Conceptual and Regulatory Frameworks For Financial Reporting

Conceptual and Regulatory
Frameworks for Financial Reporting
1
Learning Outcomes
At the end of this chapter, you should be able to:

• Explain what a conceptual framework is;
• Describe the evolution of the conceptual
framework of financial reporting;
• Outline the structure and components of the
framework;
• Explain the components of the framework;
• Explain the benefits and criticisms of the
framework; and
• Discuss the regulatory framework applicable to
financial reporting.
2
Lesson Outline
 What is a Conceptual Framework?
 Evolution of the Conceptual Framework
 Structure and Components of the Conceptual

Framework
 Benefits and perceived disadvantages of the

Conceptual Framework
 Regulatory Framework on Financial Reporting in Sri

Lanka
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What is a conceptual
framework?
A set of guiding principles that influence and
direct decisions in a particular area.
In accounting - provides guidance and apply in

relation to a range of issues relating to preparation of
financial statements.
General purpose financial reporting, which

meets the needs of external users of
information.
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framework? (Contd.)
• “A coherent system of inter-related
objectives and fundamentals that can lead
to consistent standards and that prescribes
the nature, function, limits of financial
accounting and financial statements” .
(FASB,USA)
• A body of interrelated objectives (objectives

of financial reporting) and fundamentals
(underlying concepts to achieve those objectives).
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framework? (Contd.)
 The Conceptual Framework describes the
objective of, and the concepts for, general
purpose financial reporting. It is a practical tool
that: (IFRS)
1. assists the IASB to develop Standards that are based on
consistent concepts;
2. assists preparers to develop consistent accounting
policies when no Standard applies to a particular
transaction or event, or when a Standard allows a choice
of accounting policy; and
3. assists others to understand and interpret the
Standards.
Evolution of Conceptual Framework
Studies commenced in
1960s
FASB, USA IASB

Framework (1978), Framework
first conceptual (First time in
framework to 1989)
develop
IASB Revised
Framework (2010)
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Conceptual Framework for Financial Reporting
1st Level
2nd Level
3rd Level
8
The Structure and Components of the IASB
Conceptual Framework for Financial Reporting
 The objective of general purpose financial reporting

 The qualitative characteristics of useful financial
information
 The elements of the financial statements
 The recognition and measurement of the elements
of financial statements
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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.
Those decisions involve buying, selling, or holding equity
and debt instruments and providing or settling loans and
other forms of credit.
10
The objective of general purpose financial
reporting (Contd.)
Information
Economic resources and Changes in economic

claims resources and claims
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Qualitative characteristics
Qualitative Characteristics
Enhancing
12
Elements of Financial Statements
 Asset
Directly related
with measurement
 Liability of financial position
 Equity
 Income Directly related with
the measurement of
performance (i.e.
 Expenses frequently profit.)
13
Recognition of Elements in the Financial
Statements
Recognition is the process of incorporating in the Statement of

Financial Position or Statement of Comprehensive Income an item that
meets:
 The definition of an element of the financial statements and
 The criteria for recognition;
 It is probable that any future economic benefit associated
with the item will flow to or from an entity. (The probability
of future economic benefit)
 The item has a cost or value that can be measured reliably.
(Reliability of measurement)
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Measurement
 The measurement is the process of determining

the monetary amounts at which the elements
of the financial statements are to be recognized
and carried in the Statement of Financial Position
and the Statement of Comprehensive Income.
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Measurement Bases
• Historical Cost
• Current Cost
• Realizable (Settlement) Value
• Present Value
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The Benefits of the Conceptual Framework
 Accounting standards are more consistent and logical
 Standard-setters become accountable for their decisions

 Communication process is enhanced
 The development of accounting standards become

more economical
 Emphasize the ‘decision usefulness’ role of financial
reports
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Perceived Disadvantages of the
 Burden on small organizations.

 Economic in focus of Conceptual framework.
 Representation of a codification of existing practice
rather than prescribing an ‘ideal’ or logically derived
approach to accounting.
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Regulatory Framework on
Financial Accounting
Regulatory Framework
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Summary
• Prescribes the nature, function and limits of

financial accounting and reporting.
• Central goal is to achieve general consensus on
objectives and fundamentals of financial
reporting.
• Components of the conceptual framework deal
with these objectives and fundamentals.
• Provides the basis for regulations in financial
reporting.
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Conceptual and Regulatory

Frameworks for Financial Reporting

At the end of this chapter, you should be able to:

 What is a Conceptual Framework?

 Evolution of the Conceptual Framework

 Structure and Components of the Conceptual

 Benefits and perceived disadvantages of the

 Regulatory Framework on Financial Reporting in Sri

In accounting - provides guidance and apply in

General purpose financial reporting, which

• A body of interrelated objectives (objectives

FASB, USA IASB

 The objective of general purpose financial reporting

To provide financial information about the reporting

Economic resources and Changes in economic

Recognition is the process of incorporating in the Statement of

 The measurement is the process of determining

 Accounting standards are more consistent and logical

 Standard-setters become accountable for their decisions

 The development of accounting standards become

 Burden on small organizations.

• Prescribes the nature, function and limits of

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