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FRAMEWORK FOR ACCOUNTING &

REPORTING
What is conceptual framework
A structured theory of accounting,
 it states the scope and objective of financial reporting.
It identifies and defines the qualitative characteristics of financial
information and elements of accounting reports
It deals with principles and rules of recognition and measurement
of basic elements and information to be displayed in financial
report.
Definition of conceptual framework
… a coherent system
of interrelated objectives and fundamentals
that is expected to lead to consistent standards
and that prescribes the nature, function and limits of financial
accounting and reporting. (FASB)
Definition of conceptual framework
1. A structured theory of accounting
 Coherent system

2. Adopts a normative approach

 Prescriptive

3. A preface to accounting standards

 Foundation
Definition of conceptual framework

Conceptual
Framework

IAS 1 IAS 2 IAS 16

Background & historical development of
conceptual framework
Historically, accounting was developed
 In an ad-hoc manner
 Without a general theory

Over time, practice became

 Generally accepted
 Perpetuated
 Codified in the form of standards
Background & historical development of
conceptual framework
USA
 Work started in mid 1970’s
 First pronouncement in 1978

Australia
 Work started in 1980s
 First statements issued in 1990
UK
 Work commenced in 1991
 Framework issued in 1999
Background & historical development of
conceptual framework
In the United States – the FASB, in period 1987-2000, issued seven
concept statements covering the following topics:
• Objective of financial reporting by business enterprises and NGO
• Qualitative characteristics of useful accounting information
• Elements of financial statements
• Criteria for recognising and measuring the elements
• Use of cash flow and present value information in accounting
measurements.
Background & historical development of
conceptual framework
In Australia the conceptual framework project was introduced by
release of six exposure draft in 1987:
• Objective of financial reporting
• Qualitative characteristics of financial information
• The definition and recognition of assets
• The definition and recognition of liabilities
• The definition of reporting entity
• The definition and recognition of expenses.
Objective of conceptual frameworks
Both the IASB and FASB frameworks consider the main objective of
financial reporting is to communicate financial information to users.
The information is to be selected on the basis of its usefulness in the
economic decision-making process. This objective is to be seen to
be achieved by reporting information that:

• is useful in making economic decisions

• is useful in assessing cash flow prospects
• is about enterprise resources, claims to those resources and
changes in them.
Users of
Decision makers and their characteristics (for
Accounting
example, understanding, or prior knowledge )
information

Pervasive Benefits > Costs

constraint

User-specific Understandabilty
qualities
Decision usefulness

Primary
decision-specific Relevance Reliability
qualities
Timeliness verifiability Representational
faithfulness
Ingredients of
Primary qualities Predictive Feedback
value value

Secondary and Comparability Neutrality

Interactive qualities (including consistency)

Threshold for Materiality

recognition
Objective of financial reporting
Historically
Accounting served a stewardship function
 Absentee landlords
 Accounts kept by stewards (servants)

Developments in Business
 Public Companies
 Absentee Shareholders (Principals)
 Accounting by Managers (Agents
Objective of financial reporting
Today
Evolution in the Role of Accounting
 Reflected in Conceptual Framework

To provide information that is useful for economic decision-making

 By various users
 General-purpose financial statements
Qualitative characteristics
In order to be useful,
 what characteristics do you think information should possess?

Or

What characteristics should information possess, in order to be

useful?
Primary characteristics
1. Relevance
Information is relevant if it
 assists in making predictions about future situations
(i.e. influences decision-making); or
 helps to confirm past predictions
 helps to predict the future
 Primary characteristics
2. Reliability
.

Requires
 Representational faithfulness
 Verifiability
 Objectivity
 Neutrality (Without bias or undue error)
 Primary characteristics
3. Comparability
.

Requires consistency of measurement & disclosure

 Within an organisation, across time
 Across organisations, in the same period
Primary characteristics
4. Understandability
Likely to be understood by users with some business &
accounting knowledge
Constraints
1. Timeliness
Constraint to relevance
e.g. information cannot be relevant if it is received
after the decision has been made
Constraints
2. Cost versus Benefit
 Constraint to reliability
e.g. At some point, the cost of verifying information
may out-weigh the benefits
Elements of financial statement
Asset
Liabilities
Owners Equity
Expenses
Income
Elements of financial statement
Definition and recognition of assets
Para 49(a) AASB Framework

Definition of asset
‘resource controlled by the entity as a result of
past events and from which future economic
benefits are expected to flow to the entity’
Elements of financial statement
Three key characteristics
1. There must be a future economic benefit.
2. The reporting entity must control the future economic
benefits.
3. The transaction must have occurred.
Elements of financial statement
Recognition criteria
An item that meets the definition of an element should be
recognized if:
a) it is probable that any future economic benefit associated
with the item will flow to or from the entity; and
b) the item has a cost or value that can be measured with
reliability.
Elements of financial statement
Definition and recognition of liabilities
Para 49(b) AASB
Definition
‘a present obligation of an entity arising from past events,
the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits’
Elements of financial statement
Three key characteristics
1. There must be a future disposition of economic benefits
to other entities.
2. There must be a present obligation
3. A past transaction or other event must have created the
obligation
Elements of financial statement
Definition of equity
Para 49(c) AASB
Definition
‘the residual interest in the assets of the entity after
deducting all its liabilities’
Elements of financial statement
Definition and recognition of expenses
Para 70(b) AASB
Definition
‘expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences
of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants’
Elements of financial statement
Definition and recognition of income
Definition
‘increase in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decrease of liabilities
that result in increase in equity, other than those relating to
contributions from equity participants.’
eNd