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7/23/2019 2 Conceptual Framework
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CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
IFRS Edition
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Conceptual
Framework
Conceptual
Framework
NeedDevelopment
First Level:
Basic Objectives
First Level:
Basic Objectives
Second Level:
Fundamental
Concepts
Second Level:
Fundamental
Concepts
Third Level:
eco!nition and
"easurement
Third Level:
eco!nition and
"easurement
Basicassumptions
Basic
principles
Constraints
#ualitativecharacteristics
Basic elements
Conceptual Framework
Conceptual Framework
A conceptual framework ! "a co#erent !$!tem of nterrelate%
o&'ect(e! an% fun%amental! t#at can lea% to con!!tent!tan%ar%! an% t#at pre!cr&e! t#e nature) functon) an% lmt!
of fnancal accountn* an% fnancal !tatement+
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Nee% for a Conceptual Framework
ule$makin! should build on and relate to an established
bod% o& concepts'
(nables )*SB to issue more use&ul and consistent
pronouncements over time'
Conceptual Framework
Conceptual Framework establishes the conceptsthat underlie &inancial reportin!'
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,e(elopment of a Conceptual Framework
)*SB and F*SB are workin! on a joint project to
develop a common conceptual &ramework
Framework will build on e+istin! )*SB and F*SB
&rameworks'
,roject has identi&ied the objective o& &inancial
reportin! and the -ualitative characteristics o&
decision$use&ul &inancial reportin! in&ormation'
Conceptual Framework
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T#ree le(el!-
Fr!t Le(el . Basic objective.econ% Le(el . #ualitative characteristics and
elements o& &inancial statements
T#r% Le(el . eco!nition/ measurement/ and
disclosure concepts
Conceptual Framework
O(er(ew of t#e Conceptual Framework
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A..UMPTION.
0' (conomic entit%
1' 2oin! concern
3' "onetar% unit
4' ,eriodicit%
5' *ccrual
PRINCIPLE.
0' "easurement
1' evenue reco!nition
3' (+pense reco!nition
4' Full disclosure
CON.TRAINT.
0' Cost
1' "aterialit%
O/0ECTI1E
Pro(%e nformaton a&out t#e
reportn* entt$ t#at ! u!eful
to pre!ent an% potentale2ut$ n(e!tor!) len%er!) an%
ot#er cre%tor! n t#er
capact$ a! captal
Pro(%er!+
ELEMENT.
0' *ssets
1' Liabilities
3' (-uit%4' )ncome
5' (+pensesIllu!traton 345
Framework &or Financial
eportin!
Fr!t le(el
.econ% le(el
T#r%
le(el
6UALITATI1E
C7ARACTERI.TIC.
0' Fundamental
-ualities
1' (nhancin!-ualities
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“To provide fnancial inormation about the
reporting entity that is useul to present and
potential equity investors, lenders, and othercreditors in making decisions in their capacity
as capital providers.
First !evel" #asic $b%ective
O/0ECTI1E
,rovided b% issuin! !eneral$purpose &inancial statements'
*ssumption is that users have reasonable knowled!e o& business
and &inancial accountin! matters to understand the in&ormation'
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)*SB identi&ied the 6ualtat(e C#aracter!tc! o&
accountin! in&ormation that distin!uish better 6more use&ul7
in&ormation &rom in&erior 6less use&ul7 in&ormation &or
decision$makin! purposes'
&econd !evel" Fundamental Concepts
6ualtat(e C#aracter!tc! of Accountn*Informaton
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Illu!traton- 8ierarch%
o& *ccountin! #ualities
&econd !evel" Fundamental Concepts
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Fun%amental 6ualt$ 4 Rele(anceelevance is one o& the two &undamental -ualities that make
accountin! in&ormation use&ul &or decision$makin!'
&econd !evel" Fundamental Concepts
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Fun%amental 6ualt$ 8 Fat#ful Repre!entatonFaith&ul representation means that the numbers and descriptions
match what reall% e+isted or happened'
&econd !evel" Fundamental Concepts
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En#ancn* 6ualte!
Distin!uish more$use&ul in&ormation &rom less$use&ul in&ormation'
&econd !evel" Fundamental Concepts
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A..UMPTION.
0' (conomic entit%
1' 2oin! concern
3' "onetar% unit
4' ,eriodicit%
5' *ccrual
PRINCIPLE.
0' "easurement
1' evenue reco!nition
3' (+pense reco!nition
4' Full disclosure
CON.TRAINT.
0' Cost
1' "aterialit%
O/0ECTI1E
,rovide in&ormation about
the reportin! entit% that is
use&ul to present andpotential e-uit% investors/
lenders/ and other
creditors in their
capacit% as capital
,roviders'
ELEMENT.
0' *ssets
1' Liabilities
3' (-uit%
4' )ncome
5' (+pensesIllu!traton 345
Framework &or Financial
eportin!
Fr!t le(el
.econ% le(el
T#r%
le(el
6UALITATI1E
C7ARACTERI.TIC.
0' Fundamental
-ualities
1' (nhancin!-ualities
Basic ElementsBasic Elements
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&econd !evel" #asic 'lements
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&econd !evel" #asic 'lements
E9erc!e 34:- )denti&% the -ualitative characteristic6s7 to be used !iven
the in&ormation provided'
6a7 #ualitative characteristic bein! emplo%ed
when companies in the same industr% are
usin! the same accountin! principles'
6b7 #ualit% o& in&ormation that con&irms users9earlier e+pectations'
6c7 )mperative &or providin! comparisons o& a
compan% &rom period to period'
6d7 )!nores the economic conse-uences o& a
standard or rule'
LO 5
C#aracter!tc!
elevance
Faith&ul representation
,redictive value
Con&irmator% valueNeutralit%
Completeness
Timeliness
eri&iabilit%;nderstandabilit%
Comparabilit%
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&econd !evel" #asic 'lements
E9erc!e 34:- )denti&% the -ualitative characteristic6s7 to be used !iven
the in&ormation provided'
6e7 e-uires a hi!h de!ree o&
consensus amon! individuals on
a !iven measurement'
6&7 ,redictive value is an in!redient
o& this &undamental -ualit% o&
in&ormation'
6!7 #ualitative characteristics that
enhance both relevance and
&aith&ul representation'
LO 5
C#aracter!tc!
elevance
Faith&ul representation
,redictive value
Con&irmator% valueNeutralit%
Completeness
Timeliness
eri&iabilit%;nderstandabilit%
Comparabilit%
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&econd !evel" #asic 'lements
E9erc!e 34:- )denti&% the -ualitative characteristic6s7 to be used !iven
the in&ormation provided'
6h7 Neutralit% and completeness are
in!redients o& this &undamental
-ualit% o& accountin! in&ormation'
6i7 Two &undamental -ualities that make
accountin! in&ormation use&ul &or
decision$makin! purposes'
6j7 )ssuance o& interim reports is an
e+ample o& what enhancin!
in!redient<
LO 5
C#aracter!tc!
elevance
Faith&ul representation
,redictive value
Con&irmator% valueNeutralit%
Completeness
Timeliness
eri&iabilit%;nderstandabilit%
Comparabilit%
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Third !evel" (ecognition, )easurement,and *isclosure Concepts
These concepts e+plain how companies should reco!ni=e/
measure/ and report &inancial elements and events'
A..UMPTION.0' (conomic entit%
1' 2oin! concern
3' "onetar% unit
4' ,eriodicit%
5' *ccrual
PRINCIPLE.0' "easurement
1' evenue reco!nition
3' (+pense reco!nition
4' Full disclosure
CON.TRAINT.0' Cost
1' "aterialit%
Reco*nton) Mea!urement) an% ,!clo!ure Concept!
Illu!traton 345
Framework for
Fnancal Reportn*
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Economc Entt$ > compan% keeps its activit% separate &rom its
owners and other business unit'
Gon* Concern $ compan% to last lon! enou!h to &ul&ill objectives
and commitments'Monetar$ Unt $ mone% is the common denominator'
Pero%ct$ $ compan% can divide its economic activities into time
periods'
Accrual /a!! of Accountn* > transactions are recorded in theperiods in which the events occur'
Third !evel" +ssumptions
/a!c A!!umpton!
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Third !evel" +ssumptions
E34;- )denti&% which &a!c a!!umpton o& accountin! is best
described in each item below'
6a7 The economic activities o& Fed(+ Corporation 6;S*7
are divided into 01$month periods &or the purpose o&
issuin! annual reports'
6b7 Total S'*' 6F*7 does not adjust amounts in its&inancial statements &or the e&&ects o& in&lation'
6c7 Barcla%s 62B7 reports current and non$current
classi&ications in its statement o& &inancial position'
6d7 The economic activities o& Tokai ubber )ndustries
6?,N7 and its subsidiaries are mer!ed &or accountin!and reportin! purposes'
Pero%ct$
Gon* Concern
Monetar$Unt
Economc
Entt$
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Mea!urement
Co!t is !enerall% thou!ht to be a &aith&ul representation
o& the amount paid &or a !iven item'
Far (alue is @the amount &or which an asset could bee+chan!ed/ a liabilit% settled/ or an e-uit% instrument
!ranted could be e+chan!ed/ between knowled!eable/
willin! parties in an arm9s len!th transaction'A
)*SB has taken the step o& !ivin! companies the optionto use &air value as the basis &or measurement o&
&inancial assets and &inancial liabilities'
Third !evel" rinciples
Prncple!
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Re(enue Reco*nton $ revenue is to be reco!ni=ed when it is
pro&a&le that &uture economic bene&its will &low to the compan% and
rela&le mea!urement o& the amount o& revenue is possible'
Third !evel" rinciples
Illu!traton -
Tmn* of Re(enue Reco*nton
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E9pen!e Reco*nton $ out&lows or @usin! upA o& assets or
incurrin! o& liabilities 6or a combination o& both7 durin! a period as a
result o& deliverin! or producin! !oods andor renderin! services'
Third !evel" rinciples
Illu!traton 34:
E9pen!e Reco*nton
@Let the e+pense &ollow the revenues'A
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Full ,!clo!ure > providin! in&ormation that is o& su&&icient
importance to in&luence the jud!ment and decisions o& an in&ormed
user'
,rovided throu!h:
Financial Statements
Notes to the Financial Statements
Supplementar% in&ormation
Third !evel" rinciples
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Third !evel" rinciples
/E34<- )denti&% which &a!c prncple o& accountin! is best
described in each item below'
6a7 Parmalat 6)T*7 reports revenue in its income statement
when it is earned instead o& when the cash is collected'
6b7 Goo*le 6;S*7 reco!ni=es depreciation e+pense &or a
machine over the 1$%ear period durin! which thatmachine helps the compan% earn revenue'
6c7 KC Corp+ 6;S*7 reports in&ormation about pendin!
lawsuits in the notes to its &inancial statements'
6d7 Fu' Flm 6?,N7 reports land on its balance sheet at the
amount paid to ac-uire it/ even thou!h the estimated &airmarket value is !reater'
Re(enue
Reco*nton
E9pen!eReco*nton
Full
,!clo!ure
Mea!urement
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Co!t > the cost o& providin! the in&ormation must be wei!hed
a!ainst the bene&its that can be derived &rom usin! it'
Materalt$ $ an item is material i& its inclusion or omission would
in&luence or chan!e the jud!ment o& a reasonable person'
Third !evel" Constraints
Con!trant!
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E34==- hat accountin! constraints are illustrated b% the items
below<
6a7 illis Compan% does not disclose an% in&ormation
in the notes to the &inancial statements unless the
value o& the in&ormation to users e+ceeds the
e+pense o& !atherin! it'
6b7 Beckham Corporation e+penses the cost o&
wastebaskets in the %ear the% are ac-uired'
Co!t
Third !evel" Constraints
Materalt$
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.ummar$ oft#e .tructure
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The e+istin! conceptual &rameworks underl%in! ;'S' 2**, and )FS
are ver% similar'
The conver!ed &ramework should be a sin!le document/ unlike the two
conceptual &rameworks that presentl% e+ist'
Both the )*SB and F*SB have similar measurement principles/ based
on historical cost and &air value' 8owever/ ;'S' 2**, has a concept
statement to !uide estimation o& &air values when market$related data
is not available 6Statement o& Financial *ccountin! Concepts No' /@;sin! Cash Flow )n&ormation and ,resent alue in *ccountin!A7' The
)*SB is considerin! a proposal to provide e+panded !uidance on
estimatin! &air values'