decision making.

Financial statements may assist the public by providing information The Conceptual Framework places more emphasis on the importance
about the trend and the range of its activities. of providing information needed to assess the management
stewardship of the entity's economic resources.
Scope of Revised Conceptual Framework
Accordingly, the specific objectives of financial reporting are:
1. Objective of financial reporting
2. Qualitative characteristics of useful financial information a. To provide information useful in making decisions about providing
3. Financial statements and reporting entity resources to the entity.
4. Elements of financial statements b. To provide information useful in assessing the cash flow prospects
5. Recognition and derecognition of the entity.
6. Measurement c. To provide information about entity resources, claims and changes
7. Presentation and disclosure in resources and claims.
8. Concepts of capital and capital maintenance
Economic decisions
OBJECTIVE OF FINANCIAL REPORTING
Existing and potential investors need general purpose financial
The objective of financial reporting forms the foundation of the reports in order to enable them in making decisions whether to buy,
Conceptual Framework. sell or hold equity investments.

The overall objective of financial reporting is to provide financial Existing and potential lenders and other creditors need general
information about the reporting entity that is useful to existing and purpose financial reports in order to enable them in making decisions
potential investors, lenders and other creditors in making decisions whether to provide or settle loans and other forms of credit.
about providing resources to the entity.
Assessing cash flow prospects
The objective of financial reporting is the "why", purpose or goal of
accounting. Decisions by existing and potential investors about buying, selling or
holding equity instruments depend on the returns that they expect
Financial reporting is the provision of financial information about from an investment, for example, dividends.
an entity to external users that is useful to them in making economic
decisions and for assessing the effectiveness of the entity's Similarly, decisions by existing and potential lenders and other
management. creditors about providing or settling loans and other forms of credit
depend on the principal and interest payments or other returns that
The principal way of providing financial information to external they expect.
users is through the annual financial statements.
Consequently, financial reporting should provide information useful
However, financial reporting encompasses not only financial in assessing the amount, timing and uncertainty of prospects for
statements but also other information such as financial highlights, future net cash inflows to the entity.
summary of important financial figures, analysis of financial
statements and significant ratios. Economic resources and claims

Financial reports also include nonfinancial information such as General purpose financial reports provide information about the
description of major products and a listing of corporate officers and financial position of a reporting entity.
directors.
Financial position is information about the entity's economic
Target Users resources and the claims against the reporting entity.
Financial reporting is directed primarily to the existing and potential
investors, lenders and other creditors which compose the primary The economic resources are the assets and the claims are the
user group. liabilities and equity of the entity.

In other words, the financial position comprises the assets, liabilities

and equity of an entity at a particular moment in time.
Usefulness of financial performance For example, management can decide not to dispose or sell
investments when prices are declining in order to avoid realized
Information about financial performance helps users to understand losses.
the return that the entity has produced on the economic resources.

Information about the return the entity has produced provides an

indication of how well management has discharged its
responsibilities to make efficient and effective use of the entity's
economic resources.

Information about past financial performance is usually helpful in

predicting the future returns on the entity's economic resources.

Information about financial performance during a period is

useful is assessing the entity's ability to generate future cash inflows
from operations.

Accrual accounting

The financial performance of the entity must be measured using the

accrual basis of accounting.

Accrual accounting depicts the effects of transactions and other

events and circumstances on an entity's economic resources and
claims in the periods in which those effects occur even if the
resulting cash receipts and payments occur in a different period.

In other words, under the accrual basis, the effects of transactions

and other events are recognized when they occur and not as cash is
received or paid.

Simply stated, accrual accounting means that income is recognized

when earned regardless of when received and expense is recognized
when incurred regardless of when paid.

Information about financial performance measured in accordance

with accrual accounting provides a better basis for assessing past and
future performance than information solely about cash receipts and
payments during a period.

Limitations of financial reporting

a.General purpose financial reports do not and cannot provide all of

the information that existing and potential investors, lenders and
other creditors need.

Primary users need to consider pertinent information from other

sources, for example, general economic conditions, political events
and industry outlook.

b. General purpose financial reports are not designed to show the

value of an entity but the reports provide information to help the
primary users estimate the value of the entity.

c. General purpose financial reports are intended to provide common

information to users and cannot accommodate every request for
information.

d. To a large extent, general purpose financial reports are based on

estimate and judgment rather than exact depiction.

Management stewardship

Information about how efficiently and effectively management has

discharged its responsibility to use the entity's economic resources
helps users to assess management stewardship of those resources.

Such information is also useful for predicting how management will

use the entity's economic resources in future periods.

Hence, the information can be useful for assessing the entity's

prospects for future net cash flows.