TOPIC 1:

CONCEPTUAL FRAMEWORK AND

REPORTING ENVIRONMENT IN MALAYSIA

Dr. Saidatunur Fauzi Saidin

ACN 3112 (Group 4)

 Subs-topics:

1.1 Economic Resources and Claims

1.2 Substance of Contractual Rights and Obligations
1.3 Assumptions and Concepts
1.4 Qualitative Characteristics
The Conceptual Framework of Financial Reporting

o The Conceptual Framework of Financial Reporting describes

the objective of and the concepts for financial reporting.
o Is not an accounting standard.
o First issue in November 2011, and was revised in April 2018.

3
Contents: CHAPTERS
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 De-recognition
6 Measurement
7 Presentation And Disclosure
8 Concepts Of Capital And Capital Maintenance

4
 1 The objective of general purpose financial
reporting
o 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.
o Those decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence,
management’s actions that affect the use of the entity’s economic
resources.

5
2 Qualitative characteristics of useful financial
information

Qualitative
Characteristics

Fundamental Faithful
Relevance
Characteristics Representation

Comparability Verifiability
Enhancing
Characteristics
Timeliness Understandability

6
Fundamental qualitative characteristics:
1-Relevance
o Financial information is relevance if capable of making a
difference in the decisions made by users.
o It is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
o Predictive value if it can be used as an input to processes
employed by users to predict future outcomes.
o Confirmatory value if it provides feedback about (confirms or
changes) previous evaluations.
o The predictive value and confirmatory value of financial
information are interrelated.

7
• For example, revenue information for the current year, which
can be used as the basis for predicting revenues in future
years, can also be compared with revenue predictions for the
current year that were made in past years. The results of those
comparisons can help a user to correct and improve the
processes that were used to make those previous predictions.

Materiality
• Materiality is an entity-specific aspect of relevance based on
the nature or magnitude, or both, of the items to which the
information relates in the context of an individual entity’s
financial report.
• Information is material if omitting it or misstating it could
influence decisions.
8
2-Faithful representation
o Faithfully represent the substance of the phenomena that it
purports to represent.
o Most economic phenomenon and its legal form are the same.
However, some are not.
o Providing information only about the legal form would not
faithfully represent the economic phenomenon.
o To be a perfectly faithful representation, a depiction would
have three characteristics; complete, neutral and free from
error.
o A complete depiction includes all information necessary for a
user to understand the phenomenon, including all necessary
descriptions and explanations.

9
• A neutral depiction is without bias in the selection or
presentation of financial information. Neutrality is supported
by the exercise of prudence- assets and income are not
overstated and liabilities and expenses are not understated.
• Free from error means there are no errors or omissions in the
description of the phenomenon, and the process use to produce
the information has been selected and applied with no errors in
the process. It does not mean accurate in all respects, since
some data need to be estimated.

10
Enhancing qualitative characteristics:
1-Comparability
o Information about a reporting entity is more useful if it can be
compared
(i) with similar information about other entities and
(ii) with similar information about the same entity for another
period or another date.
o Comparable characteristics enables users to identify and
understand similarities and differences.
o Like things must look alike and different things must look
different

11
2-Verifiability
o Different knowledgeable and independent observers could
reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful
representation.
• Helps assure users that information faithfully represents the
economic phenomenon it purports to represent.

12
3-Timeliness
o Having information available to decision-makers in time to be
capable of influencing their decisions.
o The older the information is the less useful it is.

13
4-Understandability
o Classifying, characterising and presenting information clearly
and concisely makes it understandable.
o Financial reports are prepared for users who have a reasonable
knowledge of business and economic activities and who
review and analyse the information diligently.

14
 3 Financial statements and the reporting entity
Financial Statements:
• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in Equities
• Accounting policies and notes to the accounts

15
Reporting period (3.4)
• Financial statements are prepared for a specified period of
time.
• A common period consist of 12 months.
• Information about possible future transactions and events is
included in financial statements if it:
(i) relates to entity’s assets, liabilities, equities, income or
expenses;
(ii) is useful to users
• To help users of financial statements to identify and assess
changes and trends, financial statements also provide
comparative information.

16
Going concern assumption (3.9)
• Financial statements are normally prepared on the assumption
that the reporting entity is a going concern and will continue in
operation for the foreseeable future.
• It is assumed that the entity has neither the intention nor the
need to enter liquidation or to cease trading.
• If such an intention or need exists, the FS need to be prepared
on different basis- need to describe the basis.

17
Reporting Entity 3.10
• Is an entity that is required/ chooses to prepare the financial
statements.
• It can be a single, portion or more than one entity.
• If a reporting entity comprises both the parent and its
subsidiaries, the reporting entity’s FS are referred as
Consolidated FS.

18
 4 THE ELEMENTS OF FINANCIAL
STATEMENTS
1. Asset
2. Liabilities
3. Equity
4. Income
5. Expenses

19
Item discussed in Element Definition or description
Chapter 1
Economic Asset A present economic resource controlled by
resource the entity as a result of past events.
An economic resource is a right that has
the potential to produce economic
benefits.
Claim 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.

20
Item discussed in Element Definition or description
Chapter 1
Changes in Income Increases in assets, or decreases in
economic resources liabilities, that result in increases in
and claims, equity, other than those relating to
reflecting financial contributions from holders of equity
performance 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.
Other changes in − Contributions from holders of equity
economic resources claims, and distributions to them.
Exchanges of assets or liabilities that do
and claims − not result in increases or decreases in
equity.

21
Economic Resources and Claims (1.12)
Economic resource is a right that has the potential to produce
economic benefits such as (4.6):
(a) Rights that correspond to an obligation of another party.
(i) rights to receive cash
(ii) rights to receive goods or services
(iii) rights to exchange economic resources
(iv) rights to benefit from an obligation of another party
(b) Rights that do not correspond to an obligation of another
party

22
Many rights are established by contract, legislation or similar
means. May also obtain in other ways.
Not all rights are assets of entity.
An entity cannot have a right to obtain economic benefits from
itself.
The set of rights arising from legal ownership of a physical
object is accounted for as a single asset.

23
Potential to produce economic benefits
It does not need to be certain, only necessary that the right
already exist.
An economic resource could produce economic benefits for an
entity by entitling or enabling it to do of the following:
(a) receive contractual cash flows or another economic resource;
(b) exchange economic resources with another party on
favourable terms;
(c) produce cash inflows or avoid cash outflows by, for example:
(d) receive cash or other economic resources by selling the
economic resource; or
(e) extinguish liabilities by transferring the economic resource.

24
Unit of account (4.48)
A unit of account is selected for an asset or liability when
considering how recognition criteria and measurement concepts
will apply to.
In some circumstances, it may be appropriate to select one unit of
account for recognition and a different unit of account for
measurement.

25
 5 Recognition and derecognition

• Recognition is the process of capturing for inclusion in the

statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the
elements of financial statements.
• The amount recognised in the statement of financial position is
referred to as its ‘carrying amount’.
• Derecognition is the removal of all or part of a recognised
asset or liability from an entity’s statement of financial
position.
• Derecognition normally occurs when that item no longer
meets the definition of an asset or of a liability.

26
 6 Measurement

Elements recognized in FS are quantified in monetary terms,

which requires the measurement basis.
Applying a measurement basis creates a measure for the
elements.

27
Measurement Bases:
1. HISTORICAL COST
• All transactions are recorded in terms of their cost at the time
the transaction occurred
• Does not reflect changes in values, except on changes relate to
impairment of an asset or liability becoming onerous.
The historical cost of an asset is updated over time to depict, if applicable:
(a) the consumption of part or all of the economic resource that constitutes the
asset (depreciation or amortisation);
(b) payments received that extinguish part or all of the asset;
(c) the effect of events that cause part or all of the historical cost of the asset to
be no longer recoverable (impairment); and
(d) accrual of interest to reflect any financing component of the asset.

28
The historical cost of a liability is updated over time to depict, if
applicable:
(a) fulfilment of part or all of the liability, for example, by
making payments that extinguish part or all of the liability or by
satisfying an obligation to deliver goods;
(b) the effect of events that increase the value of the obligation to
transfer the economic resources needed to fulfil the liability to
such an extent that the liability becomes onerous. A liability is
onerous if the historical cost is no longer sufficient to depict the
obligation to fulfil the liability; and
(c) accrual of interest to reflect any financing component of the
liability.

29
2. CURRENT VALUE
• Current value provide monetary information using information
updated to reflect conditions at the measurement date.
• Include: fair value, value in use, current cost.

Fair Value:
Fair value is the price that would be received to sell an asset
(paid to transfer a liability) in an orderly transaction between
market participants at the measurement date.
In some cases, fair value can be determined directly by observing
prices in an active market.

30
In other cases, it is determined indirectly using measurement
techniques reflecting all the following factors:
(i) Estimates of future cash flows
(ii) Possible variations in the estimated amount or timing of
future cash flows
(iii) the time value of money.
(iv) the price for bearing the uncertainty inherent in the cash
flows
(v) other factors

31
Value in use and fulfilment value:
Value in use is the present value of the cash flows, or other
economic benefits, that an entity expects to derive from the use
of an asset and from its ultimate disposal.
Fulfilment value is the present value of the cash, or other
economic resources, that an entity expects to be obliged to
transfer as it fulfils a liability.

32
Current cost:
Current cost of an asset is the cost of an equivalent asset at the
measurement date, comprising the consideration that would be
paid at the measurement date plus the transaction costs that
would be incurred at that date.
Current cost of a liability is the consideration that would be
received for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at that date.

33
TERIMA KASIH / THANK YOU
www.upm.edu.my