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CFAS NOTES SALISID
Chapter 02 : Conceptual Framework
A coherent system of interrelated objectives and fundamentals that is
expected to lead to consistent standards.
PURPOSE
Assist the IASB to develop IFRS Standards that are based on
consistent concepts.
Assist all parties to understand and interpret the Standards.
Assist preparers to develop consistent accounting policies when no
standard applies to a particular transaction or other event, or when
a standard allows a choice of accounting policy
💡 Conceptual Framework is not a Standard and nothing in the
Framework overrides any Standard.
GENERAL PURPOSE FINANCIAL REPORTING
Provide financial information about the reporting entity that is useful
to existing and potential investors, lenders, and other creditors.
💡 Why do we need Financial Reporting?
Liquidity, Solvency, Management Stewardship, Needs for
Additional Financing
💡 Useful in making economic decisions, useful in assessing cash
flow prospects, about enterprise resources claims to those
resources and changes.
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General purpose financial reporting deals with providing information
that caters the common needs of the primary users, however, it cannot
provide all the information to these users.
The financial information that will help the primary
users are:
The economic resources of the entity, claims against the entity and
changes in those resources and claims.
How efficiently and effectively the entity's management and governing
bodies have discharged their responsibilities to use the entity's
economic resources.
QUALITATIVE CHARACTERISTICS OF USEFUL INFORMATION
1. Fundamental Characteristics
Relevance - Relevant financial information is making a difference in the
decision made by users. It is relevant if it has predictive value,
confirmatory value or both.
💡 Predictive Value - Predict future outcomes
💡 Confirmatory Value - Feedback on previous evaluations
Materiality - Material information if omitted,
misstated or obscured could reasonably be expected to
influence the decisions of the primary users of general
purpose financial reports.
Faithful Representation - the financial reports which represents
economic phenomena in words or numbers must faithfully represent the
substance of the phenomena that it purports to represent.
💡 True, Correct, Complete
1. Completeness - a complete depiction includes all information
necessary for a user to understand the phenomenon.
2. Neutrality - a neutral depiction is an information without bias in
the selection or presentation of financial information.
3. Free form Error - Information has no errors or omissions in the
description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors.
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2. Enhancing Characteristics
Comparability - Identify and understand similarities in and differences
among items.
Intra Comparability - Single entity of different periods
Inter Comparability - Different entities in a single period
Verifiability - different knowledgeable and independent observers could
reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.
Direct Verification - verifying amount or other representation
through direct observation.
Indirect Verification - checking the inputs to a model formula or
other technique and recalculating the outputs using the same
methodology.
Timeliness - having information available to decision-makers in time to
be capable of influencing their decisions.
Understandability - Information is understandable if it is classified,
characterized and presented in clear and concise manner.
FINANCIAL STATEMENTS AND THE REPORTING ENTITY
💡 Financial statements is to provide financial information about
the reporting entity's assets, liabilities, equity, income and
expenses that is useful to users of financial statements in
assessing the prospects for future net cash inflows to the
reporting entity's economic resources
Financial statements are prepared for a reporting
period and provide information about:
Assets and liabilities — including unrecognized assets and
liabilities — and equity that existed at the end of the reported
period, or during the reporting period.
Income and expenses for the reporting period.
Reporting Entity is an entity requires, or choose to prepare financial
statements
Single entity
A period of an entity
Comprise of more than one entity
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Reporting Period
Prepared for a specified period of time
FS provide comparative information for at least 1 preceding reporting
period
FS are designed to provide information about past events.
Information about possible future transactions and other events is
included it relates to past information.
THE ELEMENTS OF FINANCIAL STATEMENTS
💡 ASSET is a present economic resource controlled by the entity as
a result of past events. An economic resource is a right that
has the potential to produce economic benefits. a right he basic
purpose of accounting is to provide information that is useful
in making economic decision. It has three aspects right,
potential to produce economic benefits and control.
Right that corresponds to an obligation of another party
Right to receive cash, goods and resources
Right to exchange on favorable terms
Right to benefit from an obligation of another party
Rights that do not
Right over physical object corresponds to an corresponds to an
Right to use intellectual property obligation of another party
POTENTIAL TO PRODUCE ECONOMIC BENEFITS
Sold, leased, transferred or exchanged for other asset
Used singly or in combination with other asset to produce goods or
service
Use to enhance the value of other assets
Used to promote efficiency and cost savings
Used to settle liabilities
💡 CONTROL means the entity has the exclusive right over the
benefits of an asset and the ability to prevent others from
accessing those benefits.
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💡 LIABILITY “According to Conceptual Framework 4.26 a liability is
a present obligation of the entity to transfer economic resource
as a result of pas events"
💡 OBLIGATION Legal Obligation - An obligation that results from an
obligation that results from a contract legislation or other
operation of law. Constructive An obligation that results from
an entity's action that obligation - Create a valid expectation
on others that the entity will accept and discharge certain
responsibilities
💡 TRANSFER OF ECONOMIC BENEFITS pay cash, deliver goods, or render
services exchange assets with another party on unfavorable terms
transfer assets if a specified uncertain future event occurs
💡 PRESENT OBLIGATION AS A RESULT OF PAST EVENTS already obtained
economic benefits or taken action the entity will or may have to
transfer an economic resource that it would not otherwise have
had transfer.
💡 EXECUTORY CONTRACTS is a contract that is equally unperformed
neither party has fulfilled any of its obligations, or both
parties have partially fulfilled their obligations to an equal
extent.
💡 EQUITY is the residual interest in the assets of the entity
after deducting the liabilities. A - L=E. Reserves may refer to
amounts set aside by the entity as protection for its creditors
or stakeholders from losses.
💡 INCOME increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or
decreases in liabilities
💡 EXPENSES decreases in economic benefits during the accounting
period in the form of outflows or depletion of assets or
incurrence of liabilities, Expenses vs Losses
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