STUDY UNIT

CONCEPTUAL
FRAMEWORK

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Unit 2: Conceptual Framework
Prior learning for this unit is per the knowledge acquired in prior years

You should already be able to in respect of the Conceptual Framework

 Set out the objectives of general purpose financial reporting and the scope and purpose
for applying the Conceptual Framework
 Define and apply the qualitative characteristics and enhancing characteristics of useful
financial information
 For all other aspects of the Conceptual Framework,
 Discuss it in brief discussion questions
 Apply it to practical case studies and
 Apply it to all Standards covered prior to accounting 3AB
 Identify and discuss the following:
 the purpose of the Conceptual Framework for Financial Reporting,
 the users and their information needs,
 the objective of financial statements,
 the qualitative characteristics of financial statements,
 the elements of financial statements,
 the recognition criteria,
 the measurement of the elements of financial statements.

 Apply the principles set out in the Conceptual Framework in the application of all Statements
of IFRS.

Outcomes for this unit

After completion of this unit you should be able to in respect of the Conceptual Framework

 set out the objectives of general purpose financial reporting and the scope and purpose for
applying the Conceptual Framework.
 define and apply the qualitative characteristics of useful financial information
 for all other aspects of the Conceptual Framework,
 discuss it in brief discussion questions
 apply it to practical case studies and
 apply it to all Standards covered in accounting 3AB

Literature

 The Conceptual Framework for Financial Reporting (pdf provided as part of study notes)

 Introduction to IFRS – 9th edition

 Chapter 1

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Unit 2: Conceptual Framework

Overview of the unit

The Conceptual Framework is not a Standard and nothing in it overrides any standard or any
requirement in a Standard. It serves as a general frame of reference for a specific area of enquiry
and should provide a theoretical background against which practical problems can be
tested. This Conceptual Framework will mainly be tested in theory questions, and can easily be
integrated with other units.

This is considered to be a very important unit. You have to make sure that you understand all the
theoretical principles in the Conceptual Framework. More importantly, you need to be able to
identify the relevant issues in a theoretical question, and apply the theory to the case study.

When you write an assessment opportunity some marks will be awarded for a mere repetition of
theory. More marks will be awarded once the theory is applied to the information in a case
study. Use the five step approach as explained in Unit 1 to answer a theory question.

In a theory question it is often difficult to identify the issue at hand, thus the five steps have
been designed to help you find a way to structure your thoughts and present a well-argued
solution. This will ensure that maximum marks are obtained. (Refer to unit 1)

Specifics for this unit

1. The Conceptual Framework in perspective

The 2018 Conceptual Framework is structured into an introductory explanation on the status and
purpose of the Conceptual Framework, eight chapters, and a glossary:

Chapter Topic
1 The objective of general purpose 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

Appendix A Glossary

Summary of the key content of each chapter

Status and purpose of the Conceptual Framework.

The Conceptual Framework's purpose is to assist the IASB in developing and revising IFRSs that
are based on consistent concepts, to help preparers to develop consistent accounting policies for
areas that are not covered by a standard or where there is choice of accounting policy, and to assist
all parties to understand and interpret IFRS.

It maintains that the framework does not override any specific IFRS. Should the IASB decide to issue
a new or revised pronouncement that is in conflict with the framework, the IASB will highlight the fact
and explain the reasons for the departure in the basis for conclusions.

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Unit 2: Conceptual Framework
Chapter 1 - The objective of general purpose financial reporting.

The objective of general purpose financial reporting is 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. This is identified as information about the
entity’s economic resources and the claims against the reporting entity as well as information about
the effects of transactions and other events that change a reporting entity’s economic resources and
claims.
The chapter newly stresses that information can also help users to assess management’s
stewardship of the entity’s economic resources.

Chapter 2 - Qualitative characteristics of useful financial information.

The chapter explains the:

1. fundamental qualitative characteristics (relevance and faithful representation) and
2. the enhancing qualitative characteristics (comparability, verifiability, timeliness, and
understandability) of useful financial information and
3. notes the cost constraint.

Materiality is noted as an entity-specific aspect of relevance.

Prudence is defined as the exercise of caution when making judgements under conditions of
uncertainty. The exercise of prudence supports neutrality.

Faithful representation means representation of the substance of an economic phenomenon

instead of representation of its legal form only.

Chapter 3 - Financial Statements and the reporting entity.

The objective of financial statements is to provide information about an entity's assets, liabilities,
equity, income and expenses that is useful to financial statements users in assessing the prospects
for future net cash inflows to the entity and in assessing management's stewardship of the entity's
resources.

The going concern assumption is stated in the chapter.

Two statements are explicitly mentioned:

 the statement of financial position and
 the statement(s) of financial performance (this being the former statement of comprehensive
income); and

the rest are "other statements and notes".

Financial statements are prepared for a specified period of time and provide comparative information
and under certain circumstances forward-looking information.

New to the framework is the definition of a reporting entity and the boundary of it. The chapter also
states the IASB's conviction that, generally, consolidated financial statements are more likely to
provide useful information to users of financial statements than unconsolidated financial statements.

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Unit 2: Conceptual Framework

Chapter 4 - The elements of financial statements.

The focus of this chapter is on the definitions of assets, liabilities, and equity as well as income and
expenses.

Asset: 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.

Liability: A present obligation of the entity to transfer an economic resource as a result of

past events.
Equity: The residual interest in the assets of the entity after deducting all its liabilities.

Income: Increases in assets or decreases in liabilities that result in increases in equity,

other than those relating to contributions from holders of equity claims.

Expenses: Decreases in assets or increases in liabilities that result in decreases in equity,

other than those relating to distributions to holders of equity claims.

Chapter 5 - Recognition and derecognition.

The Conceptual Framework states that only items that meet the definition of an asset, a liability or
equity are recognised in the statement of financial position and only items that meet the definition of
income or expenses are to be recognised in the statement(s) of financial performance.

But, their recognition depends on two criteria

Their recognition provides users of financial statements with

a. relevant information about the asset or the liability and about any income, expenses
or changes in equity and
b. a faithful representation of the asset or the liability and of any income, expenses or
changes in equity.

The framework also notes a cost constraint.

The discussion of derecognition.

 the assets and liabilities retained after the transaction or other event that led to derecognition
must be presented faithfully and
 the change in the entity's assets and liabilities as a result of that transaction or other event
must also be presented faithfully.
 The framework also describes alternatives when it is not possible to achieve both aims.

Chapter 6 - Measurement.

Measurement bases for assets and liabilities

1. historical cost and
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Unit 2: Conceptual Framework
2. Current value
a. fair value,
b. value in use/fulfilment value, and
c. current cost

Current cost is newly introduced into the Conceptual Framework as it is widely advocated in
academic literature.

Table 6.1 in the chapter offers an overview of the information provided by various measurement
bases.

The framework also sets out factors to consider when selecting a measurement basis:
 relevance,
 faithful representation,
 enhancing qualitative characteristics and the cost constraint,
 factors specific to initial measurement, and
 more than one measurement basis

Further, the framework points out that the consideration of the objective of financial reporting, the
qualitative characteristics of useful financial information and the cost constraint are likely to result in
the selection of different measurement bases for different assets, liabilities and items of income and
expense.

The framework does not provide detailed guidance on when a particular measurement basis would
be suitable because the suitability of particular measurement bases will vary depending on facts and
circumstances.

On equity, the framework offers some limited discussion, although total equity is not measured
directly. Still, the framework maintains, it may be appropriate to measure directly individual classes
of equity or components of equity to provide useful information.

Chapter 7 - Presentation and disclosure.

In this chapter, the framework discusses concepts that determine what information is included in the
financial statements and how that information should be presented and disclosed.

The statement of statement of comprehensive income is newly described as "statement of financial

performance", however, the framework does not specify whether this statement should consist of a
single statement or two statements, it only requires that a total or subtotal for profit or loss must be
provided. It also notes that the statement of profit or loss is the primary source of information about
an entity’s financial performance for the reporting period and that only in "exceptional circumstances"
the Board may decide that income or expenses are to be included in other comprehensive income.

Notably, the framework does not define profit or loss, thus the question of what goes into profit or
loss or into other comprehensive income is still unanswered.

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Unit 2: Conceptual Framework
Chapter 8 - Concepts of capital and capital maintenance. (Not Applicable to the 3AB syllabus)

This chapter discusses concepts of capital (financial and physical), concepts of capital maintenance
(again financial and physical) and the determination of profit as well as capital maintenance
adjustments.