Learning Objectives

After studying this module, the student should be able to:

1. Describe the usefulness of a conceptual framework

and the objective of financial reporting.
2. Identify the qualitative characteristics of accounting
information and the basic elements of financial
statements.
3. Review the basic assumptions of accounting.
4. Explain the application of the basic principles of
accounting.
Conceptual Framework For Financial Reporting

Third Level:
Second Level: Recognition,
Conceptual First Level:
Fundamental Measurement,
Framework Basic Objective
Concepts and Disclosure
Concepts

Need Qualitative Basic

Development characteristics assumptions

Overview Basic elements Basic principles

Constraints
Summary of the
structure
 Conceptual Framework
Conceptual Framework establishes the concepts that
underlie financial reporting.

Need for a Conceptual Framework

Rule-making should build on and relate to an
established body of concepts.

Enables IASB to issue more useful and consistent

pronouncements over time.
 Conceptual Framework
Development of a Conceptual Framework
IASB and FASB are working on a joint project to
develop a common conceptual framework

Framework are build on existing IASB and FASB

frameworks.

Project has identified the objective of financial reporting

and the qualitative characteristics of decision-useful
financial reporting information.
 The Revised Conceptual Framework
IASB issued the revised Conceptual Framework for
Financial Reporting in March 2018. It sets out:

• Objective of financial reporting

• Qualitative characteristics of useful financial information
• Description of the reporting entity and its boundary
• Definition
expenses
of an asset, a liability, equity, income and

• Criteria for including assets and liabilities in financial

statements (recognition) and guidance on when to
remove them (derecognition)
• Measurement bases and guidance on when to use them
• Concepts and guidance on presentation and disclosure
 Conceptual Framework

Overview of the Conceptual Framework

Three levels:

• First Level = Basic objective

• Second Level = Qualitative characteristics

and elements of financial statements

• Third Level = Recognition, measurement,

and disclosure concepts

 ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition 2. Materiality
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure Third
5. Accrual level
QUALITATIVE ELEMENTS
CHARACTERISTICS 1. Assets
1. Fundamental 2. Liabilities
qualities 3. Equity Second
4. Income
2. Enhancing qualities
5. Expenses level

OBJECTIVES
OBJECTIVE
To Provide
provide information
financial
about the reporting
information that is
entity that is useful First
useful
to presentto users
and in
potential
making decisions
equity investors, level
lenders,
relating toand other
providing
creditors in their
resources to the
capacity as capital
entity.
Providers.
 2010
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 about providing
resources to the entity. Those decisions involve buying,
selling, or holding equity and debt instruments, and
providing or settling loans and other forms of credit.

2018
The objective of general purpose financial reporting is to
provide financial information about the reporting entity
that is useful to existing and potential investors, lender
and other creditors in making decisions relating to
providing resources to the entity.
Stewardship
Stewardship
Users of financial reports need information to
help them assess management’s stewardship.
The Conceptual Framework explicitly
discusses this need as well as the need for
information that helps users assess the
prospects for future net cash inflows to the
entity.
Second Level: Fundamental Concepts

Qualitative Characteristics of Accounting

Information

IASB identified the Qualitative Characteristics

of accounting information that distinguish
better (more useful) information from inferior
(less useful) information for decision-making
purposes.
Second Level: Fundamental Concepts
Second Level: Fundamental Concepts

Fundamental Quality - Relevance

Information is relevant if it is capable of making

a difference to the decisions made by users.
 Second Level: Fundamental Concepts

Fundamental Quality – Faithful Representation

Information must faithfully represent the substance of what it
purports to represent. It is affected by level of measurement
uncertainty.
 Second Level: Fundamental Concepts

Enhancing Qualities
Distinguish more-useful information from less-useful
information.
 Cost Constraint

The benefit of providing the information

needs to justify the cost of providing and
using the information.
 Materiality Constraint

The materiality constraint is a threshold used

to determine whether business transactions
are important to the financial results of a
business.
 ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition 2. Materiality
3. Monetary unit 3. Expense recognition Third
level
4. Periodicity 4. Full disclosure
5. Accrual

QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities
Second level
3. Equity
2. Enhancing
4. Income
qualities
5. Expenses

OBJECTIVES
OBJECTIVE
Provide
To provideinformation
financial
about the reporting
information that is
entity that is useful
to useful
present toandusers in
potential First level
making decisions
equity investors,
lenders,toand
relating other
providing
creditors in their
resources
capacity as to the
capital
entity.
Providers.
 Second Level: Basic Elements

Asset – 2010 Asset – 2018

A resource controlled by A present economic

the entity as a result of resource controlled by the
past events and from entity as a result of past
which future economic events. An economic
benefits are expected to resource is a right that has
flow to the entity. the potential to produce
economic benefits.
 Second Level: Basic Elements

Main changes in the definition of an asset:

• Separate definition of an economic resource – to

clarify that an asset is the economic resource,
not the ultimate inflow of economic benefits.
• Deletion of “expected flow” – it does not need to
be certain, or even likely, that economic benefits
will arise.
• A low probability of economic benefits might
affect recognition decision and the measurement
of the asset.
 Second Level: Basic Elements

Liability – 2010 Liability – 2018

A present obligation of the A present obligation of

entity arising from past the entity to transfer an
events, the settlement of economic resource as
which is expected to a result of past events.
result in an outflow from An obligation is a duty
the entity of resources or responsibility that
embodying economic the entity has no
benefits. practical ability to
avoid.
 Second Level: Basic Elements

Main changes in the definition of a liability:

• Separate definition of an economic resource – to

clarify that a liability is the obligation to transfer
the economic resource, not the ultimate outflow
of economic benefits.
• Deletion of “expected flow” – with the same
implication as asset.
• Introduction of the “no practical ability to avoid”
criterion to the definition of obligation.
 Second Level: Basic Elements
“No practical ability to avoid”
Applied to:
• If a duty or responsibility arises from the entity’s
customary practices, published policies or specific
statements – the entity has an obligation of it as no
practical ability to act in a manner inconsistent with
those practices, polices or statements.
• If a duty or responsibility is conditional on a
particular future action that the entity itself may
take – the entity has an obligation if it has no
practical ability to avoid taking that action.
 Review
Identify the qualitative characteristic(s) to be used given the
information provided.
Characteristics
(a) Qualitative characteristic being • Relevance
employed when companies in the • Faithful representation
same industry are using the same
• Predictive value
accounting principles.
• Confirmatory value
(b) Quality of information that confirms
users’ earlier expectations.
• Neutrality
• Completeness
(c) Imperative for providing comparisons
of a company from period to period.
• Timeliness
• Verifiability
(d) Ignores the economic consequences
of a standard or rule.
• Understandability
• Comparability
 Review
Identify the qualitative characteristic(s) to be used given the
information provided.
Characteristics
(a) Qualitative characteristic being • Relevance
employed when companies in the • Faithful
same industry are using the same representation
accounting principles.
• Predictive value
(b) Quality of information that confirms • Confirmatory value
users’ earlier expectations.
• Neutrality
(c) Imperative for providing comparisons • Completeness
of a company from period to period.
• Timeliness
(d) Ignores the economic consequences • Verifiability
of a standard or rule.
• Understandability
• Comparability
 Review
Identify the qualitative characteristic(s) to be used given the
information provided.
Characteristics
(e) Requires a high degree of consensus • Relevance
among individuals on a given • Faithful representation
measurement.
• Predictive value
(f) Predictive value is an ingredient of this • Confirmatory value
fundamental quality of information.
• Neutrality
(g) Qualitative characteristics that • Completeness
enhance both relevance and faithful
representation.
• Timeliness
• Verifiability
• Understandability
• Comparability
 Review
Identify the qualitative characteristic(s) to be used given the
information provided.
Characteristics
(e) Requires a high degree of consensus • Relevance
among individuals on a given • Faithful representation
measurement.
• Predictive value
(f) Predictive value is an ingredient of this • Confirmatory value
fundamental quality of information.
• Neutrality
(g) Qualitative characteristics that
• Completeness
enhance both relevance and faithful
representation. • Timeliness
• Verifiability
• Understandability
• Comparability
 Review
Identify the qualitative characteristic(s) to be used given the
information provided.
Characteristics
(h) Neutrality and completeness are • Relevance
ingredients of this fundamental quality • Faithful representation
of accounting information.
• Predictive value
(i) Two fundamental qualities that make • Confirmatory value
accounting information useful for
decision-making purposes.
• Neutrality
• Completeness
(j) Issuance of interim reports is an
example of what enhancing
• Timeliness

ingredient? • Verifiability
• Understandability
• Comparability
 Review
Identify the qualitative characteristic(s) to be used given the
information provided.
Characteristics
(h) Neutrality and completeness are • Relevance
ingredients of this fundamental quality • Faithful representation
of accounting information.
• Predictive value
(i) Two fundamental qualities that make • Confirmatory value
accounting information useful for
decision-making purposes.
• Neutrality
• Completeness
(j) Issuance of interim reports is an
example of what enhancing • Timeliness
ingredient? • Verifiability
• Understandability
• Comparability
 Third Level: Recognition, Measurement, and
Disclosure Concepts

These concepts explain how companies should recognize,

measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition 2. Materiality
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual
Definition of Equity

IAS 32.11

Equity is defined as “any contract that

evidences a residual interest in the assets
of an entity after deducting all of its
liabilities.
Definition of Revenue
IAS 18
Revenue is the gross inflow of economic benefits
during the period arising from the course of the
ordinary activities of an entity, other than increases
relating to contributions from equity participants.

Revenue arising from the following transactions and

events:
• Sale of goods
• Rendering of services; and
• Use by others of entity assets yielding interest,
royalty and dividends.
Definition of Income

Income is increases in economic benefits

during the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity.
Definition of Expenses

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.
Measurement

Measurement uncertainty arises when a

measure for an asset or liability cannot
be observed directly and must be
estimated.
Impairment

• Impairment describes a permanent reduction in the

value of a company's asset,

• typically a fixed asset or an intangible asset.

Key Takeaways on Impairment
● Impairment can occur as the result of an unusual or one-time
event, such as a change in legal or economic conditions,
change in consumer demands, or damage that impacts an
asset.
● Assets should be tested for impairment regularly to prevent
overstatement on the balance sheet.
● Impairment exists when an asset's fair value is less than its
carrying value on the balance sheet.
● If impairment is confirmed as a result of testing, an impairment
loss should be recorded.
● An impairment loss records an expense in the current period
which appears on the income statement and simultaneously
reduces the value of the impaired asset on the balance sheet.
What Is Impairment Loss? 
● The technical definition of impairment loss is a decrease in
net carrying value, the acquisition cost minus depreciation,
of an asset that is greater than the future undisclosed 
cash flow of the same asset.
● An impairment occurs when assets are sold or abandoned
because the company no longer expects them to benefit
long-run operations.
● This is different from a write-down, though impairment
losses often result in a tax deferral for the asset.
Depending on the type of asset being impaired,
stockholders of a publicly held company may also lose
equity in their shares, which results in a lower 
debt-to-equity ratio.
Why Recognition is Important
● Recognizing assets, liabilities, equity, income and
expenses depicts an entity’s financial position and
financial performance in structured summaries (the
FS).
● The amounts recognized in a statement are included
in the totals and, if applicable, subtotals, in the
statement.
● The statements are linked because income and
expenses are linked to changes in assets and
liabilities.
 Third Level: Assumptions

Basic Assumptions
Economic Entity – company keeps its activity separate from its
owners and other business unit.
Going Concern - company to last long enough to fulfill
objectives and commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activitiesinto
time periods.
Accrual Basis of Accounting – transactions are recorded in
the periods in which the events occur.
 Third Level: Assumptions
Identify which basic assumption of accounting is best described
in each item below.

(a) The economic activities of FedEx Corporation

(USA) are divided into 12-month periods for the Periodicity
purpose of issuing annual reports.
(b) Total S.A. (FRA) does not adjust amounts in its Monetary
financial statements for the effects of inflation. Unit
(c) Barclays (GBR) reports current and non-current
classifications in its statement of financial Going Concern
position.
(d) The economic activities of Tokai Rubber
Economic
Industries (JPN) and its subsidiaries are merged
for accounting and reporting purposes.
Entity
 Third Level: Assumptions

Principles:
Measurement
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
Fair value is “the amount for which an asset could be
exchanged, a liability settled, or an equity instrument granted
could be exchanged, between knowledgeable, willing parties in
an arm’s length transaction.”
IASB has taken the step of giving companies the option to use
fair value as the basis for measurement of financial assets and
financial liabilities.
 Third Level: Assumptions

Revenue Recognition - revenue is to be recognized

when it is probable that future economic benefits will flow to
the company and reliable measurement of the amount of
revenue is possible.
 Third Level: Assumptions

Expense Recognition - outflows or “using up” of assets or

incurring of liabilities (or a combination of both) during a period as a
result of delivering or producing goods and/or rendering services.

“Let the expense follow the revenues.”

 Third Level: Principles

Full Disclosure – providing information that is of

sufficient importance to influence the judgment and
decisions of an informed user.
Provided through:
Financial Statements
Notes to the Financial Statements
Supplementary information
 Third Level: Principles

Identify which basic principle of accounting is best described

in each item below.
(a) Parmalat (ITA) reports revenue in its income
statement when it is earned instead of when the
cash is collected.
(b) Google (USA) recognizes depreciation expense
for a machine over the 2-year period during which
that machine helps the company earn revenue.
(c) KC Corp. (USA) reports information about pending
lawsuits in the notes to its financial statements.
(d) Fuji Film (JPN) reports land on its balance sheet
at the amount paid to acquire it, even though the
estimated fair market value is greater.
 Third Level: Principles
Identify which basic principle of accounting is best
described in each item below.

(a) Parmalat (ITA) reports revenue in its income Revenue

statement when it is earned instead of when the Recognition
cash is collected.
(b) Google (USA) recognizes depreciation expense for Expense
a machine over the 2-year period during which that Recognition
machine helps the company earn revenue.
(c) KC Corp. (USA) reports information about pending Full
lawsuits in the notes to its financial statements. Disclosure
(d) Fuji Film (JPN) reports land on its balance sheet at
the amount paid to acquire it, even though the Measurement
estimated fair market value is greater.
 Third Level: Constraints

Constraints
Cost – the cost of providing the information must be
weighed against the benefits that can be derived from
using it.

Materiality - an item is material if its inclusion or omission

would influence or change the judgment of a reasonable
person.
 Third Level: Constraints
What accounting constraints are illustrated by the items
below?
(a) Willis Company does not disclose any
information in the notes to the financial
statements unless the value of the
information to users exceeds the expense of
gathering it.
(b) Beckham Corporation expenses the cost of
wastebaskets in the year they are acquired.
 Third Level: Constraints

a. Willis Company does not disclose

any information in the notes to the Cost
financial statements unless the value of
the information to users exceeds the
expense of gathering it.
a. Beckham Corporation expenses the
cost of wastebaskets in the year they Materiality
are acquired.
Summary of
the Structure

OBJECTIVES
To provide financial
information that is
useful to users in
making decisions
relating to providing
resources to the
entity.