The Conceptual Framework for Financial Reporting

Conceptual Framework – is a summary of the terms and concepts that underlie the preparation of
financial statements. It is an attempt to provide an overall theoretical foundation for accounting which
will guide standard setters, preparers and users of financial information in the preparation of financial
statements.

Another definition:

• The conceptual framework for financial reporting is a complete, comprehensive and single
document promulgated by the International Accounting Standards Board.

• As to its, importance, nature, scope, we will discuss them one by one in the succeeding topics

Important notes about conceptual framework:

• The conceptual framework is not a standard. It only serves as a reference in developing and
applying the standards.

• In cases of conflict, The Philippine Financial Reporting Standards shall prevail.

The conceptual framework is concerned with general purpose financial statements.

Statement of Financial Position

 Asset, liabilities, equity

Statement of Financial Performance

 Income, expenses

Other statements

 Info about elements

 Cash flows
 Contributions/distributions
 Assumptions, estimates

Purpose and Status of the Financial Conceptual Framework

As a background on the evolution of the Conceptual Framework, let us have a walkthrough on some
important dates and events:

The International Accounting Standards Board (the IASB or the Board) issued the revised Conceptual
Framework for Financial Reporting (the revised Conceptual Framework) on 29 March 2018. The revised
version includes comprehensive changes to the previous Conceptual Framework, issued in 1989 and
partly revised in 2010. The previous Conceptual Framework (the 2010 Conceptual Framework) was
criticized for its lack of clarity, the exclusion of certain important concepts and for being outdated in
terms of the IASB’s current thinking. Following the IASB’s agenda consultation in 2011, the Conceptual
Framework project was added to the IASB’s work plan in September 2012. Since then, the IASB has
issued a discussion paper in July 2013 and an exposure draft in June 2015. In revising the Conceptual
Framework, the Board was looking to underpin high level concepts with sufficient detail for it to set
standards and to help others to better understand and interpret the standards.

Status and purpose of the Conceptual Framework

As a reminder, the Conceptual Framework is not a standard, and none of the concepts override the
concepts or requirements in any standard. The purpose of the Conceptual Framework is:

 to assist the Board in developing standards,

 to help preparers develop consistent accounting policies where there is no applicable standard
in place, and

 to assist all parties understand and interpret the standards

The revised conceptual framework includes new concepts, provides updated definitions and
recognition criteria. It has eight (8) chapters apart from an introduction and a glossary:

Conceptual Framework for Financial Reporting 2018

1. the objective of general purpose financial accounting

2. qualitative characteristics of useful financial information
3. financial statements and the reporting entity
4. the elements of financial statements
5. recognition and derecognition
6. measurement
7. presentation and disclosure
8. concepts of capital and capital maintenance

Learning content

Objective of Financial Reporting

 The objective of general purpose financial reporting is 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.
 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.

Qualitative Characteristics of Useful Financial Information

Financial statements must meet some characteristics or attributes in order for the information to
become more useful and meaningful. These are divided into two (2) groups:

• the Fundamental Qualitative characteristics; and

• the Enhancing Qualitative characteristics.

Preview!!!

Why do you think QUALITY is a very important element relating to financial information?

When buying jeans, the first thing that I look into is the brand, taking into consideration also is the price
but that is just secondary when you are not on budget, right?. In my case, I will prefer, in the order of
priority, 1) Levis, 2) Lee and 3) Jag. So Levis is in my top 1 list, why Levis? It has been there for a long
period of time; I have been using it and not only me, also my family. It has been tested and proven
through time that it last longer than the other brands.

So what am I getting into? It is a trusted Brand, it has QUALITY and it has CREDIBILITY.

In the same light, I would like to compare the financial statements (F/S) that a CPA has painstakingly
prepared for one accounting cycle with utmost care. If the F/S will be the basis for making decisions, it is
a MUST that is prepared by someone who is knowledgeable on some accounting rules and procedures.
In other words, it must be characterized with QUALITY to make it a credible basis for making a decision.

How can we achieve that? Let us discuss them one by one as we go along.

QUALITATIVE CHARACTERISTICS

 Are the attributes that make the information provided in the F/S useful to users

 Contribute to the decision usefulness of financial reporting information

 Distinguish better information from inferior information for decision-making purposes

Qualitative characteristics are subdivided into two(2) considered either as:

1. Fundamental or

2. Enhancing

The fundamental qualitative characteristics are:

1) Relevance and

2) Faithful Representation

*Financial information to be useful must possess relevance and faithful representation.

What is Relevance?

 Briefly explained, relevance means capacity of information to influence a decision. By way of

example, the Income statement is a tool that gives management relevant information about the
results of operations of the business for a certain period of time, while the statement of
financial position gives relevant information about the solvency and liquidity of the business for
short to long term. In other words, relevance simply means the financial information is related
or pertinent to the economic decision.

When do we say that financial information is Relevant?

• When it has Predictive Value and Confirmatory Value

When financial information can help users to plan or predict correctly the outcome of events in the
future, it has predictive value.

Financial information has confirmatory value if it provides feedback about previous evaluations.

 Information with predictive value also has confirmatory value. Both terms are interrelated. An
example is the revenue for this year will be used to predict the revenue next year while it can
also be used to compare revenue predictions in the past years. The first part of the sentence
making forecast of future revenues by using the revenue figure at present is predictive value
while is confirmatory value is comparing predictions or forecasts made in the past. Both
predictive and confirmatory value result will be used to correct or improve processes for the
future.

FUNDAMENTAL QUALITATIVE CHARACTERISTICS RELEVANCE

 Predictive value
 Confirmatory value

Relevant financial information is capable of making a difference in users' decisions.

 Predictive value: can be used as an input to processes to predict future outcomes

 Confirmatory value: provides feedback about (confirms or changes) previous evaluations.
Materiality: Information is material if omitting it or misstating it could influence decisions.
The conceptual framework states that Materiality is an entity-specific aspect of relevance. Materiality
depends on the facts and circumstances surrounding a specific entity. The Conceptual Framework and
the Standards do not specify a uniform quantitative threshold for Materiality.

Materiality is a matter of judgment. This has been thoroughly discussed in your F A R subject.

How do we define Faithful Representation?

Fundamental Quality- Faithful Representation

 Faithful representation means that the numbers and descriptions match what really existed or
happened.
 Amounts and descriptions presented reflect the actual results of the transactions of the entity.
 Substance over form.
 Provides true, correct, and complte depiction of the economic phenomena

Fundamental quality

Ingredients of the fundamental quality

 Completeness Neutrality Free from error

Faithful Representation means that financial reports must present economic events measured in words
in numbers. To be useful, financial information must show in substance and in form the actual effects of
transactions.

Examples:

1) When a Sales of P10,000,000 is recorded only as P5,000,000 is the opposite of faithful

representation. Another example is when an ending Inventory of P2,000,000 is recorded only as
P200,000 is also an opposite of faithful representation.

2) The recognition of an Impairment Loss to record the destruction of a building by typhoon is an

example of Faithful Representation.
To achieve the goal of Faithful Representation, financial information must have all of the following
characteristics:

• Completeness– is the result of adequate disclosure. To be complete, financial statements shall

be accompanied by Notes to Financial Statements that provides in narrative form and description of
the items presented in the financial statements and other items that do not qualify for recognition.

- All information necessary to understand the phenomenon is provided

- Includes description of nature of item, numerical depiction(monetary amount) and its
description(historical or fair value), and explanations of significant facts surrounding the item

• Neutrality– means free from bias. The financial statements must not favor the needs of just one
specific user. Financial Statements must be general purpose in nature. To be neutral is to be fair.

- Information is selected or presented without bias

- Prudence---- use of caution when making judgements under condition od uncertainty. Making
sure that assets and income are not overstated and liabilities or expenses are not understand

• Freedom from Error – does not mean perfectly accurate in all respects. Freedom from error
means that there are no omissions in description of the transactions and events, the process used to
produce the financial information has been selected and applied with no errors in the process. In making
estimates, Freedom from error is achieved when the amount is clearly and accurately described as an
estimate.

The Enhancing Qualitative Characteristics that will add to the reliability and usefulness of financial
information are:

Qualitative Characteristics of Accounting Information

Enhancing Qualitative characteristics

 Comparability: Comparable comparisons within the entity and across entities.

 Consistency: Closely related to comparability is the notion that consistency of accounting
practices over time permits valid comparisons between different periods.
- use the same method for the same items
 Verifiability: Helps to assure users that information represents faithfully what it purports to
represent.
 Timeliness: Means providing information to decision- makers in time to be capable of
influencing their decisions.
 Understandability: Requires financial information to be understandable or comprehensible.

1. Comparability– means the ability to bring together for the purpose of noting points of likeness
and differences. Comparability is achieved by presenting information for at least two (2)
accounting periods. When preparing financial statements for the year 2019, there is another
column for year 2018.
 -helps users identify similarities and differences between different sets of information provided by :
a single entity but different periods(intra-comparability) and different entities in an single
period(inter-comparability)

Comparability can be achieved by adhering to the principles of Consistency.

Comparability can be:

COMPARABILITY AND CONSISTENCY

Comparability means that the information should be comparable with accounting information about
other enterprises.

Consistency means that the same accounting principles and methods should be used from year to year
within a company.

a) Intracomparability or horizontal comparability.

The example given in number 1 above is horizontal comparability or within the same
organization

b) Intercomparability or dimensional comparability

is done between and among different enterprises. If I want to compare the performance of
all banks in the Philippines in terms of their loan portfolio, I have to dig into their Audited
Financial Statements and make interviews with their top management. Comparably,
intercomparability is more difficult to achieve that intracomparability.

2. Verifiability – an information is verifiable in the sense that it is supported by evidence so that

when another person will look into it and make his own computations using the same methods,
he will arrive at the same amount. Verifiability means that different knowledgeable and
independent observers could reach an agreement or a consensus that a particular depiction is a
faithful representation.
-if different users could reach a genereal agreement as to what the information purports
to present
* direct verification- applying techniques and methods to achieve the same result;
direct result
* indirect verification- recalculation using verified information

3. Timeliness –“Aanhin pa ang damo kung patay na ang kabayo?” or “Timeliness is next to
Godliness”. Simply put, timeliness means that financial information should be made available to
the users on time to influence their decisions. What happened in the past would become the
basis of what would happen in the future.

Example of Timeliness :
If the annual stockholders’ meeting is scheduled on April 15, annual audit reports should be distributed
as early as the first week of first of March to give the stockholders ample time to review the financial
and other information. During annual stockholders’ meetings, major decisions are made to formulate
the policies for future plans. The financial statements play a major role in this decision-making exercise.

4. Understandability – understandability relies on two factors, quality of the information and

quality of the user. Even though the information is well presented, it will be useless if the user
does not understand it.
-quality of information------ presented in a clear and concise manner
-quality of the user--------- responsibility to understand the contents

------ willingness to stucy information with reasonable diligence

5. Cost of constraint – benefits derived from information should exceed the cost of providing it.

*Classifying, characterizing and presenting information clearly and concisely makes it understandable
(par 2.24, Conceptual Framework). For information to be useful, it must be adapted to the users’ range
of knowledge and understanding.

The Conceptual Framework for Financial Reporting

Conceptual Framework – is a summary of the terms and concepts that underlie the preparation of
financial statements. It is an attempt to provide an overall theoretical foundation for
accounting which will guide standard setters, preparers and users of financial information in the
preparation of financial statements.

Another definition:

• The conceptual framework for financial reporting is a complete, comprehensive and single
document promulgated by the International Accounting Standards Board.

• As to its, importance, nature, scope, we will discuss them one by one in the succeeding topics.

Important notes about conceptual framework:

• The conceptual framework is not a standard. It only serves as a reference in developing and
applying the standards.
• In cases of conflict, The Philippine Financial Reporting Standards shall prevail.
 The conceptual framework is concerned with general purpose financial statements.

Purpose and Status of the Financial Conceptual Framework

As a background on the evolution of the Conceptual Framework, let us have a walkthrough on some
important dates and events:

The International Accounting Standards Board (the IASB or the Board) issued the revised
Conceptual Framework for Financial Reporting (the revised Conceptual Framework) on 29 March
2018. The revised version includes comprehensive changes to the previous Conceptual Framework,
issued in 1989 and partly revised in 2010. The previous Conceptual Framework (the 2010 Conceptual
Framework) was criticized for its lack of clarity, the exclusion of certain important concepts and for
being outdated in terms of the IASB’s current thinking. Following the IASB’s agenda consultation in
2011, the Conceptual Framework project was added to the IASB’s work plan in September 2012. Since
then, the IASB has issued a discussion paper in July 2013 and an exposure draft in June 2015. In revising
the Conceptual Framework, the Board was looking to underpin high level concepts with sufficient detail
for it to set standards and to help others to better understand and interpret the standards.

Status and purpose of the Conceptual Framework

As a reminder, the Conceptual Framework is not a standard, and none of the concepts override
the concepts or requirements in any standard. The purpose of the Conceptual Framework is:
• to assist the Board in developing standards,
 • to help preparers develop consistent accounting policies where there is no applicable standard
in place, and
• to assist all parties understand and interpret the standards

The revised conceptual framework includes new concepts, provides updated definitions and
recognition criteria. It has eight (8) chapters apart from an introduction and a glossary:

REFERENCES:

Textbook:
Empleo, P. and Robles, N. (2019). The Philippine Financial Reporting Reporting (Conceptual Framework
and Accounting Standards). Mandaluyong City: Millennium Books, Inc.

Millan, Z. (2020). Conceptual Framework & Accounting Standards. 4F Pelizloy Centrum, Lower Session
Road, Baguio City. Bandolin Enterprise Publishing and Printing.

References:
1. Cabrera, E, et al. (2018). Conceptual Framework and Accounting Standards. Manila: GIC
Enterprises
 2. Valix, C, et al. (2019). Conceptual framework and accounting standards. Manila: GIC
Enterprises & Co., Inc.
3. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
4. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc.,
Manila
5. Financial Reporting Standard Council (2017). Philippine Financial Reporting Standards. PICPA
6. Valencia, E. and Roxas, G. (2017), Basic Accounting. Baguio City: Valencia Educational Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I. GIC Enterprises & Co., Inc.,
Manila

Electronic Resource:
1. Introduction to accounting, https://courses.lumenlearning.com/sac-
finaccounting/chapter/chapter1/
2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research -topics/finance/basic-
accounting/theaccounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons,
http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html
7. International Financial Reporting Standards. www.ifrs.org
8. International Accounting Standards. www.iasplus.com/en/standards/ias

ASSESSMENTS:

PARTICIPATION (for recitation purposes)

DRILLS/ ACTIVITIES/ APPLICATION

EVALUATION (Quiz)

ASSIGNMENT

LEARNING CONTENT
 Qualitative Characteristics of Useful Financial Information

Financial statements must meet some characteristics or attributes in order for the information to
become more useful and meaningful. These are divided into two (2) groups:  the Fundamental
Qualitative characteristics; and  the Enhancing Qualitative characteristics.

Preview!!!

Why do you think QUALITY is a very important element relating to financial information?

When buying jeans, the first thing that I look into is the brand, taking into consideration also is the price
but that is just secondary when you are not on budget, right?. In my case, I will prefer, in the order of
priority, 1) Levis, 2) Lee and 3) Jag. So Levis is in my top 1 list, why Levis? It has been there for a long
period of time; I have been using it and not only me, also my family. It has been tested and proven
through time that it last longer than the other brands.

So what am I getting into? It is a trusted Brand, it has QUALITY and it has CREDIBILITY.

In the same light, I would like to compare the financial statements (F/S) that a CPA has painstakingly
prepared for one accounting cycle with utmost care. If the F/S will be the basis for making decisions, it is
a MUST that is prepared by someone who is knowledgeable on some accounting rules and procedures.
In other words, it must be characterized with QUALITY to make it a credible basis for making a decision.
How can we achieve that? Let us discuss them one by one as we go along.

QUALITATIVE CHARACTERISTICS
• Are the attributes that make the information provided in the F/S useful to users
• Contribute to the decision usefulness of financial reporting information
• Distinguish better information from inferior information for decision-making purposes

Qualitative characteristics are subdivided into two(2) considered either as:

1. Fundamental or
2. Enhancing

The fundamental qualitative characteristics are:

1) Relevance and

2) Faithful Representation
*Financial information to be useful must possess relevance and faithful representation.

What is Relevance?

Briefly explained, relevance means capacity of information to influence a decision. By way of

example, the Income statement is a tool that gives management relevant information about the results
of operations of the business for a certain period of time, while the statement of financial position gives
relevant information about the solvency and liquidity of the business for short to long term. In other
words, relevance simply means the financial information is related or pertinent to the economic
decision.

When do we say that financial information is Relevant?

2)  When it has Predictive Value and

Confirmatory Value

*When financial information can help users to plan or predict correctly the outcome of events in the
future, it has predictive value.

*Financial information has confirmatory value if it provides feedback about previous evaluations.

Information with predictive value also has confirmatory value. Both terms are interrelated. An
example is the revenue for this year will be used to predict the revenue next year while it can also be
used to compare revenue predictions in the past years. The first part of the sentence making forecast of
future revenues by using the revenue figure at present is predictive value while is confirmatory value is
comparing predictions or forecasts made in the past. Both predictive and confirmatory value result will
be used to correct or improve processes for the future.
The conceptual framework states that Materiality is an entity-specific aspect of relevance. Materiality
depends on the facts and circumstances surrounding a specific entity. The Conceptual Framework and
the Standards do not specify a uniform quantitative threshold for Materiality.

Materiality is a matter of judgment. This has been thoroughly discussed in your F A R subject.

How do we define Faithful Representation?

Faithful Representation means that financial reports must present economic events measured in words
in numbers. To be useful, financial information must show in substance and in form the actual effects of
transactions.

Examples:

1) When a Sales of P10,000,000 is recorded only as P5,000,000 is the opposite of faithful

representation. Another example is when an ending Inventory of P2,000,000 is recorded only as
P200,000 is also an opposite of faithful representation.

2) The recognition of an Impairment Loss to record the destruction of a building by typhoon is an

example of Faithful Representation.

To achieve the goal of Faithful Representation, financial information must have all of the following
characteristics:

• Completeness– is the result of adequate disclosure. To be complete, financial statements shall

be accompanied by Notes to Financial Statements that provides in narrative form and
description of the items presented in the financial statements and other items that do not
qualify for recognition.
• Neutrality– means free from bias. The financial statements must not favor the needs of just one
specific user. Financial Statements must be general purpose in nature. To be neutral is to be
fair.
• Freedom from Error – does not mean perfectly accurate in all respects. Freedom from error
means that there are no omissions in description of the transactions and events, the process
used to produce the financial information has been selected and applied with no errors in the
process. In making estimates, Freedom from error is achieved when the amount is clearly and
accurately described as an estimate.

The Enhancing Qualitative Characteristics that will add to the reliability and usefulness of financial
information are:
 1. Comparability– means the ability to bring together for the purpose of noting points of likeness
and differences. Comparability is achieved by presenting information for at least two (2)
accounting periods. When preparing financial statements for the year 2019, there is another
column for year 2018.

Comparability can be achieved by adhering to the principles of Consistency.

Comparability can be:

a) Intracomparability or horizontal comparability. The example given in number 1 above is

horizontal comparability or within the same organization

b) Intercomparability or dimensional comparability– is done between and among different

enterprises. If I want to compare the performance of all banks in the Philippines in terms of their loan
portfolio, I have to dig into their Audited Financial Statements and make interviews with their top
management. Comparably, intercomparability is more difficult to achieve that intracomparability.

2. Verifiability – an in formation is verifiable in the sense that it is supported by evidence so that

when another person will look into it and make his own computations using the same methods,
he will arrive at the same amount. Verifiability means that different knowledgeable and
independent observers could reach an agreement or a consensus that a particular depiction is a
faithful representation.

3. Timeliness –“Aanhin pa ang damo kung patay na ang kabayo?” or “Timeliness is next to
Godliness”. Simply put, timeliness means that financial information should be made available to
 the users on time to influence their decisions. What happened in the past would become the
basis of what would happen in the future.

Example of Timeliness : If the annual stockholders’ meeting is scheduled on April 15, annual audit
reports should be distributed as early as the first week of first of March to give the stockholders ample
time to review the financial and other information. During annual stockholders’ meetings, major
decisions are made to formulate the policies for future plans. The financial statements play a major role
in this decision-making exercise.

4. Understandability – understandability relies on two factors, quality of the information and

quality of the user. Even though the information is well presented, it will be useless if the user
does not understand it.

*Classifying, characterizing and presenting information clearly and concisely makes it understandable
(par

2.24, Conceptual Framework). For information to be useful, it must be adapted to the users’ range of
knowledge and understanding.

REFERENCES:

Textbook:
Empleo, P. and Robles, N. (2019). The Philippine Financial Reporting Reporting (Conceptual Framework
and Accounting Standards). Mandaluyong City: Millennium Books, Inc.

Millan, Z. (2020). Conceptual Framework & Accounting Standards. 4F Pelizloy Centrum, Lower Session
Road, Baguio City. Bandolin Enterprise Publishing and Printing.

References:
1. Cabrera, E, et al. (2018). Conceptual Framework and Accounting Standards. Manila: GIC
Enterprises
2. Valix, C, et al. (2019). Conceptual framework and accounting standards. Manila: GIC
Enterprises & Co., Inc.
3. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
4. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
5. Financial Reporting Standard Council (2017). Philippine Financial Reporting Standards. PICPA
6. Valencia, E. and Roxas, G. (2017), Basic Accounting. Baguio City: Valencia Educational Supply
7. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I. GIC Enterprises & Co., Inc.,
Manila
Electronic Resource:
1. Introduction to accounting, https://courses.lumenlearning.com/sac-
finaccounting/chapter/chapter1/
2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research -topics/finance/basic-
accounting/theaccounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons,
http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html
7. International Financial Reporting Standards. www.ifrs.org
8. International Accounting Standards. www.iasplus.com/en/standards/ias

ASSESSMENTS:

PARTICIPATION (for recitation purposes)

DRILLS/ ACTIVITIES/ APPLICATION

EVALUATION (Quiz)

ASSIGNMENT