CONCEPTUAL FRAMEWORK

 A complete, comprehensive, and single document promulgated by the International Accounting

Standards Board (IASB), which publishes standards in a series of pronouncements called
International Financial Reporting Standards (IFRS).
 A summary of terms and concepts that underlie the preparation and presentation of financial
statements for external users
 Describes the concepts for general purpose financial reporting

Purposes of the conceptual framework

1. Assist the International Accounting Standards Board (IASB) in developing standards (IFRS) and
review of existing IFRS.
2. Assist the Board in promoting harmonization 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 IFRS
3. Assist national standard-setting bodies (Philippine Financial Reporting Standard Council) in
developing national standards (Philippine Accounting Standards)
4. Assist preparers of financial statements in applying IFRS and in dealing with topics that have yet
to form the subject of an IFRS
5. Assist auditors in forming an opinion on whether the FS comply IFRS
6. Assist users of FS in interpreting the information contained in FS prepared in compliance with IFRS
7. To guide those who are interested in the work of IASB with information about its approach to the
formulation of IFRS

Authoritative status of Conceptual Framework

 If there is an interpretation that specifically applies to a transaction, the standard or interpretation
overrides the Conceptual Framework
 Nothing in the Conceptual Framework overrides any specific IFRS
 In case where there is a conflict, the requirements of the IFRS shall prevail over the Conceptual
Framework

Applicability of International Accounting Standards (IAS) and IFRS

Public-Interest Entities – issued a class of securities listed for the trading on an Exchange (traded on the
PSE)

Other entities are as follows:

NON-PUBLIC INTEREST
OTHER PUBLIC-INTEREST MICRO-FINANCE ENTITIES
ENTITIES WHICH ARE SUBJECT
ENTITIES
PFRS for SMEs
Entities which are economically Entities with total assets of Total assets or liabilities are less
significant. These are entities between P3M and P350M or than P3M
whose total assets exceed total liabilities between P3M
P350M or total liabilities exceed and P250M
P250M. Based on FS and on
consolidated totals
Entities with assets of at least
P50M and having 200 or more
holders each holding at least 100
shares of equity securities as of
the first day of the issuers’ fiscal
year
Entities which have sold a class Entities not required to file FS Are not required to file FS under
of their securities pursuant to a under SRC 68.1 Part 2 of SRC 68
registration under Sec 12
(Procedure of Registration
Securities) of the Securities
Regulation Code

Entities which are in the process
of filing their FS for the purpose
of issuing any class of
instruments in the public market
Entities that hold assets in a
fiduciary capacity for a broad
group of outsiders such as a
bank, investment house, finance
company, an insurance
company, securities broker,
mutual fund and pre-need
company or entities with
secondary license
Entities not in the process filing Are not in the process filing FS
FS for the purpose of issuing any for the purpose of issuing any
class of instruments in a public class of instruments in a public
market market
Entities which are not holders of Are not holders of secondary
secondary license issued by a licenses issued by a regulatory
regulatory agency, such as a agency
bank (all types); an investment
house, a finance company; an
instrument company; a
securities broker/ dealer, a
mutual fund and a pre-need
company

Public utility entities Entities which are not public

utility companies

*Investment house - individuals or organizations that are engaged in investment banking and financing
activity);
Instrument company - engaged in monetary contracts between parties. They can be created, traded,
modified and settled. They can be cash or currency, evidence of an ownership interest in an entity or
share, or a contractual right to receive or deliver cash or bond)

SCOPE OF CONCEPTUAL FRAMEWORK

I. OBJECTIVE OF FINANCIAL REPORTING
II. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
III. FINANCIAL STATEMENTS AND REPORTING ENTITY
IV. ELEMENTS OF FINANCIAL STATEMENTS
V. RECOGNITION AND DERECOGNITION
VI. MEASUREMENT
VII. PRESENTATION AND DISCLOSURE
VIII. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
 IX. OBJECTIVE OF 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.

TYPES OF USEFUL INFORMATION:

A. Financial Flexibility
Refers to the ability of a company to use its financial resources to adapt to change:
a. How the company generate cash flows operations and how it will be managed
b. How the company manages the additional capital contributed by the investors or long-
term creditors
c. How it can manage resources from liquidated long-term resources without disrupting
operations
d. How the company reacts to uncertainties in the economic environment in which it
operates
B. Liquidity and Solvency
a. Liquidity – availability of cash in the near future to cover currently maturing obligations
b. Solvency – availability of cash over a long term to meet financial commitments when they
fall due
C. Operating Capability
Refers to the ability of the company to maintain a given physical level of operations –
quality and quantity produced, effectiveness and efficiency of operations, and entity’s
profitability.
D. Investing, Financing, and Operating Activities
Refers to the ability of the entity to generate cash and cash equivalents and how it utilizes
it.

LIMITATION OF GENERAL PURPOSE FINANCIAL STATEMENTS

1. Do not and cannot provide all of the information that existing and potential investors, lenders,
and other creditors need. They need to consider other pertinent information from other sources
lije eceonomic conditions, political events and industry outlook
2. Are not designed to show the value of an entity but the reports provide information to help the
primary users estimate the value of the entity
3. Are intended to provide common information to users and cannot accommodate every request
for information
4. To a large extent, are based on estimate and judgment rather than exact depiction.

X. QUALITATIVE CHARACTERISTICS
are the qualities or attributes that make the financial accounting information useful to
users.

Classification:
1. Fundamental Qualitative Characteristics – relate to content or substance of financial information

a. Relevance – capacity of the information to influence a(n) economic decision

 i. Predictive Value – if information can be used as an input to processes employed by
users to predict future outcome
ii. Confirmatory Value - if information provides feedback about previous evaluations or
enables users confirm or correct earlier expectations
iii. Materiality – a practical rule in accounting and a sub-quality of relevance. It pertains
when items are not significant enough to affect the evaluation, decision and fairness
of the financial statements. An information is said to be material if its omission and/
or misstatement could influence decision making of users of financial information. It
is dependent on good judgment, professional expertise/ experience, and common
sense.

b. Faithful Representation – means that financial reports represent economic phenomena or

transactions in words and numbers. Descriptions and figures must match what really
existed or happened.
i. Completeness – is the result of adequate disclosures standard or the principle of full
disclosure. Meaning, all significant and relevant information leading to the
preparation of financial statements shall be clearly reported.
ii. Neutrality - a neutral depiction is without bias in the preparation or presentation of
financial information. It should not favor one party to the detriment of the other.

Prudence – is the exercise of care and caution when dealing with the uncertainties in
the measurement process such that assets or income are not overstated and liabilities
or expenses are not understated. “Don’t count your chicks until the eggs hatch”
iii. Free from error – no errors or omissions in the description of the phenomenon or
transactions. It does not mean perfectly accurate in all respects, as it is valid to use
accounting estimates (IAS 8)
iv. Measurement Uncertainty – arises when monetary amounts in financial reports cannot
be observed directly and must instead be estimated. Use of reasonable estimate is an
essential part of providing financial information and does not undermine the usefulness
of the financial information.

*information must be both relevant and faithful represented if it is to be useful

2. Enhancing Qualitative Characteristics – relate to the presentation or form of the financial

information. This intended to increase the usefulness of the financial information that is relevant
and faithfully represented.

a. Comparability – ability to bring together for the purpose of noting points of likeness and
difference. Can be made within, between, and across entities.

Consistency – use of the same method for the same item, either from period to period within
an entity or in a single period across entities. It does not mean that no change in accounting
method can be made. If the change would result to more useful and meaningful information,
then such change shall be made with full disclosures and peso effect thereof.
b. Understandability – requires the financial information must be comprehensible or intelligible
if it is to be most useful. However, it requires users to have a reasonable knowledge of
business and economic activities to be able to understand the financial information.
 c. Verifiability – different knowledgeable and independent observers could reach consensus,
although not in complete agreement, that a particular depiction is a faithful representation.

Types:

i. Direct – verifying an amount or other representation though a direct observation,

i.e. Counting cash
ii. Indirect - checking the inputs to a model or formula or other technique and
recalculating inputs using the same methodology, i.e. recalculating ending inventory
using weighted average.
d. Timeliness – financial information must be available or communicated early enough when a
decision is to be made.

Underlying Assumptions – accounting assumptions are the basic notions or fundamental premises on
which the accounting process is based.

1. Going concern – or continuity assumption is the sole assumption included in the Conceptual
Framework. It means that in the absence of evidence to the contrary, the accounting entity is
viewed as continuing in operation indefinitely.

III. FINANCIAL STATEMENTS AND REPORTING ENTITY

Financial Statements – portray the financial effects of transactions and other events by grouping them
into broad classes according to their economic characteristic

Reporting Entity – is an entity that chooses or is required to prepare financial statements and is not
necessarily a legal entity.

IV. ELEMENTS OF FINANCIAL STATEMENTS:

1. Asset – present economic resource controlled by the entity as a result of past events
2. Liability – present obligation of the entity to transfer an economic resource as a result of past
events. An obligation is a duty or responsibility that the entity has no practical ability to avoid
3. Equity – is a residual interest in the assets of the entity after deducting all its liabilities
4. Income – increases in assets or decreases in liabilities that result in increases in equity, other than
those relating to contributions from equity holders
5. Expense – decreases in assets or increases in liabilities that result in decreases in equity, other
than those relating to distributions to equity holders.

V. RECOGNITION AND DERECOGNITION

Recognition – defines recognition as the process of capturing for inclusion in the financial statements an
item that meets the definition of an asset, liability, equity, income or expense.

Derecognition – removal of all or part of a recognized asset or liability from the statement of financial
position.
 a. Derecognition of an asset – occurs when the entity loses control of all or part of the asset
b. Derecognition of a liability – occurs when the entity no longer has a present ibligation for all
or part of the liability

VI. MEASUREMENT
Defined as quantifying in monetary terms the elements in the financial stataments.

Categories:
1. Historical Cost – cost incurred in acquiring or creating the asset comprising the consideration paid
plus transaction cost. It is the entry price or entry value to acquire an asset or incur a liability.
2. Current Value – provide information updated to reflect conditions at the measurement date
a. Fair value – price that would be received to sell an asset in ana orderly tranasaction
between market participants at measurement date
b. Value in use for asset – is the present value of cash flows that an entity expects to derive
from the use of an asset and from ultimate disposal
c. Fulfillment value for liability – is the present value of cash that an entity expects to
transfer in paying or settling a liability
d. Current Cost – current amount that would be paid (and transaction cost) to acquire an
equivalent asset and received (less transaction cost) to take on an equivalent liability

Selecting a measurement basis?

Consider nature of the information that the measurement basis will produce, that is, if it will be
useful to the users of financial statements. Historical cost is most commonly used as it is simpler and
costly.

VII. PRESENTATION AND DISCLOSURE

Can be an effective communication tool about the information in financial statements. A reporting
entity communicates information about its assets, liabilities, equity, income and expenses by presenting
and disclosing information in the financial statements.
Effective communication of information in financial statements makes the information more
relevant and contributes to faithful representation, enhances understandability and comparability of
information in different parts of the financial statements.

VIII. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Concepts of Capital:
a. Financial concept – such as invested money or purchasing power, capital is synonymous with net
assets or equity of the entity. This is the traditional concept based on historical cost and adopted
by most entities.

b. Physical Concept – is a quantitative measure of the physical productive capacity to produce goods
and services. This should be adopted if the main concern of the users is the operating capability
of the entity meaning, the resource or fund needed to achieve that operating capability or
capacity.
Concepts of Capital Maintenance
a. Financial capital maintenance - Net income under financial capital concept occurs when the
nominal amount of the net assets at the end of the year exceeds the nominal amount of the net
assets at the beginning of the period after excluding distribution to and contributions by owners
during the period. Also known as “Net Assets Approach”

b. Physical capital maintenance – Under this concept, profit is earned only if the physical productive
capacity of the entity at the end of the year exceeds the physical productive capital at the
beginning of the period after excluding distribution to and contributions by owners during the
period. Physical capital is equal to the net assets of the entity expressed in terms of current cost.

References:
Atty. Conrado T. Valix, CPA: Conceptual Framework and Accounting Standards
Conceptual Framework and Accounting Standards by Elenita Balatbat-Cabrera