ACCT401-CONCEPTUAL

FRAMEWORK FOR
FINANCIAL REPORTING
By
Dr. M. M. Bagudo
 INTRODUCTION AND MEANING
• The Conceptual Framework is a system of concepts and
principles that underpin the preparation of financial
statements. These concepts and the principles should
be consistent with one another.
• The IASC issued a conceptual framework for the
preparation and presentation of the financial
statements in 1989 and was adopted by IASB.
• Then in 2010, IASB published the new document, The
Conceptual Framework for the Financial Reporting,
however it was a bit unfinished as a few concepts and
chapters were missing.
• The newest and completed Framework was published in
March 2018 comprising of 8 chapters
 Is the Framework equivalent to the
Standard?
• Framework is NOT a Standard itself.

• Thus, if you wish to decide on the financial

reporting of certain transaction, you need to look
into the appropriate standard – IFRS or IAS.
• Sometimes, it may even happen that the rules in
that IFRS or IAS standard will be contrary to what
the Framework says.
• In this case, you need to apply the standard, not
the Framework.
 Purpose of the Framework
• Serve as a basis for Accounting practices.
• Serve as a basis for generating Accounting
Standards for consistency.
• Serve as a point of reference in the absence of
any accounting standard.
• Strengthening the credibility of financial
reporting.
• Strengthening the accounting profession in
general.
 When should you apply the
Framework?
• In most cases, when there are no specific rules
for your transaction and you need to develop
your accounting policy, then you would look to
the Framework as you cannot depart from its
basic principles and definitions.
 Chapter 1: The objective of
general-purpose financial
The main objective reporting
of general-purpose financial
reports is to provide the financial
information about the reporting entity that is
useful to existing and potential:
• Investors,
• Lenders, and
• Other creditors
to help them make various decisions (e.g. about
trading with debt or equity instruments of a
reporting entity).
 Chapter 1: The objective of
general-purpose financial
reporting
• Chapter 1 is NOT about the financial statements
itself.
• Instead, Chapter 1 describes more general-
purpose reports that should contain the following
information about the reporting entity:
 Economic resources and claims (this refers to the
financial position);
 The changes in economic resources and claims
resulting from entity’s financial performance and
from other events.
 Chapter 1: The objective of
general-purpose financial
reporting
• Chapter 1 puts an emphasis on accrual
accounting to reflect the financial performance
of an entity. It means that the events should be
reflected in the reports in the periods when the
effects of transactions occur, regardless the
related cash flows.

• However, the information about past cash

flows is very important to assess management’s
ability to generate future cash flows.
 Chapter 2: Qualitative
characteristics of useful financial
information
The Framework describes 2 types of
characteristics for financial information to be
useful:
 Fundamental, and
 Enhancing.
 Fundamental qualitative
characteristics
• Relevance: capable of making a difference in
the users’ decisions. The financial information
is relevant when it has predictive value,
confirmatory value, or both.
Materiality is closely related to relevance.

• Faithful representation: The information is

faithfully represented when it is complete,
neutral and free from error.
 Enhancing qualitative
characteristics
• Comparability: Information should be
comparable between different entities or time
periods;
• Verifiability: Independent and knowledgeable
observers are able to verify the information;
• Timeliness: Information is available in time to
influence the decisions of users;
• Understandability: Information shall be
classified, presented clearly and concisely.
 Chapter 3: Financial Statements
and the Reporting Entity
Financial Statements
The financial statements should provide the useful
information about the reporting entity:
1. In the statement of financial position, by recognizing
 Assets,
 Liabilities,
 Equity
2. In the statements of financial performance, by
recognizing
 Income, and
 Expenses
 Chapter 3: Financial Statements
and the Reporting Entity
3. In other statements, by presenting and
disclosing information about
recognized and unrecognized assets, liabilities,
equity, income and expenses, their nature and
associated risks;
Cash flows;
Contributions from and distributions to equity
holders, and
Methods, assumptions, judgements used, and
their changes.
 Chapter 3: Financial Statements
and the Reporting Entity
• Financial statements are always prepared for a
specified period of time, or the reporting
period.
• Normally, the financial statements are
prepared on the going concern assumption.
• It means that an entity will continue to
operate for the foreseeable future (usually 12
months after the reporting date).
 Reporting Entity
• This is a new concept introduced in 2018.
• Although the term “reporting entity” has been used
throughout IFRS for some time, the Framework
introduced it and “made it official” only in 2018.
• Reporting entity is an entity who must or chooses to
prepare the financial statements. It can be:
 A single entity – for example, one company;
 A portion of an entity – for example, a division of
one company;
 More than one entities – for example, a parent and
its subsidiaries reporting as a group.
 Chapter 4: Elements of the
financial statements
This chapter extensively deals with the definitions of individual
elements of the financial statements.
• There are five basic elements:
1. Asset = a present economic resource controlled by the entity as a
result of past events;
2. Liability = a present obligation of the entity to transfer an
economic resource as a result of past events;
3. Equity = the residual interest in the assets of the entity after
deducting all its liabilities;
4. Income = increases in assets or decreases in liabilities resulting in
increases in equity, other than contributions from equity holders;
5. Expenses = decreases in assets or increases in liabilities resulting in
decreases in equity, other than distributions to equity holders;
 Chapter 5: Recognition and
derecognition
This chapter discusses the recognition and derecognition
process.

• Recognition
 Simply speaking, recognition means including an
element of financial statements in the financial
statements.
 In other words, if you decide on recognition, you
decide on WHETHER to show this item in the financial
statements.
 Recognition process links the elements in the financial
statements according to the following formula:
 Chapter 5: Recognition and
derecognition
• The Framework requires recognizing the
elements only when the recognition provides
useful information – relevant with faithful
representation.
• Then, the Framework discusses the relevance,
faithful representation, cost constraints and
other aspects in a detail.
 Chapter 5: Recognition and
derecognition
Derecognition
Derecognition means removal of an asset or
liability from the statement of financial
position and normally it happens when the
item no longer meets the definition of an
asset or a liability.
Again, the Framework discusses the
derecognition in a greater detail.
 Chapter 6: Measurement
• Measurement means IN WHAT AMOUNT to
recognize asset, liability, piece of equity,
income or expense in your financial
statements.
• Thus, you need to select the measurement
basis, or the method of quantifying monetary
amount for elements in the financial
statements.
 Chapter 6: Measurement
The Framework discusses two basic measurement basis:
1. Historical cost – this measurement is based on the
transaction price at the time of recognition of the
element;
2. Current value – it measures the element updated to
reflect the conditions at the measurement date. Here,
several methods are included:
1. Fair value;
2. Value in use;
3. Current cost.
Each of these measurement base is discussed in a greater
detail.
 Chapter 6: Measurement
• The Framework then gives guidance on how to select the
appropriate measurement basis and what factors to
consider (especially relevance and faithful representation).
• The issue here is that the equity is defined as “residual
after deducting liabilities from assets” and therefore total
carrying amount of equity is not measured directly.
• Instead, it is measured exactly by the formula:
 Total carrying amount of all assets, less
 Total carrying amount of all liabilities.
• The Framework points out that it can be appropriate to
measure some components of equity directly (e.g. share
capital), but it is not possible to measure total equity
directly.
 Chapter 7: Presentation and
disclosure
• The main aim of presentation and disclosures is to
provide an effective communication tool in the
financial statements.
• Effective communication of information in the financial
statements requires:
 Focus on objectives and principles of presentation and
disclosure, not on the rules;
 Group similar items and separate dissimilar items;
 Aggregate information, but do not provide unnecessary
detail or the opposite – excessive aggregation to
obscure the information.
 Chapter 7: Presentation and
disclosure
• The Framework discusses classification of
assets, liabilities, equity, income and expenses
in a greater detail with describing offsetting,
aggregation, distinguishing between profit or
loss and other comprehensive income and
other related areas.
Chapter 8: Concepts of capital
and capital maintenance
The Framework explains two concepts of capital:
1.Financial capital – this is synonymous with
the net assets or equity of the entity. Under
the financial maintenance concept, the profit
is earned only when the amount of net assets
at the end of the period is greater than the
amount of net assets in the beginning, after
excluding contributions from and distributions
to equity holders.
• The financial capital maintenance can be
Chapter 8: Concepts of capital
and capital maintenance
2. Physical capital – this is the productive
capacity of the entity based on, for example,
units of output per day.
Here the profit is earned if physical productive
capacity increases during the period, after
excluding the movements with equity holders.
REGULATORY FRAMEWORK
 INTRODUCTION
• Accounting information is regulated to ensure
that users of financial information receive a
minimum amount of information that will
enable them to take meaningful decisions
regarding their interest in a reporting entity.
 THE NEED FOR A REGULATORY
FRAMEWORK
• A regulatory framework for accounting is needed
for the following principal reasons:
– Ensure uniformity in the preparation and presentation
of financial report in order to narrow the areas of
difference and choice in financial reporting and to
improve comparability.
– To designate a system of enforcement of that GAAP to
ensure consistency between companies in practice.
– To act as a central source of reference of generally
accepted accounting practice (GAAP) in a given
market
 PRINCIPLES-BASED VERSUS RULES-
BASED APPROACH
• A principle-based system works within a set of laid
down principles. A rules-based system regulates for
issues as they arise.
• IFRS’s are written using a 'principles-based' approach.
This means that they are written based on the
definitions of the elements of the financial statements,
recognition and measurement principles, as set out in
the Framework for the Preparation and Presentation of
Financial Statements. In IFRS’s, the underlying
accounting treatments are these 'principles', which are
designed to cover a wider variety of scenarios without
the need for very detailed scenario by scenario
guidance as far as possible.
• In absence of a reporting framework, a more
rules-based approach has to be adopted. This
leads to a large mass of regulation designed to
cover every eventuality. for example US GAAP,
are 'rules-based', which means that
accounting standards contain rules which
apply to specific scenarios.
PRINCIPLES VS RULE BASED STANDARDS
STANDARD ADVANTAGES DISADVANTAGES
PRINCIPLES- Flexible-Allows use Correct approach
BASED(IFRS) of Judgment to deal may npt always be
with variety of obvious since
situation different judgment
might arise
Difficult to use Can give illusion of
creative accounting being insufficiently
rigorous
RULE-BASED (US Brings certainty to Allows for
GAAP) accounting process manipulation
(creative
accounting)
Consistency in Rules cannot
dealing with similar anticipate all likely
situations since no accounting
judgment is allowed problems
 PRINCIPLES VS RULE BASED
STANDARDS
• There are areas of convergence and
differences between the two standards.
• The areas of convergence include business
combination, consolidation, share-based
payments, revenue recognition and some
areas of financial instruments.
• Areas of differences include accounting for
lease and insurance contract
 CONVERGENCE WITH IFRS
• International Accounting Standard Committee
(IASC)- 1973 to harmonize accounting
standards.
• First International Accounting Standard (IAS)
was issued in 1975.
• IASC is supported by Standard Interpretation
Committee (SIC)
• SIC issued Standard Interpretation Committee
(SICs) Pronouncements
• In 2001, the constitution of IASC was change
and IASC and SIC were replaced by new bodies
called International Accounting Standard
Board (IASB) and International Financial
Reporting Standard Committee (IFRSIC).
• The IASB now issue International Financial
Reporting Standard (IFRS) while the IFRSIC
issue International Financial Reporting
Interpretations(IFRIC)
 CONVERGENCE WITH IFRS
• International Accounting Standard Committee
(IASC)- 1973 to harmonize accounting
standards.
• First International Accounting Standard (IAS)
was issued in 1975.
• IASC is supported by Standard Interpretation
Committee (SIC)
• SIC issued Standard Interpretation Committee
(SICs) Pronouncements
 CONVERGENCE WITH IFRS
• International Accounting Standard Committee
(IASC)- 1973 to harmonize accounting
standards.
• First International Accounting Standard (IAS)
was issued in 1975.
• IASC is supported by Standard Interpretation
Committee (SIC)
• SIC issued Standard Interpretation Committee
(SICs) Pronouncements
 CONVERGENCE WITH IFRS
• International Accounting Standard Committee
(IASC)- 1973 to harmonize accounting
standards.
• First International Accounting Standard (IAS)
was issued in 1975.
• IASC is supported by Standard Interpretation
Committee (SIC)
• SIC issued Standard Interpretation Committee
(SICs) Pronouncements
• The change from IASC to IASB was a vital step
towards he acceptance o IFRS.
• All standards issued by IASC are called IAS
while standard issued by IASB are called IFRS.
• The interpretations issued by SIC are called SIC
pronouncements while interpretation issued
by IFRSIC are called IFRIC
 CONVERGENCE WITH IFRS
• International Accounting Standard Committee
(IASC)- 1973 to harmonize accounting
standards.
• First International Accounting Standard (IAS)
was issued in 1975.
• IASC is supported by Standard Interpretation
Committee (SIC)
• SIC issued Standard Interpretation Committee
(SICs) Pronouncements
• At the time of Establishing IASB, all standards
issued by IASC and the interpretations issued
by SIC were adopted.
• However, all new standards and
interpretations to be issued are to be called
IFRS and IFRIC respectively.
• The term IFRS now refer to the whole body of
the rules (IFRS and IAS) that are still in
existence.
• Many IASs and SICs have been replaced or
 CONVERGENCE WITH
ACCOUNTING STANDARDS
• Harmonization- Why?
• Advantages and Disadvantages
• International adoption of IFRS
• Adoption of IFRS in Nigeria
REGULATORY FRAMEWORK OF CORPORATE
FINANCIAL REPORTING IN NIGERIA
– Company and Allied Matters Act (CAMA)
– Financial Reporting Council (FRC): IFRS, IAS
– Central Bank of Nigeria (CBN): BOFIA 1991,
prudential guidelines.
– Nigerian Insurance Commission (NAICOM):
Nigerian Insurance Act 2003
– Security and Exchange Commission (SEC): Security
and Investment Act 1999
– NSE regulation
– The Nigerian Pension Act.
– Corporate Governance Codes
THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)

• Objectives of IASB
The 3 formal objectives of the IASB are:
(a) To develop, in the public interest, a single set of high
quality, understandable and enforceable global accounting
standards that require high quality, transparent and
comparable information in the financial statements and other
financial reporting to help participants in the world’s capital
markets and other users make economic decisions;
(b) To promote the use and rigorous application of those
standards; and
(c) To bring about convergence of national accounting
standards and IFRSs to high quality solutions.
 THE IASB STRUCTURE

IASC Foundation

Trustees

International International Financial Standard

Accounting Reporting Interpretation Advisory
Standard Committee (IFRIC) Council
Board (IASB) (SAC)
 THE IASB STRUCTURE
The structure of the IASB and associated organizations can be
summarized as follows:
• IASC Foundation: The parent entity of the IASB is the
International Accounting Standards Committee (IASC)
Foundation, a not-for-profit corporation incorporated in the
State of Delaware, United States.
• The Trustees: The Trustees of the IASC Foundation appoint
the 14 Board members and Chairman of the IASB, and the
members of the other organisations, and seek funding for the
organizations’ activities.
 THE IASB STRUCTURE
• The International Financial Reporting Interpretations
Committee (IFRIC): The role of IFRIC is to prepare
interpretations of IFRSs for approval by the IASB and, in
the context of the Framework, to provide timely guidance
on financial reporting issues not specifically addressed by
IFRSs. Interpretations of IFRS are prepared to give
authoritative guidance on issues that are likely to receive
divergent or unacceptable treatment in the absence of such
guidance. In developing interpretations, IFRIC works
closely with similar national committees.
• The Standards Advisory Council (SAC): The SAC
provides a formal vehicle for participation by organisations
and individuals with an interest in international financial
reporting. Its objective is to give advice to the IASB on
 THE STANDARD SETTING PROCESS

• IFRSs are developed through a formal system of due process

and broad international consultation involving accountants,
financial analysts and other users and regulatory bodies from
around the world.

• The overall agenda of the IASB will initially be set by

discussion with the IFRS Advisory Council. The process for
developing an individual standard would involve the following
steps.
• STEP 1: During the early stages of a project, the IASB may
establish an Advisory Committee to give advice on issues
arising in the project. Consultation with the Advisory
Committee and the IFRS Advisory Council occurs
throughout the project.
• STEP 2: IASB may develop and publish Discussion
Papers for public comment.
• STEP 3: Following the receipt and review of comments, the
IASB would develop and publish an Exposure Draft for
 THE STANDARD SETTING
PROCESS
• The period of exposure for public comment is
normally 90 days. However, in exceptional
circumstances, proposals may be issued with a
comment period of 60 days. Draft IFRS
Interpretations are exposed for a 60 day
comment period.
 APPLICABLE STANDARDS

 IAS 1: Presentation of Financial Statements

 IAS 2: Inventories
 IAS 7: Statement of Cash Flows
 IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors
 IAS 10: Events after the Reporting Period
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment
 IAS 19: Employee Benefits
 IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange
Rates
 APPLICABLE STANDARDS
 IAS 24: Related Party Disclosures
 IAS 26: Accounting and Reporting by Retirement Benefit
Plans
 IAS 27: Separate Financial Statements
 IAS 28: Investments in Associates and Joint Ventures
 IAS 29: Financial Reporting in Hyperinflationary
Economies
 IAS 32: Financial Instruments: Presentation
 IAS 33: Earnings per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
 IAS 37: Provisions, Contingent Liabilities and Contingent Assets
 APPLICABLE STANDARDS
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and
Measurement
 IAS 40: Investment Property
 IAS 41: Agriculture
 IFRS 1: First-time Adoption of International Financial
Reporting Standards
 IFRS 2: Share-based Payment
 IFRS 3: Business Combinations
 IFRS 4: Insurance Contracts
 IFRS 5: Non-current Assets Held for Sale and
Discontinued Operations
 IFRS 6: Explorations for and Evaluation of Mineral
Resources
 APPLICABLE STANDARDS
 IFRS 7: Financial Instruments: Disclosures
 IFRS 8: Operating Segments
 IFRS 9: Financial Instruments
 IFRS 10: Consolidated Financial Statements
 IFRS 11: Joint Arrangements
 IFRS 12: Disclosure of Interests in Other Entities
 IFRS 13: Fair Value Measurement
 IFRS 14: Regulatory Deferral Accounts
 IFRS 15: Revenue from Contracts with Customers
 IFRS 16: Leases
 IFRS 17: Insurance Contracts
 IFRS for SMES
 INTERPRETATIONS

 SIC-7 Introduction of the Euro

 SIC-10 Government Assistance – No Specific Relation to
Operating Activities
 SIC-25 Income Taxes – Changes in the Tax Status of an Entity
or its Shareholders
 SIC-29 Service Concession Arrangements: Disclosures
 SIC-32 Intangible Assets – Web Site Costs
 IFRIC 1- Changes in Existing Decommissioning,
Restoration and Similar Liabilities
 IFRIC 2- Members’ Shares in Co-operative Entities and
Similar Instruments
 IFRIC 5- Rights to Interests Arising from
Decommissioning, Restoration and Environmental
Rehabilitation Funds
 INTERPRETATIONS
 IFRIC 6- Liabilities arising from Participating in a
Specific Market – Waste Electrical and Electronic
Equipment
 IFRIC 7- Applying the Restatement Approach under
IAS 29 Financial Reporting in Hyperinflationary
Economies
 IFRIC 10- Interim Financial Reporting and
Impairment
 IFRIC 12- Service Concession Arrangements
 IFRIC 14- IAS 19 – The Limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction
 IFRIC 16- Hedges of a Net Investment in a Foreign Operation
 IFRIC 17- Distributions of Non-cash Assets to Owners
 INTERPRETATIONS
 IFRIC 19- Extinguishing Financial Liabilities with Equity
Instruments
 IFRIC 20- Stripping Costs in the Production Phase of a
Surface Mine
 IFRIC 21- Levies
 IFRIC 22- Foreign Currency Transactions and Advance
Consideration
 IFRIC 23- Uncertainty over Income Tax Treatments.
 FINANCIAL REPORTING COUNCIL
OF NIGERIA
• It roles and Function
• objectives of IFRS adoption in Nigeria