CONCEPTUAL

FRAMEWORK
PowerPoint prepared by: Bea S. Redoña
Sec. Code 202
Introduction
The International Accounting Standards Board (Board) issued the revised Conceptual Framework for Financial Reporting
(Conceptual Framework), a comprehensive set of concepts for financial reporting, in March 2018.
It sets out:
• the objective of financial reporting
• the qualitative characteristics of useful financial information
• a description of the reporting entity and its boundary
• definitions of an asset, a liability, equity, income and expenses
• criteria for including assets and liabilities in financial statements
(recognition) and guidance on when to remove them (derecognition)
• measurement bases and guidance on when to use them
• concepts and guidance on presentation and disclosure
Conceptual Framework
Previous Revised

◦ Useful, but incomplete and needed ◦ A comprehensive set of concepts for financial
improvement. reporting.
Background
◦ The Conceptual Framework had been left largely unchanged since its inception in 1989. In 2004, the IASB and the FASB
decided to review and revise the conceptual framework, however, changed priorities and the slow progress in the project led to
the project being abandoned in 2010 after only Phase A of the original joint project had been finalized and introduced into the
existing framework as Chapters 1 and 3 in September 2010. Phase D saw the publication of a discussion paper and an
exposure draft but was never finalized. The Boards discussed Phases B and C quite extensively without any consultation
document ever being issued, and Phases E to H largely remained untouched.
◦ During the 2011 agenda consultation many participants called for the IASB to reactivate and finalize the conceptual
framework project given the multitude of open conceptual issues it is facing in many of its current projects. As a result, the
IASB officially added the project to its agenda again in September 2012, this time as an IASB-only project and no longer
aimed at a substantial revision of the framework but focused on those topics that are not yet covered (e.g. presentation and
disclosure) or that show obvious shortcomings that need to be dealt with. As a first step, a Discussion Paper covering all
aspects of the framework project was published in July 2013, followed by a comprehensive Exposure Draft in May 2015.
Chapter 1 – The objective of financial statement
◦ This chapter sets out the objective of general purpose financial reporting (financial reporting), what information is needed to achieve
that objective and who the primary users (users) of financial reports are.
◦ The objective of financial reporting is to provide financial information that is useful to users in making decisions relating to providing
resources to the entity. This is identified as information about the entity’s economic resources and the claims against the reporting
entity as well as information about the effects of transactions and other events that change a reporting entity’s economic resources and
claims.
◦ The chapter newly stresses that information can also help users to assess management’s stewardship of the entity’s economic
resources. Users of financial reports need information to help them assess management’s stewardship. The Conceptual Framework
explicitly discusses this need as well as the need for information that helps users assess the prospects for future net cash inflows to the
entity.
Chapter 2 – Qualitative characteristics of useful
financial information
◦ This chapter discusses what makes financial information useful.
◦ For information to be useful it must both be relevant and provide a faithful representation of what it purports to represent.
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information, and the
guiding concepts that apply throughout the revised Conceptual Framework.
◦ This chapter reintroduces an explicit reference to the notion of prudence and states that the exercise of prudence supports
neutrality. Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements
under conditions of uncertainty. Prudence does not allow for overstatement or understatement of assets, liabilities, income or
expenses.
Chapter 3 – Financial Statements and the
Reporting Entity
◦ This chapter describes the objective and scope of financial statements and provides a description of the reporting entity.
◦ New to the framework is the definition of a reporting entity and the boundary of a it. The chapter also states the IASB's
conviction that, generally, consolidated financial statements are more likely to provide useful information to users of financial
statements than unconsolidated financial statements.
◦ The chapter states the objective of financial statements (to provide information about an entity's assets, liabilities, equity,
income and expenses that is useful to financial statements users in assessing the prospects for future net cash inflows to the
entity and in assessing management's stewardship of the entity's resources) and sets out the going concern assumption. It only
mentions two statements explicitly: the statement of financial position and the statement(s) of financial performance (the latter
being the former statement of comprehensive income); the rest are "other statements and notes".
Chapter 4 – The Elements of Financial
Statement
◦ The main focus of this chapter is on the definitions of assets, liabilities, and equity as well as income and expenses. The
definitions are quoted below:
◦ Asset. A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to
produce economic benefits.
◦ Liability. A present obligation of the entity to transfer an economic resource as a result of past events.
◦ Equity. The residual interest in the assets of the entity after deducting all its liabilities.
◦ Income. 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. Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of
equity claims.

◦ The definitions of an asset and a liability have been refined and the definitions of income and expenses have been updated
only to reflect that refinement. The definition of equity as the residual interest in the assets of the entity after deducting all its
liabilities is unchanged. The Board’s research project on Financial Instruments with Characteristics of Equity is exploring the
distinction between liabilities and equity.
Chapter 4 – The Elements of Financial
Statement
Previous Definition Revised Definition

Asset Asset
◦ A resource controlled by the entity as a result ◦ A present economic resource controlled by the
of past events and from which future economic entity as a result of past events An economic
benefits are expected to flow to the entity. resource is a right that has the potential to produce
economic benefits.
Liability
Liability
◦ A present obligation of the entity arising from ◦ A present obligation of the entity to transfer an
past events, the settlement of which is expected economic resource as a result of past events An
to result in an outflow from the entity of obligation is a duty or responsibility that the entity
resources embodying economic benefits has no practical ability to avoid
Chapter 5 – Recognition and Derecognition
◦ This chapter discusses criteria for including assets and liabilities in financial statements (recognition) and guidance on when to
remove them (derecognition).
◦ The Conceptual Framework states that only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position and only items that meet the definition of income or expenses are to be recognized in the
statement(s) of financial performance. However, their recognition depends on two criteria: their recognition provides users of
financial statements with (1) relevant information about the asset or the liability and about any income, expenses or changes in
equity and (2) a faithful representation of the asset or the liability and of any income, expenses or changes in equity. The
framework also notes a cost constraint. New to the framework is the discussion of derecognition. The requirements as
presented in the framework are driven by two aims: the assets and liabilities retained after the transaction or other event that
led to derecognition must be presented faithfully and the change in the entity's assets and liabilities as a result of that
transaction or other event must also be presented faithfully. The framework also describes alternatives when it is not possible
to achieve both aims.
Chapter 6 - Measurement
◦ This chapter describes various measurement bases and discusses factors to be considered when selecting a measurement basis.
◦ This chapter is dedicated to the description of different measurement bases (historical cost and current value (fair value, value
in use/fulfilment value, and current cost)), the information that they provide and their advantages and disadvantages. Current
cost is newly introduced into the Conceptual Framework as it is widely advocated in academic literature. A table offers an
overview of the information provided by various measurement bases. The framework also sets out factors to consider when
selecting a measurement basis (relevance, faithful representation, enhancing qualitative characteristics and the cost constraint,
factors specific to initial measurement, as well as more than one measurement basis) and points out that consideration of the
objective of financial reporting, the qualitative characteristics of useful financial information and the cost constraint are likely
to result in the selection of different measurement bases for different assets, liabilities and items of income and expense. The
framework does not provide detailed guidance on when a particular measurement basis would be suitable because the
suitability of particular measurement bases will vary depending on facts and circumstances. On equity, the framework offers
some limited discussion, although total equity is not measured directly. Still, the framework maintains, it may be appropriate
to measure directly individual classes of equity or components of equity to provide useful information.
Chapter 7 – Presentation and Disclosure
◦ This chapter includes concepts on presentation and disclosure and guidance on including income and expenses in the
statement of profit or loss and other comprehensive income.
◦ The statement of statement of comprehensive income is newly described as "statement of financial performance", however, the
framework does not specify whether this statement should consist of a single statement or two statements, it only requires that
a total or subtotal for profit or loss must be provided.
◦ It also notes that the statement of profit or loss is the primary source of information about an entity’s financial performance for
the reporting period and that only in "exceptional circumstances" the Board may decide that income or expenses are to be
included in other comprehensive income.
◦ Notably, the framework does not define profit or loss, thus the question of what goes into profit or loss or into other
comprehensive income is still unanswered.
End