Conceptual Framework

Financial reporting and assumptions

1. The Conceptual Framework for Financial Reporting

a) a complete, comprehensive and single document promulgated by the IASB.
b) a summary of the terms and concepts that underlie the preparation and presentation of financial
statements for external users.
c) an attempt to provide an overall theoretical foundation for accounting.
d) Intended to guide standard-setters, preparers and users of financial information in the preparation and
presentation of statements.
e) the underlying theory for the development of accounting standards and revision of previously issued
accounting standards.

2. Purposes of Conceptual Framework

a) to assist the Board (IASB) in the development of future IFRSs and in its review of existing IFRSs;
b) to assist the Board in promoting harmonisation 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;
c) to assist national standard-setting bodies in developing national standards;
d) to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet
to form the subject of an IFRS;
e) to assist auditors in forming an opinion on whether financial statements comply with IFRSs;
f) to assist users of financial statements in interpreting the information contained in financial statements prepared in
compliance with IFRSs; and
g) to provide those who are interested in the work of the IASB with information about its approach to the
formulation of IFRSs.

3. Authoritative status of Conceptual Framework

a) If there is a standard or an interpretation that specifically applies to a transaction, the standard or
interpretation overrides the Conceptual Framework.
b) In the absence of a standard or an interpretation that specifically applies to a transaction, management shall
consider the applicability of the Conceptual Framework in developing and applying an accounting policy that
results in information that is relevant and reliable.
c) The Conceptual Framework is not an IFRS and hence does not define standards for any particular measurement
or disclosure issue. Nothing in the Conceptual Framework overrides any specific IFRS.
d) The Board recognises that in a limited number of cases there may be a conflict between the Conceptual
Framework and an IFRS. In those cases where there is a conflict, the requirements of the IFRS prevail
over those of the Conceptual Framework.

4. Users of financial information

a) Primary users
i. include the existing and potential investors, lenders and other creditors.
ii. parties to whom general purpose financial reports are primarily directed.
iii. such users cannot require reporting entities to provide information directly to them and therefore must rely
on general purpose financial reports for much of the financial information they need.
b) Other users
i. include the employees, customers, governments and their agencies, and the public.
ii. parties that may find the general purpose financial reports useful bu the reports are not directed to them
primarily.

5. Scope of Conceptual Framework

a) the objective of financial reporting;
b) the qualitative characteristics of useful financial information;
c) the definition, recognition and measurement of the elements from which financial statements are constructed;
and
d) concepts of capital and capital maintenance.

6. The objective of GENERAL PURPOSE financial reporting

a) to provide financial information
b) about the reporting entity
c) that is useful to existing and potential investors, lenders and other creditors
d) in making decisions about providing resources to the entity.
i. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans
and other forms of credit.

7. Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide
information directly to them and must rely on general purpose financial reports for much of the financial information
they need. Consequently, they are the primary users to whom general purpose financial reports are directed.
8. However, general purpose financial reports do not and CANNOT provide ALL of the information that existing and
potential investors, lenders and other creditors need. Those users need to consider pertinent information from other
sources, for example, general economic conditions and expectations, political events and political climate, and industry
and company outlooks.

9. General purpose financial reports are NOT designed to show the value of a reporting entity; but they provide
information to help existing and potential investors, lenders and other creditors to estimate the value of the reporting
entity.

10. The management of a reporting entity is also interested in financial information about the entity. However,
management need not rely on general purpose financial reports because it is able to obtain the financial information it
needs internally.

11. Other parties, such as regulators and members of the public other than investors, lenders and other creditors, may
also find general purpose financial reports useful. However, those reports are NOT primarily directed to these other
groups.

12. To a large extent, financial reports are based on estimates, judgements and models RATHER THAN exact depictions.
The Conceptual Framework establishes the concepts that underlie those estimates, judgements and models.

13. Information about a reporting entity’s economic resources, claims against the entity and changes in resources and
claims

a) General purpose financial reports provide information about the financial position of a reporting entity, which is
information about the entity’s economic resources and the claims against the reporting entity. Financial reports
also provide information about the effects of transactions and other events that change a reporting entity’s
economic resources and claims. Both types of information provide useful input for decisions about providing
resources to an entity.

b) Financial performance reflected by ACCRUAL accounting

i. Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting
entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash
receipts and payments occur in a different period. This is important because information about a reporting
entity’s economic resources and claims and changes in its economic resources and claims during a period
provides a better basis for assessing the entity’s past and future performance than information solely about
cash receipts and payments during that period.

14. Underlying assumptions

a) Accounting assumptions (or postulates) are the basic notions or fundamental premises on which the accounting
process is based.
b) The Conceptual Framework for Financial Reporting mentions only one assumption, namely going concern.
c) However, implicit in accounting are the basic assumptions of accounting entity, time period and monetary unit.

15. Going concern assumption

a) the going concern (or continuity) assumption means that in the absence of evidence to the contrary, the
accounting entity is viewed as continuing in operation indefinitely.

16. Accounting entity assumption

a) the entity is separate from the owners, managers, and employees who constitute the entity.

17. Time period assumption

a) the indefinite life of an entity is subdivided into accounting periods which are usually of equal length for the
purpose of preparing financial reports on financial position, performance and cash flows.
b) the accounting period may be a calendar year or a natural business year.
i. A calendar year is a twelve-month period that ends on December 31.
ii. A natural business year is a twelve-month period that ends on any month when the business is at the lowest
or experiencing slack season.

18. Monetary unit assumption

a) Aspects
i. quantifiability of the peso
1. assets, liabilities, equity, income and expenses should be stated in terms of a unit of measure which is
the peso in the Philippines.
ii. stability of the peso assumption
1. the purchasing power of the peso is stable or constant and that its instability is insignificant and
therefore may be ignored.