CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

financial position changes in economic resources and claims

general purpose financial reports provides information on a reporting entity's:

b. rights that do not correspond to an obligation of another party:

i. right over physical objects (e.g., right to use a property or right to sell an inventory). ii. right to use intellectual property.

a. rights that correspond to an obligation of another party

i. right to receive cash, goods or services. ii. right to exchange economic resources with another party on favorable terms. iii. right to benefit from an obligation of another party to transfer an economic resource if a specified uncertain future event occurs.

step 1

identify information that has the potential to be material

Qualitative Characteristics

identify the types of information that are most likely to be useful to primary users in making decisions using an entity's financial report. apply to information in the financial statements as well as to financial information provided in other ways.

combined financial statement

if a reporting entity comprises two or more entities that are not all linked by the a parent-subsidiary relationship, the reporting entity's financial statement are referred to as:

consolidated financial statements

if a reporting entity comprosises both the parent and subsidiaries, the reporting entity's financial statement s are referred to as:

unconsolidated financial statement

if a reporting entity is the parent alone, the reporting entity's financial statements are referred to as:

income

increases in assets, or decreases in liabilities, that results in increases in equity, other than those relating to contributions from holders of equity claims.

accrual accounting

information based on _____ provides better basis for assessing an entitys financial performance than informtion based solely on cash receipts and payments during period.

perspective adopted in financial statement

information in financial statement is prepared from the perspective of the reporting entity, not from the perspective of any particular group of financial statement users.

Comparability

information is comparable if it helps users identify similarities and differences between different sets of information that are provided by: a. intra-comparability b. inter-comparability does not relate to only one item because a comparison requires at least two items.

materiality

information is material if omitting, misstating or obscuring it could resonably be expected to influence decisions that the primary users of a specific reporting entity's general purpose financial statements make on the basis of those financial statements.

relevance

information is relevant if can make difference in the decisions of users. relevant information has the following: a. predictive value b. confirmatory value

Neutrality

information is selected or presented without bias. information is not manipulated to increase the probability that the users will receive it favorably or unfavorably. is supported by prudence.

timeliness

information is timely if it is available to use in time to be able to influence their decisions.

verifiability

information is verifiable if different users could reach a general agreement as to what the information purports to represent.

past cash flow

information on _____ helps users assess the entity's ability to generate future cash flows by providing users a basis in understanding the entity's operating, investing, and financing activities, assessing its liquidity or solvency, and interpreting other information about its financial performance.

variability of the return

information on ______ helps users in assessing the uncertainty of future cash flows example: significant flactuations in reported profits may indicate financial instability and uncertainty on the entitys ablity to generate cash flows from its operation.

financial performance

information on _______ helps users assess the entitys ability to produce return from its economic resources.

changes in economic resources and claims

information on fnancial performance (income and expenses) and other transaction and events that leads to changes in financial position.

financial position

information on the economic reources (assets) and claims against the reporting entity (liabilities and equity); and

Indirect Verification

involves checking the inputs to a model or formula and recalculating the outputs using the same methodology. e.g., checking the debits and credits in the cash ledger and recalculating the ending balance.

Direct Verification

involves direct observation e.g., counting of cash

executory contract

is a contract that is equally unperformed- neither party has fulfilled any of its obligations, or both parties have partially fulfilled their obligation to an equal extent.

cost

is a pervasive constraint on the entity's ability to provide useful financial information.

liability

is a present obligation of the entity to transfer an economic resource as a result of past events.

materiality

is an entity specific aspect of relevance, meaning it depends on the facts and circumstances surrounding a specific entity. is a matter of judgment.

comparison

is not uniformity, meaning like things must look alike and different things must look differently. it would be inappropriate to make different things look alike, or vice versa.

reporting entity

is one that is required, or chooses, to prepare financial statements, and is not a legal entity. it can e a single entity or a group or combination of two or more entities.

derecognition

is the opposite of recognition. it is the removal of a previously recognized asset or liability from the entity's statement of financial position.

recognition

is the process of including in the financial statement of financial position or the statements of financial performance an item that meets the definition of one of the financial statement elements.

equity

is the residual interest in the assets of the entity after deducting all its liabilities. applies to all entities regardless of form.

matching of cost and income

sometimes the recognition of income results in the simultaneous recognition of a related expense. this simultaneous recognition of income and expense is also called _____. for example, the sale of goods results in the simulataneous recognition of sales and cost of sales.

predictive value

the information can help the users in making predictions about future outcomes.

transfer of an economic resource

the liability is the obligation that has the potential to require the transfer of an economic resource to another party and not the future economic benefits that the obligationmay cause to be transferred.

return

provides an indication on how well management has efficiently and effectively used the entity's resources.

cost constraint

providing information entails cost and this can only be justified by the benefits expected to be derived from using the information. accordingly, an optimum balance between costs and benefits is desirable such that cost do not outweigh the benefits.

solvency

refers to an entity's ability to meet its long term obligation.

liquidity

refers to an entity's ability to pay short term obligations

consistency

refers to the use of the same methods for the same items.

lenders

refers to those who extend loans e.g bank

other creditors

refers to those who extends other forms of credit e.g supplier

step 4

review the draft financial statements to determine whether all material information has been identified and materiality considered from a wide perspective and in aggregate, on the basis of the complete set of financial statements.

Parent-Subsidiary

sometimes an entity controls another entity. the controlling entity is called the _______, while the controlled entity is called the _______.

Understandability

Information is understandable if it is presented in a clear and concise manner. does not mean that complex matters should be excluded to make information understandable to users because this wouldmake information incomplete and potentially misleading.

Comparability and Consistency

____ is the goal while _____ is the means of achieving that goal.

obligation

a duty or responsibility that an entity has no practical ability to avoid.

asset

a present economic resource controlled by the entity as a result of past events. an economic resource is a right that has tha potential to produce economic benefits.

intra-comparability

a single entity but in different periods

completeness

all information necessary for users to understand the phenomenon being depicted is provided. these include description of the nature of the item, numerical depiction, description of the numerical depiction and explanation of significant facts surrounding the item.

recognition criteria

an item is recognized if: a. it meets the definition of an asset, liability, equity, income or expense; and b. recognizing it would provide useful information, i.e., relevant and faithfully represented information

- legal obligation - constructive obligation

an obligation is either:

legal obligation

an obligation that results from a controct or legislation, or other operation of law

constructive obligation

an obligation that results from an entity's action that creates a valid expectation on others that the entity will accept and discharge certain responsibilities. e.g., past practice or published policies

expenses

are decreses in assets, or in increases in liabilities, that results in decreases in equity, other than those relating to distributions to holders of equity claims.

Fundamental Qualitative Characteristics

are essential to the usefulness of information, meaning information must be both relevant and faithfully represented for it to be useful. EXAMPLE: neither a relevant information that is erroneous nor a correct information that is relevant helps users make good decisions.

step 2

assess whether the information identified in the step 1 is, in fact, material.

right

asset is an economic resource and an economic resource is a right that has the potential to produce economic benefits.

financial performance other events and transaction

changes in economic resources and claims results from:

primary users

1. existing and potential investors 2. lenders and other creditors

materiality process

IFRS practice statement 2 Making materiality judgments provides a non-mandatory guidance that entities may follow in making materiality judgments. tha guidance consists of a four-step process called the ________

reporting period

The life of the business is divided into 'periods' of time. Records should reflect the 'period' in which the transaction occurs

inter-comparability

different entities in a single period.

control

does not mean that the entity can ensure that the resource will produce economic benefits in all circumstances. it only means that if the resource produces benefits, it is the entity who will obtain those benefits and not another party.

executory contract

establishes a combined right and obligation to exchange economic resources, which are interdependent and inseperable. thus the two constitute a single asset or liability.

present obligation as a result of past events

exist if: a. the entity has already obtained economic benefits or taken an action; and b. as a consequence, the entity will or may have to transfer an economic resource that it will not otherwise have had to transfer.

1. completeness 2. neutrality 3. free from error

faithfully represented information has the following characteristics:

confirmatory value

feedback value. the information can help users n confirming their previous predictions.

forward-looking information

financial statement are designed to provide information about past events, information about possible future transactions and other events is included in the financial statements only if it relates to the past information presented in the financial statements and is deemed useful to users of financial statements.

going concern assumption

financial statements are normally prepared on the assumption that the reporting entity is a going concern, meaning the entity has neither the intention t=nor the need to end its operations in the forseeable future.

reserves

may refer to amounts set aside for the protection of the entity's creditors of stakeholders from losses.

control

means that the entity has the exclusive right over the benefits of an asset and the ability to prevent others from accessing those benefits. accordingly, if one party controls an asset, no other party controls that asset.

faithful representation

means the information provides a true, correct and complete depiction of the economic phenomena that it purports to represent.

derecognition

occurs when the item no longer meet the definition of an asset or liability, such as when entity losses control of all or part of the asset, or no onger has a present obligation for all or part of the liability.

Enhancing Qualitative Characteristics

only enhances the usefulness of information that is both relavant and faithfully represented but cannot make information that is irrelevant or erroneous to be useful. should be maximized to the extent possible.

step 3

organize the informationwithin the draft financial statements in a way that communicates the information clearly and concisely to primary users.

carrying amount

the amount at which an asset, a liability or equity is recognized in the statement of financial position.

potential to produce economic benefits

the asset is the present right that has the potential to produce economic benefits and not the future economic benefits that the right may produce. thus, the right's potential to produce economic benefit need not be certain, or even likely - what is important is that the right already exists and that, in alteast one circumstance, it would produce economic benefits for the entity.

Scope of Conceptual Framework

the coceptual framework is concerned with general purpose financial reporting. general purpose financial reporting involves the preparations of general purpose financial statements. the conceptual framework provides the concepts that underlie general purpose financial reporting with regards to the following: 1. the objective of financial reporting 2. qualitative characteristic useful financial information. 3. financial statements and the reporting entity. 4. the elements of financial statements 5. recognition an derecognition. 6. measurement 7. presentation and disclosure 8. concepts of capital and capital maintenance.

1. fundamental qualitative characteristics 2. enhancing qualitative characteristics

the conceptual framework classifies the qualitative characteristics into the following:

status of the conceptual framework

the conceptual framework is not a standard. if there is a conflict between a standard and the conceptual framework, the requirement of the standard will prevail.

Purpose of Conceptual Framework

the conceptual framework prescribes the concepts for general purpose financial reporting. its purpose is to: a. assist the IASB in developing standards (IFRS/PFRS) that are based on consistent concepts; b. assists preparers in developing consistent accounting policies when no standard (IFRS/PFRS) applies to a particular transaction or when a standard allows a choice of accounting policy; and c. assist all parties in understanding and interpreting the standards.

Purpose of Conceptual Framework

the conceptual framework provides the foundation for the developmet of standards that: a. promote transparency by enhancing the international comparability and quality of financial information b. strengthen accountability by reducing the information gap between providers of capital and the entity's management. c. contribute to economic efficiency by helping investors to identify opportunities and risks around the world, thus improving capital allocation. the use of a singe, trusted accounting language lowers the cost of capital and reduces international reporting costs.

right potential to produce economic benefits control

the definition of asset has the following three aspects:

- obligation - transfer of an economic resource - present obligation as a result of past events

the definition of liability has the following three aspects:

assets liabilities equity income expenses

the elements of financial statements:

favorable, unfavorable

the entity has an asset if the terms of the contract are_____; a liability if the terms are ______.

individual financial statement

the financial statement of each subsidiary alone referred to as:

objective and scope of financial statement

the objective of general purpose financial statement is to provide information about the reporting entity's assets, liabilities, equity, income and expenses that is useful in assessing: a. the entity's prospects for future net cash inflows; and b. management's stewardship over economic resources.

unit of account

the right or the group of rights, the obligation or the group of obligations, or the group or rights and obligations to which recognition criteria and measurement concepts are applied.

fundamental qualitative characteristics

these are the characteristics that make information useful to users. they consist of the ff: a. relevance b. faithful representation

Enhancing Qualitative Characteristics

these are the chracteristics that enhance tha usefulness of information. they consist of the following: a. verifiability b. comparability c. understandability d. timeliness

income and expense

these relate to entity's financial performance.

asset, liability, equity

these relates to the entity's financial position

free from error

this does not mean that the information is perfectly accurate in all respects. means there are no error in the description and in the process by which the information is selected and applied. if the information is an estimate, that fact should be described clearly, including an explanation of the process used in making that estimate.

entity's management's stewardship

this information also helps in predicting how efficiently and effectively the entity's resources will be used in future periods; thus, helping in the assessment of the entity's prospects for future net cash inflows.

recognition

this involves recording the item in words and in monetary amount and including that amount in the totals of either those statements.

comparative information

to help users of financial statements in evaluating changes and trends, financial statements also provide comparative information for at least one preceding reporting period. EXAMPLE: ab entitys 2019 current year financial statements include the 2018 preceding year financial statements as compartive information. this allow the users to assess the information's intra-comparability.

overleverage

use of too much debt (may cause difficulty in obtaining additional financing)