Module – 1

IASB Conceptual Framework for Financial Reporting

Sr. No Chapter outline - Topics

1 IASB Conceptual Framework for Financial Reporting
2 Objective of General Purpose Financial Statement
3 Financial Statements & Reporting Entity
4 Elements of Financial Statements
5 Elements of Financial Statements-Practice
6 Recognition of the Elements
7 De-recognition of the Elements
8 Measurement of the Elements of Financial Statements
9 Measurement-Historical Cost
10 Measurement-Fair Value
11 Measurement-Value in Use
12 Measurement-Current Cost
13 Selection of Measurement Basis
14 Measurement-Basis Practice
15 Presentation and Disclosure
16 Accounting Framework in Pakistan-I
17 Accounting Framework in Pakistan-II
Topic Videos 001-017 are mandatory part of this chapter/module

Topic 1 – IASB Conceptual Framework for Financial Reporting

The International Accounting Standard Board (IASB) framework describes the objective of, and the
concepts for, general-purpose financial reporting.
The IASB framework is not a standard, and nothing in the framework overrides any standard or any
requirement which the standards contain.
The Conceptual Framework describes the objectives of and concepts for the general purpose financial
statements.
Its purposes are:
❑ To assist the International Accounting Standards Board (IASB) to develop IFRS Standards that are
based on consistent concepts;
❑ To assist the IASB in promoting harmonization of regulations, accounting standards and procedures
relating to the presentation of financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs;

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❑ To assist national standard-setting bodies in developing national standards;
❑ To assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to
form the subject of an IFRS;
❑ To assist users of financial statements in interpreting the information contained in financial
statements prepared in compliance with IFRSs;
The Conceptual Framework is divided into eight chapters, namely:
❑ The objective of general purpose financial reporting;
❑ The qualitative characteristics of useful financial information;
❑ Financial statements and the reporting entity;
❑ The elements of financial statements;
❑ Recognition process and criteria and derecognition;
❑ Measurement of the elements from which financial statements are constructed;
❑ Presentation and disclosure; and
❑ Concepts of capital and capital maintenance.
This Conceptual Framework is not an IFRS and nothing in the Conceptual Framework overrides any
specific IFRS.
On very rare occasions there may be a conflict between the Conceptual Framework and an IFRS. In those
cases, the requirements of the IFRS prevail over those of the Conceptual Framework.

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Topic 2 – Objective of General Purpose Financial Statement
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.
General-purpose financial statements provide information about the financial position of an entity, its
resources and claims against those resources. Information is provided about the strengths and
weaknesses of an entity and its ability to acquire finance.
General-purpose financial statements also provide information about changes in an entity’s economic
resources and claims that result in entity’s financial performance.
Financial performance is assessed both through the process of accrual accounting and changes in cash
flows.

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Topic 3 – Financial Statement & Reporting Entity
General-purpose financial statements consist of a statement of financial position (recognising assets,
liabilities and equity), a statement of financial performance (recognising income and expenses), and
other statements and notes.
Financial statements are prepared for a specified period of time.
Comparative information for at least one preceding reporting period should also be provided
Going Concern
Financial statements are usually prepared on the assumption that the entity is a going concern and will
continue to operate for the foreseeable future.
Financial statements are prepared from the perspective of the entity as a whole, instead of from the
viewpoint of any particular group of investors, lenders or other creditors.
Reporting entity is not necessarily a legal entity.

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Topic 4 – Elements of Financial Statements
The elements are linked to the economic resources and claims, and changes in those economic
resources and claims.
The elements of financial statements defined in the conceptual framework are:
❑ Assets, liabilities and equity, which relate to a reporting entity’s financial position; and
❑ Income and expenses, which relate to a reporting entity’s financial performance
These elements are linked to the economic resources, claims and changes in economic resources and
claims and are explained as below.
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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Topic 5 – Elements of Financial Statements – Practice
Identify Assets (Y/N) ?
1. Office stationery
2. Computer & Printer
3. Airconditioning plant
4. Repair and maintenance of machinery
5. Building purchased
6. Building on rent
Identify Liabilities (Y/N) ?
1. Loan from bank
2. Bank overdraft facility
3. Cash received in advance from customer to deliver goods in future
4. Cash received from credit customer after one week of sales of goods
5. Issue of bonds to raise funds from public

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Topic 6 – Recognition of the elements of financial statement
Recognition.
Recognition of elements of the financial statements The IASB Framework states that an element (asset,
liability, equity, income or expense) should be recognized in the statement of financial position or the
statement of financial performance when it:
❑ meets the definition of an element, and also
❑ Satisfies certain criteria for recognition.
Items that fail to meet the criteria for recognition should not be included in the financial statements.
However, some of these items may have to be disclosed as additional details in a note to the financial
statements.
Recognition is the process of capturing for inclusion in the statement of financial position or the
statement 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).
Recognition Criteria
• probable 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.
❑ Only items that meet the definition of asset, liability or equity are recognised in the statement of
financial position. Similarly, only items that meet the definition of income or expenses are recognised in
the statement of financial performance. However, not all items that meet the definition of one of those
elements are recognized.
❑ Not recognizing an item that meets the definition of one of the elements makes the statement of
financial position and the statement of financial performance less complete and can exclude useful
information from financial statements. On the other hand, in some circumstances, recognising some
items that meet the definition of one of the elements would not provide useful information.
❑ An asset or liability is recognized only if recognition of that asset or liability and of any resulting
income, expenses or changes in equity provides users of financial statements:
a) Relevant information about the asset or liability and about any resulting income, expenses or change
in equity
b) A faithful representation of the asset or liability and of any resulting income, expenses or changes in
equity
Relevance may be affected by
• Low probability of flow of economic benefits
• Uncertainty of Existence
Faithful representation may be affected by
• Uncertainty of measurement
• Recognition inconsistency (accounting mismatch)
• Presentation and disclosure

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Topic 7 – Derecognition of the elements of financial statements
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.
Any assets or liabilities which have expired or been consumed, collected, fulfilled or transferred will be
derecognized, with the associated recognition of any resultant income and expenses.

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Topic 8 – Measurement of Financial Information
Elements recognised in financial statements are quantified in monetary terms.
The Conceptual Framework allows that several measurement bases are used for the elements in
financial statements. These include historic cost and current values.
Historical cost
Current value
a) Fair value
b) Value in use and fulfillment value
c) Current cost
Selection of a measurement basis.
It is noted that 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.

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Topic 9 – Measurement of Historical Cost
Historical cost
❑ Historical cost measure provides monetary information about assets, liabilities and related income
and expenses, using information derived, at least in part, from the price of the transaction or other
event gave rise to them. Unlike current value, historical cost does not reflect changes in values, except
to the extent that those changes relate to impairment of an asset or liability becoming nervous.
❑ The historical cost of an asset, when it is acquired or created is the value of the cost incurred in
acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus
transaction cost. The historical cost of a liability when it is incurred or taken on is the value of
consideration received to incur or take on the liability minus transaction costs.
❑ When an asset is acquired or created, or a liability is incurred or taken on, as a result of an event that
is not a transaction on market terms, it may not be possible to identify a cost, or the cost may not
provide relevant information about the asset or liability. In such cases, a current value of the asset or the
liability is used as a deemed cost on initial recognition and that deemed cost is then used as a starting
point for subsequent measurement at historical cost.
❑ The historical cost of an asset is updated overtime to depict, if applicable: a) The consumption of part
of the economic resource that constitute the asset depreciation or amortization; b) Payments received
that extinguish part or all of the asset; c) The effect of events that cause part or all the historical cost of
the asset to be no longer recoverable(impairment); d) Accrual of interest to reflect any financing
component of the asset.
❑ One way to apply a historical cost measurement basis to financial assets and financial liabilities is to
measure them at amortized cost. The amortized cost of a financial asset or financial liability reflects
estimates of future cash flows, discounted at a rate determined at initial recognition. For variable rate
instruments, the discount rate is updated to reflect changes in the variable rate. The amortized cost of a
financial asset or financial liability is updated over time to depict subsequent changes, such as the
accrual of interest, the impairment of a financial asset and receipt or payments.

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Topic 10 – Measurement of Fair Value
❑ Fair value is 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.
❑ Fair value reflects the perspective of market participants—participants in a market to which the
entity has access. The asset or liability is measured using the same assumptions that market participants
would use when pricing the asset or liability if those market participants act in their economic best
interest.
❑ In some cases, fair value can be determined directly by observing prices in an active market. In other
cases, it is determined indirectly using measurement techniques, for example, cashflows-based
measurement techniques reflecting all the following factors: a) estimates of future cash flows b)
possible variations in the estimated amount or timing of future cash flows for the asset or liability being
measured, caused by the uncertainty inherent in the cash flows. c) The time value of money d) The price
for bearing the uncertainty inherent in the cash (a risk premium or risk discount). The price for bearing
that uncertainty depends on the extent of that uncertainty. It also reflects the fact that investors would
generally pay less for an asset (and generally require more for taking on a liability) that has uncertain
cash flows then for an asset (or liability) whose cash flows are certain. e) Other factors for example;
Liquidity, if market participant would take those factors into account in the circumstances.
❑ The factors mentioned earlier include the possibility that a counterparty may fail to fulfill its liability
to the entity (credit risk), or that the entity may fail to fulfill its liability (own credit risk). ❑ Because fair
value is not derived, even in part, from the price of the transaction or other event that gave rise to the
asset or liability fair value is not increased by the transaction cost incurred when acquiring the asset and
is not decreased by the transaction cost incurred when the liability is incurred are taken on. In addition,
fair value does not reflect the transaction cost that would be incurred on the ultimate disposal of the
asset or not transferring or settling the liability.

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Topic 11 – Measurement Value in use (of assets) and Fulfilment value (of liabilities)
❑ Value in use is the present value of the cash flows or other economic benefit that an entity expects to
derive from the use of an asset and from its ultimate disposal. Fulfillment value is the present value of
the cash or other economic resources that an entity expects to be obliged to transfer as it fulfills a
liability. Those amounts of cash or other economic resources include not only the amounts to be
transferred to the liability counter party, but also the amounts that the entity expects to be obliged to
transfer to other parties to enable it to fulfill the liability.
❑ Because value in use and fulfillment value are based on future cash flows they don’t include
transaction cost incurred on acquiring an asset or taking on a liability. However, value in use and
fulfillment value include the present value of any transaction cost that entity expects to incur on the
ultimate disposal of the asset or on fulfilling the liability.
❑ Value in use and fulfillment value reflect entity specific assumptions rather than assumptions by
market participants. In practice there may sometimes be little difference between the assumptions that
market participants would use and those that an entity itself would use.
❑ Value in use and fulfillment value cannot be observed directly and or determined using cash flow
based measurement techniques. Value in use and fulfillment value reflect the same factors described for
fair value earlier, but from an entity specific perspective rather than from a market participant
perspective.

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Topic 12 – Measurement of Current Cost
❑ The current cost of an asset is the cost of an equivalent asset at the measurement date comprising
the consideration that would be paid at the measurement date plus the transaction cost 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 cost that would be incurred at that
date. Current cost, like historical cost is an entry value; it reflects prices in the market in which the entity
would acquire the asset or would incur the liability. Hence it is different from fair value in use and
fulfillment value, which are exit value. However, unlike historical cost, current cost reflects conditions at
the measurement date.
❑ In some cases, current cost cannot be determined directly by observing prices and in an active market
and must be determined directly by other means. For example, if prices are available only for new asset
the current cost of a used asset might need to be estimated by adjusting the current price of a new asset
to reflect the current age and condition of the asset held by the entity.

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Topic 13 – Selection of Measurement Basis
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.
Cost is recognised as a constraint on the selection of a measurement basis, as it is with all other areas of
financial reporting.
The enhancing qualitative characteristics of comparability, verifiability and understandability are also
recognised as having implications for the selection of a measurement basis.

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Topic 14 – Measurement Basis - Practice
Question
Sample Co. Purchased a Farm House for Rs. 100 million on 1st Jan, 2011. Its useful life was estimated to
be 50 years. The Farm House can be sold at its market price on 31st Dec, 2020 at Rs. 250 million.
Whereas the same size and style of Farm House in the same location can be bought for Rs. 260 million
on which Rs. 10 million will be incurred for its registration and legal fee.
Measure the value of Farm House under each of the following measurement basis:
• Historical cost
• Current cost
• Fair value
Historical cost
• Rs. 100 million less depreciation for 10 out of 50 years Rs. 20 million, equals to Rs. 80 million
Fair Value
• Rs. 250 million being the exit price available in the market among market participants.
Current Cost
• Rs. 260 million being purchase consideration plus transaction cost of Rs. 10 million, equals to Rs.
270 million.

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Topic 15 – Presentation and Disclosure of Financial Information
Effective communication through presentation and disclosure makes the information more relevant and
contributes to a faithful representation of the entity’s assets, liabilities, equity, income and expenses.
Classification.
Classification is the sorting of assets, liabilities, equity, income and expenses on the basis of shared
characteristics for presentation and disclosure purposes. Like; current asset.
Aggregation.
Aggregation is the adding together of assets, liabilities, equity, income and expenses that have shared
characteristics and are included in the same classification. Like; balance in different bank accounts
whether current account or short-term deposit account.

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Topic 16 – Financial Accounting and Reporting Framework in Pakistan - I
Role of SECP
Companies must prepare financial statements in accordance with accounting standards approved as
applicable and notified in the official gazette by the Securities and Exchange Commission of Pakistan
(SECP) and in accordance with rules in the Companies’ Act 2017.
The Securities and Exchange Commission of Pakistan (SECP) was established under the Securities and
Exchange Commission of Pakistan Act, 1997 and became operational in 1999. It is the corporate and
capital market regulatory authority in Pakistan. Its stated mission is “To develop a fair, efficient and
transparent regulatory framework, based on international legal standards and best practices, for the
protection of investors and mitigation of systemic risk aimed at fostering growth of a robust corporate
sector and broad based capital market in Pakistan” (SECP website). One of the roles of the SECP is to
decide on accounting rules that must be applied by companies in Pakistan. Companies must prepare
financial statements in accordance with accounting standards approved as applicable and notified in the
official gazette by the Securities and Exchange Commission of Pakistan (SECP) and in accordance with
rules in the Companies Act, 2017.
Role of ICAP
ICAP regulates the Chartered Accountancy profession.
ICAP is responsible for recommending reporting standards for notification by the Securities and
Exchange Commission of Pakistan.
Companies Act 2017
The Companies Act 2017 contains a series of appendices called schedules which set out detailed
requirements in certain areas of financial reporting.
Schedules
3rd Schedule classifies companies on the basis of size and nature (profit or nonprofit).
4th Schedule sets out disclosure requirements for listed companies.
5th Schedule applies to non-listed companies.

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Topic 17 – Financial Accounting and Reporting Framework in Pakistan - II
Adoption of IFRS
IFRSs cannot be applied in any country without approval of the national regulators in that country.
All jurisdictions have some kind of formal approval process which is followed before IFRS can be applied
there.
Adoption Process for IFRSs
Step 1
As a first step the IFRS/IAS is considered by ICAP’s Accounting Standards Board, which identifies any
issues that may arise on adoption.
Step 2
The Board also determines how the adoption and implementation of the standard can be facilitated. It
considers issues like how long any transition period should be.
Step 3
The Board also identifies the need for changes to regulations it refers the matter to the SECP (and/or the
SBP for matters affecting banks and other financial institutions).
This process is managed by the Coordination Committees of ICAP and SECP (SBP).
Step 4
After the satisfactory resolution of issues the Board and the Council reconsider the matter of adoption.
Step 5
ICAP recommends the adoption to the SECP by decision of the Council.
The decision to adopt the standard rests with the SECP.
Step 6
IFRSs are adopted by the SECP by notification in the official gazette.
When notified, the standards have the authority of the law.

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