CONCEPTUAL

CONCEPTUAL FRAMEWORK
FRAMEWORK

Conceptual Framework establishes the concepts that

underlie financial reporting.

Need for a Conceptual Framework

► Rule-making should build on and relate to an established
body of concepts.
► Enables IASB to issue more useful and consistent
pronouncements over time.

► IASB and FASB are working on a joint project to develop a

common conceptual framework.
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 CONCEPTUAL
CONCEPTUAL FRAMEWORK
FRAMEWORK

Overview of the Conceptual Framework

Three levels:
 First Level = Basic Objectives of Financial Reporting
 Second Level = Qualitative Characteristics and
Elements of Financial Statements
 Third Level = Recognition, Measurement, and
Disclosure Concepts.

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 ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third level
3. Monetary unit 3. Expense recognition
The "how"—
4. Periodicity 4. Full disclosure implementation
5. Accrual

QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity Bridge between
qualities 4. Income
levels 1 and 3
5. Expenses

OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors, The "why"—purpose
lenders, and other of accounting
creditors in their
capacity as capital
2-3 providers.
 FIRST
FIRST LEVEL:
LEVEL: BASIC
BASIC OBJECTIVE
OBJECTIVE

OBJECTIVE
“To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.

 Provided by issuing general-purpose financial statements.

 Assumption is that users need reasonable knowledge of business
and financial accounting matters to understand the information.

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SECOND
SECOND LEVEL:
LEVEL: FUNDAMENTAL
FUNDAMENTAL CONCEPTS
CONCEPTS

Qualitative Characteristics of Accounting

Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.

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SECOND
SECOND LEVEL:
LEVEL: FUNDAMENTAL
FUNDAMENTAL CONCEPTS
CONCEPTS

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 Relevance
Relevance

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

 Relevance is one of the two fundamental qualities that make

accounting information useful for decision making.
 To
be relevant, accounting information must be capable of
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making a difference in a decision.
SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input

to predictive processes used by investors to form their own
expectations about the future.
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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior

expectations.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence

decisions that users make on the basis of the reported financial
information.
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 Faithful
Faithful Representation
Representation

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions

match what really existed or happened.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for

faithful representation is provided.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor

one set of interested parties over another.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Information that is measured and reported in a similar manner for

different companies is considered comparable.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.
Different knowledgeable and independent observers could reach
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On Consensus .
SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Timeliness means having information available to decision-makers

before it loses its capacity to influence decisions.

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SECOND LEVEL: FUNDAMENTAL CONCEPTS

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.

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 Basic
Basic Elements
Elements

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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

Asset A resource controlled by the entity as a

result of past events and from which
future economic benefits are expected to
Liability flow to the entity.

Equity

Income

Expenses
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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

Asset
A present obligation of the entity arising
from past events, the settlement of which
Liability
is expected to result in an outflow from the
entity of resources embodying economic
Equity benefits.

Income

Expenses
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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

Equity The residual interest in the assets of the

entity after deducting all its liabilities.

Income

Expenses
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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

Equity Increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of
Income
liabilities that result in increases in equity,
other than those relating to contributions
Expenses from equity participants.
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 SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements

Asset

Liability

Equity Decreases in economic benefits during the

accounting period in the form of outflows
Income or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
Expenses
equity participants.
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THIRD
THIRD LEVEL:
LEVEL: RECOGNITION,
RECOGNITION, MEASUREMENT,
MEASUREMENT,
AND
AND DISCLOSURE
DISCLOSURE CONCEPTS
CONCEPTS

These concepts explain how companies should recognize,

measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual

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 THIRD
THIRD LEVEL:
LEVEL: ASSUMPTIONS
ASSUMPTIONS

Basic Assumptions
Economic Entity – company keeps its activity separate from its
owners and other business unit.

Going Concern - company to last long enough to fulfill

objectives and commitments.

Monetary Unit - money is the common denominator.

Periodicity - company can divide its economic activities into

time periods.

Accrual Basis of Accounting – transactions are recorded in the

periods in which the events occur.
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 THIRD
THIRD LEVEL:
LEVEL: BASIC
BASIC PRINCIPLES
PRINCIPLES

Measurement Principles
 Historical Cost is generally thought to be a faithful
representation of the amount paid for a given item.

 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.” “ Fair Value is therefore a market based measure.”

 IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial
liabilities.
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 THIRD
THIRD LEVEL:
LEVEL: BASIC
BASIC PRINCIPLES
PRINCIPLES

Measurement Principles
IASB established a fair value hierarchy that provides insight into
the priority of valuation techniques to use to determine fair value.

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 THIRD
THIRD LEVEL:
LEVEL: BASIC
BASIC PRINCIPLES
PRINCIPLES

Revenue Recognition
When a company agrees to perform a service or sell a product to
a customer, it has a performance obligation.

Requires that companies recognize revenue in the accounting

period in which the performance obligation is satisfied.

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 THIRD
THIRD LEVEL:
LEVEL: BASIC
BASIC PRINCIPLES
PRINCIPLES

Expense Recognition - Outflows or “using up” of assets

or incurring of liabilities during a period as a result of delivering
or producing goods and/or rendering services.

“Let the expense follow the revenues.”

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 THIRD LEVEL: BASIC PRINCIPLES

Full Disclosure
Providing information that is of sufficient importance to
influence the judgment and decisions of an informed user.
Provided through:
 Financial Statements
 Notes to the Financial Statements
 Supplementary information

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 THIRD LEVEL: COST CONSTRAINT

Cost Constraint
Companies must weigh the costs of providing the information
against the benefits that can be derived from using it.
 Rule-making bodies and governmental agencies use cost-
benefit analysis before making final their informational
requirements.
 In order to justify requiring a particular measurement or
disclosure, the benefits perceived to be derived from it
must exceed the costs perceived to be associated with it.

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Summary of
the Structure

ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting

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 GLOBAL ACCOUNTING INSIGHTS

THE CONCEPTUAL FRAMEWORK

The IASB and the FASB have been working together to develop a common
conceptual framework. This framework is based on the existing conceptual
frameworks underlying U.S. GAAP and IFRS. The objective of this joint project
is to develop a conceptual framework consisting of standards that are
principles-based and internally consistent, thereby leading to the most useful
financial reporting.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to the Conceptual Framework for Financial Reporting.
Similarities
• In 2010, the IASB and FASB completed the first phase of a jointly created
conceptual framework. In this first phase, they agreed on the objective of
financial reporting and a common set of desired qualitative characteristics.
These were presented in the Chapter 2 discussion. Note that prior to this
converged phase, the Conceptual Framework gave more emphasis to the
objective of providing information on management’s performance
(stewardship).

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• The existing conceptual frameworks underlying U.S. GAAP and IFRS are
very similar. That is, they are organized in a similar manner (objective,
elements, qualitative characteristics, etc.). There is no real need to change
many aspects of the existing frameworks other than to converge different
ways of discussing essentially the same concepts.
• The converged framework should be a single document, unlike the two
conceptual frameworks that presently exist. It is unlikely that the basic
structure related to the concepts will change.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• Both the IASB and FASB have similar measurement principles, based on
historical cost and fair value. In 2011, the Boards issued a converged
standard on fair value measurement so that the definition of fair value,
measurement techniques, and disclosures are the same between U.S.
GAAP and IFRS when fair value is used in financial statements.

Differences
• Although both U.S. GAAP and IFRS are increasing the use of fair value to
report assets, at this point IFRS has adopted it more broadly. As examples,
under IFRS, companies can apply fair value to property, plant, and
equipment; natural resources; and, in some cases, intangible assets.
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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• U.S. GAAP has a concept statement to guide estimation of fair values when
market-related data is not available (Statement of Financial Accounting
Concepts No. 7, “Using Cash Flow Information and Present Value in
Accounting”). The IASB has not issued a similar concept statement; it has
issued a fair value standard (IFRS 13) that is converged with U.S. GAAP.
• The monetary unit assumption is part of each framework. However, the unit
of measure will vary depending on the currency used in the country in which
the company is incorporated (e.g., Chinese yuan, Japanese yen, and British
pound).

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• The economic entity assumption is also part of each framework although
some cultural differences result in differences in its application. For
example, in Japan many companies have formed alliances that are so
strong that they act similar to related corporate divisions although they are
not actually part of the same company.

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