CF & PAS 1/IAS 1

Name: Date: 11/13/19 Score:

Conceptual Framework
1. What type of financial statements are the subject matter of the Conceptual Framework and the PFRSs?
Answer: general purpose FS

* General purpose financial statements cater to most of the common needs of a wide range of external users.

2. This is a summary of the terms and concepts that underlie the preparation and presentation of financial statements
for external users.
Ans: Conceptual Framework/ Conceptual Framework for Financial Reporting

3. What organization promulgated or issued the CF for FinRep?

Ans: International Accounting Standards Board (IASB) // if initials only (1 pt)/if spelled out (2 pts)

4. Give at least 1 purpose of the Conceptual Framework:

Ans:
The Conceptual Framework prescribes the concepts for general purpose financial reporting. Its purpose is to:
a. assist the International Accounting Standards Board (IASB) in developing Standards that are based
on consistent concepts;
b. assist preparers in developing consistent accounting policies when no Standard 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.

5. Status of the Conceptual Framework

5a. Is CF a standard? Yes or No.
Ans: No, the Conceptual Framework is not a PFRS.
5b. When there is a conflict between the Conceptual Framework and a standard or PFRS, which will prevail?
Ans: the PFRS will prevail

6. Give at at least 3 scope/concepts of CF. (there are 8)

1. The objective of financial reporting
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
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DISCUSSION: Scope of CF
The Conceptual Framework is concerned with general purpose financial reporting. General purpose financial reporting
involves the preparation of general purpose financial statements. The Conceptual Framework provides the concepts
regarding the following: (8 CONCEPTS)
1. The objective of financial reporting
 The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to primary users in making decisions about providing resources to the
entity.
 The objective of general purpose financial reporting forms the foundation of the Conceptual Framework.
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 Primary users – are those who cannot demand information directly from reporting entities. The
primary users are:
(a) Existing and potential investors
(b) Lenders and other creditors.
 Only the common needs of primary users are met by the financial statements.

2. Qualitative characteristics of useful financial information

 The fundamental qualitative characteristics are the characteristics that make information useful to
users.
 The enhancing qualitative characteristics are the characteristics that enhance the usefulness of
information

I. Fundamental qualitative characteristics

(1) Relevance - Information is relevant if it can affect the decisions of users.

(a) Predictive value - the information can be used in making predictions

(b) Feedback value - the information can be used in confirming past predictions

 Materiality – entity-specific aspect of relevance; “Information is material if

omitting, misstating or obscuring it, could reasonably be expected to influence
decisions that the primary users’ of a specific reporting entity’s FS make, on
the basis of those FS.” Materiality is a matter of judgment

(2) Faithful representation - the information provides a true, correct and complete depiction of
what it purports to represent
(a) Completeness - all information necessary for users to understand the phenomenon being
depicted is provided
(b) Neutrality- information is selected or presented without bias
(c) Free from error - there are no errors in the description and in the process by which the
information is selected and applied

II. Enhancing qualitative characteristics

(1) Comparability- the information helps users in identifying similarities and differences
between different sets of information
(2) Verifiability- different users could reach consensus as to what the information purports to
represent
(3) Timeliness- the information is available to users in time to be able to influence their decisions
(4) Understandability - users are expected to have:

a. reasonable knowledge of business activities; and

b. willingness to analyze the information diligently

3. Financial statements and the reporting entity

 The objective of general purpose financial statements is to provide financial information about the
reporting entity’s assets, liabilities, equity, income and expenses
 that is useful in assessing:
a. the entity’s ability to generate future net cash inflows; and
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b. management’s stewardship over economic resources

Reporting period
 Financial statements are prepared for a specific period of time (i.e., the reporting period) and include
comparative information for at least one preceding reporting period.

Going concern
 Financial statements are normally prepared on the assumption that the reporting entity is a going
concern, meaning the entity has neither the intention nor the need to end its operations in the
foreseeable future.

Reporting entity
 A reporting entity is one that is required, or chooses, to prepare financial statements, and is not
necessarily a legal entity. It can be a single entity or a group or combination of two or more entities.

4. 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.” (Conceptual Framework 4.3 & 4.4)
Three aspects in the definition of an asset
1. Right – asset refers to a right, and not necessarily to a physical object, e.g., the right to use, sell, lease
or transfer a building.
2. Potential to produce economic benefits – the right has a potential to produce economic benefits for
the entity that are beyond the benefits available to all others. Such potential need not be certain or
even likely – what is important is that the right already exists and that, in at least one circumstance, it
would produce economic benefits for the entity.
3. Control – means the entity has the exclusive right over the benefits of an asset and the ability to
prevent others from accessing those benefits.

• Liability is “a present obligation of the entity to transfer an economic resource as a result of past events.”
(Conceptual Framework 4.26)
Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or responsibility that an entity has no practical ability to avoid.”
(CF 4.29) An obligation can be either legal obligation or constructive obligation.
2. Transfer of an economic resource – the obligation has the potential to require the transfer of an
economic resource to another party. Such potential need not be certain or even likely – what is
important is that the obligation already exists and that, in at least one circumstance, it would require
the transfer of an economic resource.
3. Present obligation as a result of past events – A present obligation exists as a result of past events if:
the entity has already obtained economic benefits or taken an action; and
as a consequence, the entity will or may have to transfer an economic resource that it would not
otherwise have had to transfer.
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(Conceptual Framework 4.43)

• Equity is the residual interest in the assets of the entity after deducting all its liabilities.” (Conceptual
Framework 4.63)// Equity equals Assets minus Liabilities

• Income is “increases in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.” (Conceptual Framework 4.68)

• Expenses are “decreases in assets, or increases in liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims.” (Conceptual Framework 4.69)

5. Recognition and derecognition

• Recognition is the process of including in the statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the financial statement elements (i.e., asset, liability,
equity, income or expense). This involves recording the item in words and in monetary amount and including
that amount in the totals of either of those statements.

• 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.

** Measurement uncertainty
• Measurement uncertainty exists if the asset or liability needs to be estimated. A high level of
measurement uncertainty does not necessarily lead to the non-recognition of an asset or liability
if the estimate provides relevant information and is clearly and accurately described and
explained.
• However, measurement uncertainty can lead to the non-recognition of an asset or a liability if
making an estimate is exceptionally difficult or exceptionally subjective.

• Derecognition is the removal of a previously recognized asset or liability from the entity’s statement of
financial position. //Derecognition occurs when the item ceases to meet the definition of an asset or liability

6. Measurement
a. Historical cost
b. Current value
1. Fair value
2. Value in use and fulfilment value
3. Current cost

• Current cost and historical cost are entry values (i.e., they reflect prices in acquiring an asset or incurring a
liability),
• Fair value, value in use and fulfilment value are exit values (i.e., they reflect prices in selling or using an asset
or transferring or fulfilling a liability).

The historical cost of: The current cost of:

a. an asset is “the cost of an equivalent asset at
the measurement date, comprising the
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a. an asset is the consideration paid to consideration that would be paid at the

acquire the asset plus transaction measurement date plus the transaction costs
costs. that would be incurred at that date.”
b. a liability is the consideration b. a liability is “the consideration that would
received to incur the liability minus be received for an equivalent liability at the
transaction costs. measurement date minus the transaction
• Historical cost is updated over time to depict costs that would be incurred at that date.”
the following: (Conceptual Framework 6.21)
a. Depreciation, amortization, or
impairment of assets
b. Collections or payments that
extinguish part or all of the asset or
liability
c. Unwinding of discount or premium
when the asset or liability is
measured at amortized cost

Measurement of Equity
• Total equity is not measured directly. It is simply equal to difference between the total assets and total
liabilities.
• Because different measurement bases are used for different assets and liabilities, total equity cannot be
expected to be equal to the entity’s market value nor the amount that can be raised from either selling or
liquidating the entity.
• Equity is generally positive, although some of its components can be negative. In some cases, even total
equity can be negative such as when total liabilities exceed total assets.

7. Presentation and disclosure

o Information is communicated through presentation and disclosure in the financial statements.
o Effective communication makes information more useful. Effective communication requires:
1. focusing on presentation and disclosure objectives and principles rather than on rules.
• The objectives are specified in the Standards.
• The principles include:
a. the use of entity-specific information is more useful that standardized
descriptions, and
b. duplication of information is usually unnecessary.

2. classifying information by grouping similar items and separating dissimilar items.

• Classifying means combining similar items and separating dissimilar items.
• Offsetting of assets and liabilities is generally not appropriate.

Classification of income and expenses

• Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income.

3. aggregating information in a manner that it is not obscured either by excessive detail or by

excessive summarization.
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Aggregation is “the adding together of assets, liabilities, equity, income or expenses that
have shared characteristics and are included in the same classification.” (Conceptual
Framework 7.20)

8. Concepts of capital and capital maintenance

o Financial concept of capital – capital is regarded as the invested money or invested purchasing power.
Capital is synonymous with equity, net assets, and net worth.
o Physical concept of capital – capital is regarded as the entity’s productive capacity, e.g., units of output
per day.