CONCEPTUAL

FRAMEWORK
For Financial Reporting
Learning objectives

Explain the roles and structures of key regulatory bodies.

Learning objectives Describe efforts to construct a conceptual framework.

Understand the objective of financial reporting.

Identify the qualitative characteristics of accounting information.

Define the basic elements of financial statements.

Describe the basic assumptions of accounting.

Explain the application of the basic principles of accounting.

Understand the concepts of capital maintenance.

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 Institutional
structure of
International
standard
setting
➢ The IFRS Foundation is an independent
foundation based in the US.
➢ Its activities are directed by the Trustees
who appoint the members to the IASB,
IFRS.AC and IFRIC.
➢ The trustees are individuals of diverse
geographical and functional backgrounds
and comprise of 6 members from North
America, 6 from Europe, 4 from Asia
Pacific and 3 from other parts of the world.
➢ Of the 19 members, 5 represent the
accounting profession and others
represent the international organisation of
preparers, users and academics.
International Accounting
Standards Board
IASB is responsible for developing and issuing
new international standards which are known as
International Financial Reporting Standards
(IFRS).
IASB consists of 15 members and their
foremost qualification is technical expertise. All
members are appointed for a terms of 5 years,
renewable once.
Before a standard, exposure draft or a final
IFRIC interpretation can be published, at least 8
out of the 15 members must approve it.
All existing IASs and SICs remain in force until
amended or withdrawn in the future. Therefore,
IFRS includes IFRSs, IFRIC, IASs, SICs. 6
 The objectives of the IFRS
Advisory Council are:
• To give advice to the IASB
on agenda decisions and
priorities in its work;
• To inform the IASB of the
views of organizations and
individuals on the Council
on major standards setting
projects;
• To give other advice to the
Board or to the Trustees
IFRS Interpretation Committee

This International Financial Reporting

Interpretation Committee (IFRIC)
▪ is a committee of the IASB;
▪ review, on a timely basis, new
financial reporting issues not
specifically addressed in IFRS;
▪ clarify issues where unsatisfactory
or conflicting interpretations have
developed, with a view to reaching
a consensus on the most
appropriate treatment.

8
Conceptual Framework
V2018

9
 Apr 1989
Framework for the Preparation and Presentation of

History Jul 1989

The Framework was published.
Financial Statements was approved by the IASC Board.

Apr 2001
The Framework was adopted by the IASB.

Sep 2010
The Conceptual Framework for Financial
Reporting 2010 was approved by the IASB.

Mar 2018
WWW.IFRS.ORG

Conceptual Framework for Financial Reporting 2018

(the Conceptual Framework) was published.
Appendix – IASB Conceptual Framework
11
The Conceptual Framework
It is not an accounting standard

Conceptual
Framework
establishes
It is a guidance to the the concepts
preparation and presentation of that underlie
financial statements financial reporting.

It does not override any accounting standards

12
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

15
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

17
The objective of general purpose
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 relating to providing resources to the entity

Users’ decisions involve decisions about:

buying, selling or providing or settling voting, or

holding equity and loans and other otherwise influence to
debt instruments forms of credit management’s actions
 The objective of general purpose
financial reporting

To make decisions users must:

assess of the amount,

timing and uncertainty of
future net cash inflows to
the entity

assess of management’s
stewardship of the entity’s
economic resources

19
Information to make decisions

Claims
Economic resources

Changes in
economic resources and claims
Changes in not resulting from
economic resources and claims financial performance
by financial performance
20
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

21
 Qualitative
characteristics of
useful financial
information

22
Fundamental qualitative characteristics

Fundamental Quality—Relevance
To be relevant, accounting information must be capable of
making a difference in a decision.

LO 4 23
Fundamental qualitative characteristics

Fundamental Quality—Relevance

Financial information has predictive value if it has value as an input to

predictive processes used by investors to form their own expectations
about the future.
LO 4 24
Fundamental qualitative characteristics

Fundamental Quality—Relevance

Relevant information also helps users confirm or correct prior expectations

LO 4 25
Fundamental qualitative characteristics

Fundamental Quality—Relevance

Information is material if omitting it or misstating it could influence decisions

that users make on the basis of the reported financial information.

LO 4 26
Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and
descriptions match what really existed or happened.

LO 4 27
Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Completeness means that all the information that is necessary for faithful
representation is provided.

LO 4 28
Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

Neutrality means that a company cannot select information to favor one

set of interested parties over another.

LO 4 29
Fundamental qualitative characteristics

Fundamental Quality—Faithful Representation

An information item that is free from error will be a more accurate

(faithful) representation of a financial item.

LO 4 30
Enhancing qualitative characteristics

Enhancing Qualities

Information that is measured and reported in a similar manner for different

companies is considered comparable.

LO 4 31
Enhancing qualitative characteristics

Enhancing Qualities

Verifiability occurs when independent measurers, using the same

methods, obtain similar results.

LO 4 32
Enhancing qualitative characteristics

Enhancing Qualities

Timeliness means having information available to decision-makers before

it loses its capacity to influence decisions.

LO 4 33
Enhancing qualitative characteristics

Enhancing Qualities

Understandability is the quality of information that lets reasonably

informed users see its significance.

LO 4 34
Qualitative characteristics - Exercises
Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(a) Qualitative characteristic being Relevance
displayed when companies in the Faithful representation
same industry are using the same Predictive value
accounting principles.
Confirmatory value
(b) Quality of information that confirms Neutrality
users’ earlier expectations.
Materiality
(c) Imperative for providing comparisons Timeliness
of a company from period to period.
Verifiability
(d) Ignores the economic consequences Understandability
of a standard or rule. Comparability
LO 5 35
Qualitative characteristics - Exercises
Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(e) Requires a high degree of consensus Relevance
among individuals on a given Faithful representation
measurement. Predictive value
(f) Predictive value is an ingredient of this Confirmatory value
fundamental quality of information. Neutrality
(g) Four qualitative characteristics that Materiality
enhance both relevance and faithful Timeliness
representation.
Verifiability
(h) An item is not reported because its Understandability
effect on income would not change a Comparability
decision.
LO 5 36
Qualitative characteristics - Exercises
Exercise: Identify the qualitative characteristic(s) to be used given
the information provided. Characteristics
(i) Neutrality is a key ingredient of this Relevance
fundamental quality of accounting Faithful representation
information. Predictive value
(j) Two fundamental qualities that make Confirmatory value
accounting information useful for Neutrality
decision-making purposes.
Materiality
(k) Issuance of interim reports is an Timeliness
example of what enhancing
Verifiability
ingredient?
Understandability
Comparability
LO 5 37
38
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

39
Financial statements and reporting entity

Statement of financial position

Liquidity

Current liability
Current asset Non current liability

Economic resources and claims

Non current asset Equity Strengths & weaknesses
Liquidity & solvency

40
Financial statements and reporting entity
Statement of comprehensive income

Revenue Profit or loss from

Expenses operating activity

Financial income Profit or loss from

Financial expenses financial activity

Other income Profit or loss from

Other expenses other activity

Profit or loss before tax Changes in resources and claims

Income tax from financial performance
Profit or loss after tax - Components of that return
➔ Efficiently effective use of the reporting
Other comprehensive income
entity’s resources

41
 Financial statements and reporting entity
Statement of changes in equity
Share Retain Revaluation
Total
capital earnings surplus

Balance as at 1/1/XX
Retrospective application
Issuance of new share
Dividend
Transfers between equity components
Balance as at 31/12/XX

Changes in Resources and claims

NOT from financial performance
debt or equity instruments

42
Financial statements and reporting entity

Statement of cash flows

Net cash from operating activities
Net cash from investing activities
Net cash from financing activities

Changes in cash flows

Cash generating ability
Cash usage

43
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

45
The elements of financial statements

Liability Income
Asset

Equity
Expenses

46
Basic elements
Elements of Financial Statements

A present economic resource

Asset controlled by the entity as a
result of past events.
Liability An economic resource is a right
that has the potential to produce
economic benefits.
Equity

Income

Expenses

LO 5
Basic elements
Elements of Financial Statements

Asset

A present obligation of the entity

Liability to transfer an economic resource
as a result of past events.

Equity

Income

Expenses

LO 5
Basic elements
Elements of Financial Statements

Asset

Liability

The residual interest in the assets of

Equity
the entity after deducting all its liabilities.

Income

Expenses

LO 5
Basic elements
Elements of Financial Statements

Asset

Liability

Equity
Increases in economic benefits during
the accounting period in the form of inflows
or enhancements of assets or decreases of
Income
liabilities that result in increases in equity,
other than those relating to contributions
from equity participants.
Expenses

LO 5
Basic elements
Elements of Financial Statements

Asset

Liability

Equity
Decreases in economic benefits during
Income the accounting period in the form of outflows
or depletions of assets or incurrences of
liabilities that result in decreases in equity,
Expenses other than those relating to distributions to
equity participants.
LO 5
53
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

54
Recognition, measurement, disclosure concepts

These concepts explain how companies should

recognize, measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Recognition
3. Monetary unit 3. Derecognition
4. Periodicity 4. Presentation and
disclosure
5. Accrual

LO 6
Basic assumptions Economic entity
Company keeps its activity separate
from its owners and other business unit.

Accrual
Going concern
Transactions are recorded in the
Company to last long enough to fulfill
periods in which the events occur.
objectives and commitments.

Periodicity Monetary unit

Company can divide its economic Money is the common denominator.
activities into time periods.

56
Recognition
How recognition links the elements of financial statement

Principles

Recognition is the
process of capturing for
inclusion in the statement
of financial position or
the statement(s) of
financial performance an
item that meets the
definition of one of the
elements of financial
statements—an asset, a
liability, equity, income or
expenses.

57
Recognition criteria
When?

➢Meets the definition of an element

➢Provides users of financial statements with relevant information and
faithful representation
➢And information which results in benefits which exceed the cost
of providing that information.

58
Recognition criteria
whether recognition of an item results in relevant
information may be affected
v by, for example:

Existence uncertainty Low probability of an inflow or

outflow of economic benefits

› it is uncertain whether an › An asset or liability can exist

asset exists or is separable even if the probability of an
from goodwill, or whether a inflow or outflow of economic
liability exists. benefits is low.

59
Recognition criteria
a faithful representation may be affected by the level
of measurement uncertainty
v or by other factors.

Measurement uncertainty Other factors

› the depiction of resulting income,

expenses and changes in equity.
› a measurement of an asset or › whether related assets and liabilities
liability is available but the level of are recognized.
measurement uncertainty is so high. › presentation and disclosure of
related information can enable a
recognized amount to form part of a
faithful representation.

60
 Derecognition

Derecognition is
the removal of all
or part of a
recognised asset
or liability from
› Derecognition an entity’s › derecognition

Liabilities
statement of normally occurs
Assets

normally occurs
when the entity no
when the entity financial
loses control of all longer has a
position. present obligation
or part of the
recognised asset for all or part of the
recognised liability. 61
Recognition

62
63
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

64
Measurement
Historical cost Current cost
Assets are recorded at the amount of Assets are carried at the
cash or cash equivalent paid or the fair amount of cash or cash
value of the consideration given to equivalent that would be
acquire them. Liabilities are recorded at paid if the asset were
the amount of proceeds received in acquired currently. Liabilities
exchange for the debt. are carried at the discounted
value or cash equivalent that
would be required to settle
the debt currently.

Realisable value Present value

Assets are carried at the amount of cash Assets are carried at the discounted value
or cash equivalent that could currently of the future cash inflows that the items
be obtained by selling the asset in an are expected to generate in the normal
orderly disposal. The liabilities are course of business. Liabilities are carried
carried at their settlement values being at the discounted value of the future net
undiscounted amounts of cash that need cash outflows required to settle the
to be paid in the course of business. liabilities in the normal course of business. 65
Measurement
➢ Measurement bases

Historical cost Current value

➢ Historical cost, Amortized cost, ➢ Fair value, Value in use (for

Carrying amount. assets) or Fulfilment value
➢ Derived from the transaction or event (for liabilities), Current cost.
that created them ➢ Updated at measurement date.
➢ Do not reflect changes in prices, just ➢ Capture any positive or negative
reflect change in consumption changes.
(depreciation / amortization), impairment,
or fulfilment.
➢ Historical cost of the asset is no longer
recoverable.
66
 Measurement

➢ Factors to consider when selecting a measurement basis

✓ Must be relevant and it must faithfully represent what it purports to represent

✓ Should, as far as possible, be comparable, verifiable, timely and understandable

✓ Benefits of the information must be sufficient to justify the cost of providing that information

67
Cost constraint

Companies must weigh the costs of providing the information

against the benefits that can be derived from using it.

◆ Rule-making bodies and governmental agencies use cost-

benefit analysis before making final their informational
requirements.

◆ In order to justify requiring a particular measurement or

disclosure, the benefits perceived to be derived from it must
exceed the costs perceived to be associated with it.

LO 8
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

71
 Presentation and disclosure

PRESENTATION & DISCLOSURE PRINCIPLES

CLASSIFICATION

➢ Classification of assets and liabilities

Offsetting

➢ Classification of equity

➢ Classification of income and expenses

72
Presentation and disclosure principles
Effective communication in
financial statements

entity-specific information No duplication

› duplication of information
› entity-specific information
in different parts of the
is more useful than
financial statements is
standardised descriptions,
usually unnecessary and
sometimes referred to as
can make financial
‘boilerplate’
statements less
understandable.

73
 Classification
Classification is applied to the unit of
01 account selected for an asset or liability.

Classification Offsetting

of assets and 02
Offsetting occurs when an entity
recognises and measures both an asset
and liability as separate units of account,

liabilities but groups them into a single net amount

in the statement of financial position.

03 Offsetting vs. A set

Offsetting assets and liabilities differs
from treating a set of rights and
obligations as a single unit of account.
74
Classification of equity

Classify components of equity separately if some of

those components are subject to particular legal,
regulatory or other requirements.

75
 Classification of income and expenses
Classification is applied to
(a) income and expenses resulting from the unit of account selected for an asset or liability; or

(b) components of such income and expenses if those components have different characteristics and are
identified separately. me and expenses resulting from the unit of account selected for an asset or liability;

The statement of profit or loss

• The statement of profit or loss is the primary source of information about an entity’s financial performance
for the reporting period;
• Profit or loss could be a section of a single statement of financial performance or a separate statement;
• The statement(s) of financial performance include(s) a total (subtotal) for profit or loss;
• In principle, all income and expenses are classified and included in the statement of profit or loss;
• Income and expenses that arise on a historical cost measurement basis are included in the statement of
profit or loss. That is also the case when income and expenses of that type are separately identified as a
component of a change in the current value of an asset or liability.
76
 Classification of income and expenses
Other comprehensive income
• In exceptional circumstances, the Board may decide to exclude from the statement of profit or loss income
or expenses arising from a change in current value of an asset or liability and include those income and
expenses in other comprehensive income
• The Board may make such a decision when doing so would result in the statement of profit or loss providing
more relevant information or a more faithful representation

Recycling
• In principle, income and expenses included in other comprehensive income in one period are recycled to
the statement of profit or loss in a future period when doing so results in the statement of profit or loss
providing more relevant information or a more faithful representation
• When recycling does not result in the statement of profit or loss providing more relevant information or a
more faithful representation, the Board may decide income and expenses included in other comprehensive
income are not to be subsequently recycled
77
Contents of the conceptual framework

Chapter 1: The objectives of general purpose financial reporting

Chapter 2: Qualitative characteristics of useful financial information
Chapter 3: Financial statements and the reporting entity
CF 2018

Chapter 4: The elements of financial statements

Chapter 5: Recognition and derecognition
Chapter 6: Measurement
Chapter 7: Presentation and disclosure
Chapter 8: Concepts of capital and capital maintenance

78
Capital concept

Capital can be
• the net assets of an entity or
• the amount of capital contributed
by the owners plus increases in the
net assets that remain in the entity.
Capital can be expressed as money
invested or purchasing power
invested.
It can also be expressed in terms of
productive capacity.

79
Concepts of capital maintenance
Financial Physical
capital maintenance capital maintenance
Nominal monetary units or
units of constant purchasing power

Capital = Net asset or equity of the entity. Capital = Productive capacity of the entity
(measured as units of output per day)
Used if the main concern of the user of the
financial statements is the maintenance of Used if the main concern of the user of the
the nominal value invested capital. financial statements is the operating
capacity of the entity.
Profit is the difference in money terms
between the opening and closing capital Profit is earned only if the operating
excluding any contributions from and capacity at the end of the period exceeds
distribution to owners. that of the beginning of the period.
80
Concepts of capital maintenance

FCM – Constant Physical capital

FCM - Monetary term
Purchasing Power maintenance
➢ Profit represents the ➢ Profit represents the ➢ Profit represents the
increase in nominal increase in invested increase in that capital
Profit money capital over the purchasing power over the over the period.
period. period.

➢ Increases in the prices of ➢ Only that part of the ➢ All price changes of the
assets may not be increase in the prices of assets and liabilities are
recognized until the assets that exceeds the viewed as changes in the
assets are disposed of in increase in the general measurement of the
Increase in an exchange transaction. level of prices is regarded physical productive
the prices as profit. The rest of the capacity of the entity
increase is treated as a as capital maintenance
capital maintenance adjustments that are part
adjustment and, hence, as of equity and not as profit.
part of equity.

81
Example

On 1 Jan X0, an inventory was purchased with the price of

100 CU.
On 31 Dec X0, the purchasing power increase by 10%.
The fair value of the inventory was 130 CU.
On 1 Jan X1, the inventory was sold at the price of 150 CU.
Required: Calculate the carrying amount of inventory, P/L
and OCI under different capital maintenance views.

82
 Answer

Accounting items FCM – Monetary term FCM – Constant PP term Physical CM

Inventory (1.1.x0) 100 100 100

Inventory (31.12.x0) 100 100 x 110% = 110 130
Changes in equity (31.12.x0) 0 110 – 100 = 10 130 – 100 = 30
Profit or Loss (1.1.x1) 150 – 100 = 50 150 – 110 = 40 150 – 130 = 20

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The
End!
Address: Contact:
279 Nguyen Tri Phuong st., School of Accounting –
District 10, HCMC, Vietnam University of Economics, HCMC

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