Module 2

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Overview
A conceptual framework can be defined as a system of ideas and objectives that lead to
the creation of a consistent set of rules and standards. Specifically, in accounting, the rule and
standards set the nature, function and limits of financial accounting and financial statements.
Different companies and countries follow different methods of financial accounting and
reporting. This might not always be due to choose but also a requirement of the business model
itself. For example, a company working with the distributorship model records its sale when the
goods leave the factory against a purchase order from the distributor. On the other hand, a
company working under the consignment sale model can record a sale only when goods are sold
to customer (and not the sale channel intermediaries). As such, there arise differences in financial
accounting and reporting, which magnify upon reaching the analysis and reporting stage.
The main reasons for developing an agreed conceptual framework are that it provides:
 a framework for setting accounting standards;
 a basis for resolving accounting disputes; and
 fundamental principles which then do not have to be repeated in accounting standards.
Having a fixed set of definitions of each line item, hence, becomes useful and rather
indispensable to ensure conceptual consistency amongst the audience of the report. It also helps
the potential investor better gauge and compare the performances of target companies,
regardless of their physical location and differences in business models.
The International Accounting Standards Board (Board) issued the revised Conceptual
Framework for Financial Reporting (Conceptual Framework), a comprehensive set of concepts
for financial reporting, in March 2018. It sets out, the objective of financial reporting; the qualitative
characteristics of useful financial information; a description of the reporting entity and its
boundary; definitions of an asset, a liability, equity, income and expenses; 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; and concepts and
guidance on presentation and disclosure.

Learning Outcomes:
After successful completion of this module, you should be able to:
❖ Understand the objective of financial reporting;
❖ Identify the qualitative characteristics of financial information;
❖ Describe the objective of financial statement;
❖ Identify the elements of financial statements;
❖ Understand the criteria for recognition and derecognition of the elements of financial
statement;
❖ Understand the measurement principles of financial reporting;
❖ Understand the presentation and disclosure principles of financial reporting; and
❖ Understand the concepts of capital and capital maintenance

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 14

Course Materials

STATUS AND PURPOSE OF THE CONCEPTUAL FRAMEWORK

The Conceptual Framework for Financial Reporting (Conceptual Framework) describes
the objective of, and the concepts for, general purpose financial reporting. The purpose of the
Conceptual Framework is to:
a) assist the International Accounting Standards Board (Board) to develop IFRS Standards
(Standards) that are based on consistent concepts;
b) assist preparers to develop consistent accounting policies when no Standard applies to
a particular transaction or other event, or when a Standard allows a choice of accounting
policy; and
c) assist all parties to understand and interpret the Standards.

The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework

overrides any Standard or any requirement in a Standard. To meet the objective of general-
purpose financial reporting, the Board may sometimes specify requirements that depart from
aspects of the Conceptual Framework. If the Board does so, it will explain the departure in the
Basis for Conclusions on that Standard.

Objective, usefulness and limitations of general-purpose financial reporting

The objective of general-purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Framework—the qualitative
characteristics of, and the cost constraint on, useful financial information, a reporting entity
concept, elements of financial statements, recognition and derecognition, measurement,
presentation and disclosure—flow logically from the objective.
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. 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.

The decisions described depend on the returns that existing and potential investors,
lenders and other creditors expect, for example, dividends, principal and interest payments or
market price increases. Investors’, lenders’ and other creditors’ expectations about returns
depend on their assessment of the amount, timing and uncertainty of (the prospects for) future
net cash inflows to the entity and on their assessment of management’s stewardship of the entity’s
economic resources. Existing and potential investors, lenders and other creditors need
information to help them make those assessments. To make the assessments described in
paragraph 1.3, existing and potential investors, lenders and other creditors need information
about:
a) the economic resources of the entity, claims against the entity and changes in those
resources and claims; and
b) how efficiently and effectively the entity’s management and governing board have
discharged their responsibilities to use the entity’s economic resources.

Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial reports
for much of the financial information they need. Consequently, they are the primary users to whom

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 15

general purpose financial reports are directed. To a large extent, financial reports are based on
estimates, judgements and models rather than exact depictions. The Conceptual Framework
establishes the concepts that underlie those estimates, judgements and models. The concepts
are the goal towards which the Board and preparers of financial reports strive. As with most goals,
the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at
least not in the short term, because it takes time to understand, accept and implement new ways
of analyzing transactions and other events. Nevertheless, establishing a goal towards which to
strive is essential if financial reporting is to evolve to improve its usefulness.

Economic resources and claims

Information about the nature and amounts of a reporting entity’s economic resources and
claims can help users to identify the reporting entity’s financial strengths and weaknesses. That
information can help users to assess the reporting entity’s liquidity and solvency, its needs for
additional financing and how successful it is likely to be in obtaining that financing. That
information can also help users to assess management’s stewardship of the entity’s economic
resources. Information about priorities and payment requirements of existing claims helps users
to predict how future cash flows will be distributed among those with a claim against the reporting
entity.

Changes in economic resources and claims

Changes in a reporting entity’s economic resources and claims result from that entity’s
financial performance and from other events or transactions such as issuing debt or equity
instruments. To properly assess both the prospects for future net cash inflows to the reporting
entity and management’s stewardship of the entity’s economic resources, users need to be able
to identify those two types of changes.

Financial performance reflected by accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances
on a reporting entity’s economic resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in a different period. This is important
because information about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for assessing the entity’s
past and future performance than information solely about cash receipts and payments during
that period.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

The qualitative characteristics of useful financial information discussed in this chapter
identify the types of information that are likely to be most useful to the existing and potential
investors, lenders and other creditors for making decisions about the reporting entity on the basis
of information in its financial report (financial information). Financial reports provide information
about the reporting entity’s economic resources, claims against the reporting entity and the effects
of transactions and other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the economic
phenomena.) Some financial reports also include explanatory material about management’s
expectations and strategies for the reporting entity, and other types of forward-looking information.
If financial information is to be useful, it must be relevant and faithfully represent what it purports
to represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely and understandable.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 16

Fundamental qualitative characteristics

Relevance
Relevant financial information can make a difference in the decisions made by users.
Information may be capable of making a difference in a decision even if some users choose not
to take advantage of it or are already aware of it from other sources. Financial information can
make a difference in decisions if it has predictive value, confirmatory value or both.

Faithful representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but it must also faithfully
represent the substance of the phenomena that it purports to represent. In many circumstances,
the substance of an economic phenomenon and its legal form are the same. If they are not the
same, providing information only about the legal form would not faithfully represent the economic
phenomenon. To be a perfectly faithful representation, a depiction would have three
characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom,
if ever, achievable. The Board’s objective is to maximize those qualities to the extent possible.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics
that enhance the usefulness of information that both is relevant and provides a faithful
representation of what it purports to represent. The enhancing qualitative characteristics may also
help determine which of two ways should be used to depict a phenomenon if both are considered
to provide equally relevant information and an equally faithful representation of that phenomenon.

Comparability
Users’ decisions involve choosing between alternatives, for example, selling or holding an
investment, or investing in one reporting entity or another. Consequently, information about a
reporting entity is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.
Comparability is the qualitative characteristic that enables users to identify and understand
similarities in, and differences among, items. Unlike the other qualitative characteristics,
comparability does not relate to a single item. A comparison requires at least two items.

Verifiability
Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement,
that a depiction is a faithful representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the related probabilities can also be
verified.

Timeliness
Timeliness means having information available to decision-makers in time to be capable
of influencing their decisions. Generally, the older the information is the less useful it is. However,
some information may continue to be timely long after the end of a reporting period because, for
example, some users may need to identify and assess trends.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 17

Understandability
Classifying, characterizing and presenting information clearly and concisely makes it
understandable. Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the information diligently. At times,
even well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by financial
reporting. Reporting financial information imposes costs, and it is important that those costs are
justified by the benefits of reporting that information. There are several types of costs and benefits
to consider.

Financial statements
Financial statements provide information about economic resources of the reporting entity,
claims against the entity, and changes in those resources and claims, that meet the definitions of
the elements of financial statements. The objective of financial statements is to provide financial
information about the reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for future net cash inflows to
the reporting entity and in assessing management’s stewardship of the entity’s economic
resource. That information is provided:
a) in the statement of financial position, by recognizing assets, liabilities and equity;
b) in the statement(s) of financial performance, by recognizing income and
expenses; and
c) in other statements and notes, by presenting and disclosing information about:
i. recognized assets, liabilities, equity, income and expenses, including information
about their nature and about the risks arising from those recognized assets and
liabilities;
ii. assets and liabilities that have not been recognized, including information about
their nature and about the risks arising from them;
iii. cash flows;
iv. contributions from holders of equity claims and distributions to them; and
v. the methods, assumptions and judgements used in estimating the amounts
presented or disclosed, and changes in those methods, assumptions and
judgements.

Reporting period
Financial statements are prepared for a specified period of time (reporting period) and
provide information about:
a) assets and liabilities—including unrecognized assets and liabilities—and equity that
existed at the end of the reporting period, or during the reporting period; and
b) income and expenses for the reporting period.
To help users of financial statements to identify and assess changes and trends, financial
statements also provide comparative information for at least one preceding reporting period.

Going concern assumption

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. Hence, 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 financial statements may have to be prepared on a different basis.
If so, the financial statements describe the basis used.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 18

THE ELEMENTS OF FINANCIAL STATEMENTS

An asset is 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. This section
discusses three aspects of those definitions:
a) right;
b) potential to produce economic benefits; and
c) control.

A liability is a present obligation of the entity to transfer an economic resource as a result

of past events. For a liability to exist, three criteria must all be satisfied:
a) the entity has an obligation;
b) the obligation is to transfer an economic resource; and
c) the obligation is a present obligation that exists as a result of past events.

Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of a
liability. Such claims may be established by contract, legislation or similar means, and include, to
the extent that they do not meet the definition of a liability:
a) shares of various types, issued by the entity; and
b) some obligations of the entity to issue another equity claim.

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 Income is 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 are decreases in assets, or increases in liabilities, that result in decreases in

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

Income and expenses are the elements of financial statements that relate to an entity’s
financial performance. Users of financial statements need information about both an entity’s
financial position and its financial performance. Hence, although income and expenses are
defined in terms of changes in assets and liabilities, information about income and expenses is
just as important as information about assets and liabilities.

THE RECOGNITION PROCESS

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—an asset, a liability, equity, income or expenses. Recognition
involves depicting the item in one of those statements—either alone or in aggregation with other
items—in words and by a monetary amount and including that amount in one or more totals in
that statement. The amount at which an asset, a liability or equity is recognized in the statement
of financial position is referred to as its ‘carrying amount’.
The statement of financial position and statement(s) of financial performance depict an
entity’s recognized assets, liabilities, equity, income and expenses in structured summaries that
are designed to make financial information comparable and understandable. An important feature
of the structures of those summaries is that the amounts recognized in a statement are included
in the totals and, if applicable, subtotals that link the items recognized in the statement.
Recognition links the elements; the statement of financial position and the statement(s) of
financial performance as follows (see Diagram 5.1):
a) in the statement of financial position at the beginning and end of the reporting period,
total assets minus total liabilities equal total equity; and
b) recognized changes in equity during the reporting period comprise:
i. income minus expenses recognized in the statement(s) of financial
performance; plus
ii. contributions from holders of equity claims, minus distributions to holders of
equity claims.

The statements are linked because the recognition of one item (or a change in its carrying
amount) requires the recognition or derecognition of one or more other items (or changes in the
carrying amount of one or more other items). For example:
a) the recognition of income occurs at the same time as:
i. the initial recognition of an asset, or an increase in the carrying amount of an
asset; or
ii. the derecognition of a liability, or a decrease in the carrying amount of a liability.

b) the recognition of expenses occurs at the same time as:

i. the initial recognition of a liability, or an increase in the carrying amount of a
liability; or
ii. the derecognition of an asset, or a decrease in the carrying amount of an asset.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 20

How recognition links the elements of financial statements

Recognition criteria
Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position. Similarly, only items that meet the definition of income or expenses
are recognized in the statement(s) of financial performance. However, not all items that meet the
definition of one of those elements are recognized. Not recognizing an item that meets the
definition of one of the elements makes the statement of financial position and the statement(s)
of financial performance less complete and can exclude useful information from financial
statements. On the other hand, in some circumstances, recognizing some items that meet the
definition of one of the elements would not provide useful information. An asset or liability is
recognized only if recognition of that asset or liability and of any resulting income, expenses or
changes in equity provides users of financial statements with information that is useful.

Derecognition
Derecognition is the removal of all or part of a recognized 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:
a) for an asset, derecognition normally occurs when the entity loses control of all or part
of the recognized asset; and
b) for a liability, derecognition normally occurs when the entity no longer has a present
obligation for all or part of the recognized liability.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 21

MEASUREMENT BASES
Elements recognized in financial statements are quantified in monetary terms. This
requires the selection of a measurement basis. A measurement basis is an identified feature—for
example, historical cost, fair value or fulfilment value—of an item being measured. Applying a
measurement basis to an asset or liability creates a measure for that asset or liability and for
related income and expenses.

Historical cost
Historical cost measures provide monetary information about assets, liabilities and related
income and expenses, using information derived, at least in part, from the price of the transaction
or other event that gave rise to them. Unlike current value, historical cost does not reflect changes
in values, except to the extent that those changes relate to impairment of an asset or a liability
becoming onerous.

Current value
Current value measures provide monetary information about assets, liabilities and related
income and expenses, using information updated to reflect conditions at the measurement date.
Because of the updating, current values of assets and liabilities reflect changes, since the
previous measurement date, in estimates of cash flows and other factors reflected in those current
values. Unlike historical cost, the current value of an asset or liability is not derived, even in part,
from the price of the transaction or other event that gave rise to the asset or liability. Current value
measurement bases include:
a) fair value;
b) value in use and fulfilment value for liabilities; and
c) current cost

Measurement of equity
The total carrying amount of equity (total equity) is not measured directly. It equals the
total of the carrying amounts of all recognized assets less the total of the carrying amounts of all
recognized liabilities.

Presentation and disclosure as communication tools

A reporting entity communicates information about its assets, liabilities, equity, income
and expenses by presenting and disclosing information in its financial statements. Effective
communication of information in financial statements makes that information more relevant and
contributes to a faithful representation of an entity’s assets, liabilities, equity, income and
expenses. It also enhances the understandability and comparability of information in financial
statements. Just as cost constrains other financial reporting decisions, it also constrains
decisions about presentation and disclosure. Hence, in making decisions about presentation and
disclosure, it is important to consider whether the benefits provided to users of financial
statements by presenting or disclosing particular information are likely to justify the costs of
providing and using that information.

Classification
Classification is the sorting of assets, liabilities, equity, income or expenses based on
shared characteristics for presentation and disclosure purposes. Such characteristics include—
but are not limited to—the nature of the item, its role (or function) within the business activities
conducted by the entity, and how it is measured.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 22

Classification of assets and liabilities
Classification is applied to the unit of account selected for an asset or liability. However, it
may sometimes be appropriate to separate an asset or liability into components that have different
characteristics and to classify those components separately. That would be appropriate when
classifying those components separately would enhance the usefulness of the resulting financial
information. For example, it could be appropriate to separate an asset or liability into current and
non-current components and to classify those components separately.

Offsetting
Offsetting occurs when an entity recognizes and measures both an asset and liability as
separate units of account, but groups them into a single net amount in the statement of financial
position. Offsetting classifies dissimilar items together and therefore is generally not appropriate.

Classification of equity
To provide useful information, it may be necessary to classify equity claims separately if
those equity claims have different characteristics

Classification of income and expenses

Classification is applied to:
a) income and expenses resulting from the unit of account selected for an asset or liability;
or
b) components of such income and expenses if those components have different
characteristics and are identified separately. For example, a change in the current value
of an asset can include the effects of value changes and the accrual of interest. It would
be appropriate to classify those components separately if doing so would enhance the
usefulness of the resulting financial information.

Profit or loss and other comprehensive income

Income and expenses are classified and included either:
a) in the statement of profit or loss; or
b) outside the statement of profit or loss, in other comprehensive income.

The statement of profit or loss is the primary source of information about an entity’s
financial performance for the reporting period. That statement contains a total for profit or loss
that provides a highly summarized depiction of the entity’s financial performance for the period.
Many users of financial statements incorporate that total in their analysis either as a starting point
for that analysis or as the main indicator of the entity’s financial performance for the period.
Nevertheless, understanding an entity’s financial performance for the period requires an analysis
of all recognized income and expenses—including income and expenses included in other
comprehensive income—as well as an analysis of other information included in the financial
statements.

Aggregation
Aggregation is the adding together of assets, liabilities, equity, income or expenses that
have shared characteristics and are included in the same classification. Aggregation makes
information more useful by summarizing a large volume of detail. However, aggregation conceals
some of that detail. Hence, a balance needs to be found so that relevant information is not
obscured either by a large amount of insignificant detail or by excessive aggregation.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 23

CONCEPTS OF CAPITAL
A financial concept of capital is adopted by most entities in preparing their financial
statements. Under a financial concept of capital, such as invested money or invested purchasing
power, capital is synonymous with the net assets or equity of the entity. Under a physical concept
of capital, such as operating capability, capital is regarded as the productive capacity of the entity
based on, for example, units of output per day.

Concepts of capital maintenance and the determination of profit

The concepts of capital in paragraph 8.1 give rise to the following concepts of capital
maintenance:
a) Financial capital maintenance. Under this concept a profit is earned only if the financial
(or money) amount of the net assets at the end of the period exceeds the financial (or
money) amount of net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period. Financial capital
maintenance can be measured in either nominal monetary units or units of constant
purchasing power.
b) Physical capital maintenance. Under this concept a profit is earned only if the physical
productive capacity (or operating capability) of the entity (or the resources or funds
needed to achieve that capacity) at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period.
The concept of capital maintenance is concerned with how an entity defines the capital
that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts
of profit because it provides the point of reference by which profit is measured; it is a prerequisite
for distinguishing between an entity’s return on capital and its return of capital; only inflows of
assets in excess of amounts needed to maintain capital may be regarded as profit and therefore
as a return on capital. Hence, profit is the residual amount that remains after expenses (including
capital maintenance adjustments, where appropriate) have been deducted from income. If
expenses exceed income the residual amount is a loss.
The physical capital maintenance concept requires the adoption of the current cost basis
of measurement. The financial capital maintenance concept, however, does not require the use
of a basis of measurement. Selection of the basis under this concept is dependent on the type of
financial capital that the entity is seeking to maintain.
Under the concept of financial capital maintenance where capital is defined in terms of
nominal monetary units, profit represents the increase in nominal money capital over the period.
Thus, increases in the prices of assets held over the period, conventionally referred to as holding
gains, are, conceptually, profits. They may not be recognized as such, however, until the assets
are disposed of in an exchange transaction. When the concept of financial capital maintenance
is defined in terms of constant purchasing power units, profit represents the increase in invested
purchasing power over the period. Thus, only that part of the increase in the prices of assets that
exceeds the increase in the general level of prices is regarded as profit. The rest of the increase
is treated as a capital maintenance adjustment and, hence, as part of equity.
Under the concept of physical capital maintenance when capital is defined in terms of the
physical productive capacity, profit represents the increase in that capital over the period. All price
changes affecting the assets and liabilities of the entity are viewed as changes in the
measurement of the physical productive capacity of the entity; hence, they are treated as capital
maintenance adjustments that are part of equity and not as profit.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 24

Course Assessment

A. Identification - Write the word(s) best described by the statements below:

1. The standard-setting body who issues the International Financial Reporting Standards
2. The standard-setting organization who issues the U.S. GAAP
3. The process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
4. This was created to issue implementing guidelines on PFRS.
5. The amount of time that is expected to elapse until an asset is realized or otherwise converted
into cash
6. The financial report that shows the reporting entity’s economic resources and claims
7. The financial report that shows the changes due to events and transactions other than
financial performance such as the issue of equity instruments and distributions of cash or
other assets to shareholders
8. This is used when assets are recorded at the amount of cash or cash equivalents or the fair
value of the consideration given to acquire them at the time of their acquisition.
9. Refers to the ability of the business to raise cash to meet unexpected cash requirements.
10. Those responsible for the preparation and presentation of financial statements.
11. The standard that sets out the requirements for the presentation of the cash flow statement
and related disclosures.
12. Portray the financial effects of transactions and other events by grouping them into broad
classes according to their economic characteristics.
13. Result if an asset is sold more than book value.
14. One of its recognition criteria is that it is probable that the future economic events will flow to
the enterprise.
15. Under this concept a profit is earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to achieve that capacity) at the end
of the period exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.

B. Fill in the Blanks - Write the word(s) to make the statements complete and correct.

1. _______________ provide financial reporting information to a wide variety of users.

2. As part of the objective of general-purpose financial reporting, an _______________ is
adopted. This means that companies are viewed as separate and distinct from their owners.
3. Accounting standards set out the recognition, _______________, presentation and
_______________ requirements of transactions and events that are important in financial
statements.
4. The creation of FRSC in 2006 replaced the _______________.
5. The objective of the _______________ is to establish generally accepted accounting
principles in the Philippines.
6. _______________ sets out the concepts that underlie the preparation and presentation of
financial statements for external users.
7. If there are any conflict in the framework and IFRS, the _______________ prevails.
8. _______________ is a resource controlled by the enterprise as a result of past events and
from which future economic events are expected to flow to the enterprise.
9. _______________ are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities that result in decreases in
equity other than those relating to distributions to equity participants.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 25

10. The conceptual framework specifically mentions one underlying assumption, namely,
_______________.
11. The four sectors of accountancy under PICPA are: _______________, _______________,
_______________, _______________.
12. One constraint on useful financial reporting is that costs should be justified by the
_______________ of the reported financial information.
13. Assets that are carried at the amount of cash or cash equivalents that would have to be paid
if the same or an equivalent asset was acquired currently is measured using the
_______________.
14. Under the _______________ approach, investment must be recovered before a company
can have income.
15. The objective of PAS 1 is to prescribe the basis for presentation of general-purpose financial
statements in order to ensure _______________.

C. Matching – Write the letter of the term under List B that corresponds to the statement
indicated under List A.

LIST A LIST B
Concerns the relative size of an item and its effect on
1 a. Predictive value
decisions.
2 Information confirms expectations. b. Relevance
3 Important for making inter-firm comparisons. c. Timeliness
Accrual basis of
4 Applying the same accounting practices over time. d.
accounting
5 Implies consensus among different measures. e. Feedback value
A complete set of financial statements (including
6 comparative information) should be presented at least f. Frequency of reporting
annually.
7 Information is available prior to the decisions. g. Faithful representation
8 Pertinent to the decision at hand. h. Understandability
Along with relevance, a fundamental qualitative
9 i. Materiality
characteristic.
Requires consideration of the cost and value of
10 j. Comparability
information.
The process of admitting information into financial
11 k. Offsetting
statements.
An entity reports separately both assets and liabilities,
12 l. Recognition
and income and expenses.
13 Information is useful in determining the future m. Consistency
Effects of transactions on an entity’s economic
resources and claims are recognized in the periods in
14 n. Cost effectiveness
which those effects occur, even if the resulting cash
receipts and payments occur in a different period.
It requires that users have some knowledge of the
complex economic activities of enterprises, the
15 o. Verifiability
accounting process and the technical terminology in the
statements.
p. Prudence
q. Substance over form

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 26

D. Sequencing - Arrange the following according to the correct sequence.
A. IASB Due Process
1. An exposure draft, which is IASB’s main vehicle for consulting the public, is published for
public comment.
2. All comments received on discussion document and exposure draft are considered.
3. Topics are identified and placed on IASB’s agenda.
4. After the due process is completed, all outstanding issues are resolved, and the IASB
members have balloted in favor of publication, the IFRS is issued.
5. After comments on the first exposure draft have been affected, the IASB considers whether
to publish its revised proposals for another round of comments.

B. FRSC Due Process

1. Approval of a standard or an interpretation by a majority of the FRSC members.
2. Consideration of pronouncement of IASB.
3. Consideration of all comments received within the comment period and, when appropriate,
preparing a comment letter to the IASB.
4. An exposure draft approved by a majority of the FRSC members for comments (comment
period 60 – 30 days)

E. True or False: Write A if the statement is correct or B if incorrect.

1. The principal difference between two concepts of capital maintenance is the treatment of the
effects of changes in the prices of assets and liability of the entity.
2. The selection of the appropriate concept of capital by an entity should be based on the needs
of the users of its financial statements.
3. The concept of capital maintenance chosen by an entity shall determine the accounting model
used in the preparation of its financial statements.
4. The Conceptual Framework serves as a guide in developing future financial reporting
standards and in reviewing existing ones.
5. The Conceptual Framework is a source of guidance for determining an accounting treatment
where a standard does not provide specific guidance.
6. The Conceptual Framework does not in any was assist prepares of financial statements in
applying PFRS and in dealing with topics that have yet to form the subject of PFRS.
7. The Conceptual Framework is not a PFRS, and nothing in it overrides any specific PFRS,
including PFRS that is in some respect in conflict with the Conceptual Framework.
8. The GPFS show the results of the stewardship of the management for the resources entrusted
to it by the capital providers.
9. The GPFS are prepared at least annually and are directed to both the common and specific
information needs of a wide range of statement users.
10. The GPFS provide information about the financial position, performance and cash flows of an
enterprise that is useful to a wide range of users in making economic decisions.

F. Multiple Choices: Select the best answer for each of the following.

1. According to the Preface to International Financial Reporting Standards, which of the following
are objectives of the IASB?
I. To harmonize financial reporting between IFRS and US GAAP and European
II. To work actively with national standard setters
III. To promote the use and strict application of financial accounting standards
A. I and II C. II and III
B. I and III D. I, II and III

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 27

2. Which of the following are parts of the “due process” of the IASB in issuing a new International
Financial Reporting Standard?
I. Establishing an advisory committee to give advice
II. Developing and publishing a discussion document for public comment
III. Issuance of an interpretation as authoritative guidance
IV. Reviewing compliance and enforcement procedures
V. Issuance of the final standard with number and title
A. I, II and III only C. I, II, III & IV only
B. I, II and V only D. I, II, III, IV & V

3. Which of the following bodies is responsible for reviewing accounting issues that are likely to
receive divergent or unacceptable treatment in the absence of authoritative guidance, whit a
view to reaching consensus as to the appropriate accounting treatment?
A. Standards Advisory Council (SAC)
B. International Accounting Standards Board (IASB)
C. International Financial Reporting Interpretations Committee (IFRIC)
D. International Accounting Standards Committee Foundation (IASC Foundation)

4. Which of the following statements about international accounting standards is true?

A. Accounting professionals in the USA consider US GAAP superior to IAS and has no
intention to adopt International Accounting Standards.
B. The IASB is able to enforce its standards by prohibiting the listing of companies which do
not comply on stock exchanges which sell internationally.
C. The International Accounting Standards Board (IASB) was established with the purpose
of narrowing the range of divergence in accounting standards throughout the world.
D. Legal and psychological hurdles to achieving common reporting standards will be fully
overcome by the year 2012, the time frame set for convergence between IAS and US
GAAP.

5. Which of the following bodies report to the IFRS Foundation?

A. The IASB and AASB.
B. The IASB and the FASB.
C. The IASB and the IFRS Advisory Council.
D. The IASB, AASB, and the IFRS Advisory Council.

6. Which body appoints the members of International Accounting Standards Board (IASB) that
make the present IFRS?
A. IFRS Foundation.
B. IFRS Advisory Council.
C. International Accounting Standards Committee.
D. International Financial Reporting Interpretations Committee.

7. Financial accounting standard-setting

A. is based solely on research and empirical findings.
B. is a legalistic process based on rules promulgated by governmental agencies.
C. is democratic in the sense that a majority of accountants must agree with a standard
before it becomes enforceable.
D. can be described as a social process which reflects political actions of various interested
user groups as well as a product of research and logic.

8. The “due process” system in developing financial reporting standards

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 28

 A. is an efficient system for collecting dues from members.
B. identifies the accounting issues that are the most important.
C. enables interested parties to express their views on issues under consideration.
D. requires that all accountants must receive a copy of financial accounting standards.

9. What is due process in the context of standard setting at the IASB?

A. IASB operates in full view of the public.
B. Interested parties can make their views known.
C. Public hearings are held on proposed accounting standards.
D. All of these.

10. What is the chronological order in the evaluation of a typical standard?

A. Discussion paper, Exposure draft and Standard.
B. Exposure draft, Discussion paper and Standard.
C. Exposure draft, Standard and Discussion paper.
D. Standard, Discussion paper, and Exposure draft.

11. The IASB declared that the merits of proposed standards are assessed
A. from a position of neutrality.
B. from a position of materiality.
C. based on arguments of lobbyist.
D. based on possible impact on behavior.

12. Under Philippine Financial Reporting Standards

A. the cash basis of accounting is accepted.
B. events are recorded in the period in which the event occurs.
C. net income will be lower under the cash basis than accrual basis accounting.
D. all of the choices are correct.

13. RA 9298 is officially known as

A. The Revised Accountancy Act.
B. The Revised Accountancy Law.
C. The Philippine Accountancy Act of 2004.
D. The Accountancy Law of the Philippines, 2007.

14. Under Section 5 of RA 9298, who shall appoint the members of the Professional Regulatory
Board of Accountancy?
A. The chairman of the Board of Accountancy.
B. The president of the Republic of the Philippines.
C. The chairperson of Professional Regulations Commission.
D. The president of Philippine Institute of Certified Public Accountants.

15. The following statements relate to the Board of Accountancy. Select the incorrect statement:
A. The Board consists of a Chairman and six members.
B. The chairman and members of the Board are appointed by the President of the
Philippines upon recommendation of the Professional Regulation Commission.
C. The Professional Regulation Commission may remove from the Board of
Accountancy, any member whose certificate to practice has been revoked or
suspended.
D. All sectors of accountancy practice shall as much as possible be equitably
represented in the Board.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 29

16. Which of the following is not an economic entity?
A. SM Group of Companies.
B. Lions Club International, a civic organization.
C. ABS-CBN Foundation, a charitable institution.
D. Chris James, a Quezon City resident who owns a chain of beauty salons.

17. This accounting objective emphasizes the importance of the Income Statement as it is geared
toward proper income or performance determination of the enterprise.
A. Entity theory. C. Proprietary theory.
B. Fund theory D. Residual equity theory.

18. Which of the following is not a description or a function of the Financial Reporting Standards
Council (FRSC)?
A. It establishes generally accepted accounting principles in the Philippines.
B. It receives financial support principally from the Professional Regulations Commission
(PRC).
C. It is the successor of Accounting Standards Council (ASC) and the creator of Philippine
Interpretations Committee (PIC).
D. It assists the Professional Regulatory Board of Accountancy (BOA) in carrying out its
power and function to promulgate accounting standards in the Philippines.

19. Which of the following situations violates the concept of reliability?

A. Data on segments having the same expected risks and growth rates are reported to
analysts estimating future profits.
B. Financial statements are issued nine months late.
C. Management reports to stockholders’ new projects undertaken, but the financial
statements never report the projected results.
D. Financial statements include a property with a carrying amount increased to
management’s estimate of market value.

20. Which of the following statements about financial statements is incorrect?

A. They are the primary responsibility of the management of the enterprise.
B. They show the results of the stewardship of the management for the resources entrusted
to it by the capital providers.
C. They are prepared at least annually and are directed to both the common and specific
information needs of a wide range of statement users.
D. The provide information about the financial position, performance and cash flows of an
enterprise that is useful to a wide range of users in making economic decisions.

21. Under the Conceptual Framework for Financial Reporting which of the following statements
is not a feature of financial information’s “comparability” characteristics?
A. Comparability is uniformity.
B. A comparison requires at least two items.
C. Consistency, although related to comparability, is not the same.
D. Comparability is the goal; consistency helps to achieve that goal.

22. When fair value is used in measuring assets in the financial statements, current GAAP
provides following references as basis of fair value, except
A. Price in active market.
B. Price in recent transaction.
C. Price taken from industry or sector benchmarks.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 30

 D. Price based on assessed value of government bodies.

23. The objectives of financial reporting for business enterprises are based on
A. the need for conservative information
B. the needs of the users of the information
C. the need to report on management’s stewardship
D. the need to comply with financial accounting standards

24. Which of the following statements regarding users of financial information is correct?
A. Managers of an entity are considered to be internal decision makers.
B. Accounting information is prepared for and useful to only outside decision makers.
C. External decision makers can obtain whatever financial data they need and whenever
they need it.
D. The members of the Board of Directors are not internal rather than external users of
financial information.

25. Which of the following statements is (are) true, concerning the Going Concern assumption?
I. When preparing financial statements, management is required to make an assessment
of an enterprise’s ability to continue as a going concern which should be at least twelve
months from balance sheet date.
II. When an enterprise has a history of profitable operations and ready access to financial
resources it is not a detailed analysis as to is ability to operate as a going concern is not
necessary.
III. When the financial statements are not prepared on a going-concern basis, this fact should
disclose
A. I and II only C. II and III
B. II and III only D. I, II, and III

26. If accounting information is timely, and has predictive as well as feedback value, then it is
considered to be
A. relevant C. understandable
B. reliable D. verifiable

27. In the first week of December 2016, Elisa Company signs a major contract to develop an
accounting information system for Edward Inc. No work is begun the current year, yet the
notes to the financial statements discuss the nature and peso amount of the contract. This is
an example of:
A. completeness or full disclosure C. historical cost
B. conservatism D. relevance

28. Which of the following statements best describes the term “going concern”?
A. The expenses of an entity exceed its income
B. When current liabilities of an entity exceed current assets
C. The ability of the entity to continue in operation for the foreseeable future
D. The potential to contribute to the flow of cash and cash equivalents to the entity

29. Which TWO of the following are listed in the IASB Framework as ‘underlying assumptions’
regarding financial statements?
A. The financial statements are prepared under the accrual basis
B. The entity can be viewed as a going concern
C. The financial statements are reliable

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 31

 D. Accounting policies are consistently applied
A. A and B C. B and D
B. B and C D. C and D

30. Which of the following situations violates the concept of reliability?

I. Relevance is the capacity of information to make difference in decision by helping users
from predictions about outcome of past, present and future events or confirm/correct prior
expectations
II. The quality of reliability assures readers that the financial information is free from bias
and faithfully represents what it purports to show, including adequate disclosure of
significant information
III. Under the IASB Framework for the Preparation and presentation of financial statements,
conservatism is not a concept that is recognized as a qualitative objective.
A. I and II only C. II and III only
B. I and III only D. I, II and III

31. Which of the following is the best description of reliability in relation to information in financial
statements?
A. Comprehensibility to users C. Influence on the economic decisions
B. Freedom from material error and bias D. Inclusion of degree of caution of
users

32. According to the IASB Framework for the preparation and presentation of financial
statements, which TWO of the following are examples of expenses?
I. A loss on the disposal of a non-current asset
II. A decrease in equity arising from a distribution to equity participants
III. A decrease in economic benefits during the accounting period
IV. A reduction in income for the accounting period
A. I and II C. II and III
B. I and III D. III and IV

33. An expiration of cost which is incurred without compensation or return and is not absorbed as
cost of revenue is called
A. Deferred charge C. Indirect cost
B. Deferred credit D. Loss

34. Which of the following best describes the distinction between expenses and losses?
A. Losses are material items whereas expenses are immaterial items
B. Losses are extraordinary charges whereas expenses are ordinary charges
C. Losses are reported net-of-related-tax effect whereas expenses are not reported not-of-
tax
D. Losses results from peripheral or incidental transactions whereas expenses result from
ongoing major or central operations of the entity

35. Which of the following statements about accounting recognition is (are) true?
I. In accounting, there are instances when a gain/loss would arise upon initial recognition
of an asset.
II. No asset can simultaneously be an asset of more than one entity
III. At times, two or more entities may share the benefits that an asset provides
IV. An appropriate basis for recognizing an asset is when a particular enterprise acquires the
right to utilize and control access to the asset’s benefits

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 32

 A. I and II only C. I, II and III only
B. I and IV only D. I, II, III and IV

36. Which one of the following terms best describes the amount of cash or cash equivalents that
could currently be obtained by selling an asset in an orderly disposal?
A. Fair value C. Residual value
B. Realizable value D. Value in use

37. Which of the following assets are initially and subsequently measured at Fair Value?
I. Biological assets IV. Property and Equipment
II. Available for sale securities V. Held for trading securities
III. Inventories VI. Intangible assets

A. I and II only C. I, II, III and V only

B. I, II and III only D. I, II, IV, and V only

38. The capital maintenance concept followed under present GAAP is

A. Economic capital C. Physical capital
B. Financial and physical capital D. Real capital

39. What concept is critical in distinguishing an enterprise’s return on investment from return of
its investment?
A. Capital maintenance concept C. Current operating performance concept
B. Comprehensive income concept D. Return on investment concept

40. Under the Conceptual Framework of Financial Reporting, users of financial information may
be classified into
A. Heavy users (management) and slight users (public, government).
B. Primary users (existing and potential investors and creditors) and other users.
C. Internal users (employees, customers) and external users (investors, creditors).
D. Main users (existing investors, creditors) and incidental users (potential investors,
creditors)

41. Which of the following situations violates the concept of reliability?

A. Data on segments having the same expected risks and growth rates are reported to
analysts estimating future profits.
B. Financial statements are issued nine months late.
C. Management reports to stockholders’ new projects undertaken, but the financial
statements never report the projected results.
D. Financial statements include a property with a carrying amount increased to
management’s estimate of market value.

42. What is the authoritative status of the Conceptual Framework?

A. The Framework applies when FRSC develops new or revised Standards. An enterprise
is never required to consider the framework.
B. It has the highest level of authority. In case of a conflict between the Framework and s
Standard or Interpretation, the Framework overrides the Standard or Interpretation.
C. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides
the Framework. In the absence of a Standard or an Interpretation that specifically
applies, the Framework should be followed.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 33

 D. If there is a Standard or Interpretation that specifically applies to a transaction,
management should consider the applicability of the Framework in developing and
applying an accounting policy which results in information that is relevant and reliable.

43. Which of the following is the first step within hierarchy of guidance to which management
refers, and whose applicability at considers, when selecting accounting policies?
A. Apply the requirements in PFRS dealing with similar and related issues.
B. Apply a standard from PFRS if it specifically relates to the transaction, event, or condition.
C. Consider the applicability of the definitions, recognition criteria, and measurement
concepts in the Conceptual Framework.
D. Consider the most recent pronouncements of other standard-setting bodies to the extent
they do not conflict with PFRS or the Conceptual Framework?

44. Under the Conceptual Framework for Financial Reporting 2010, which of the following is a
new item added in its scope but is still a work-in-progress?
A. Consolidated financial statements. C. The government entity.
B. Mergers and acquisitions. D. The reporting entity.

45. What is the qualitative characteristic of financial statements according to the Framework?
A. Qualitative characteristics are broad classes of financial effects of transactions and other
events.
B. Qualitative characteristics are the attributes that make the information provided in
financial statements useful to others.
C. Qualitative characteristics measure the extent to which an entity has complied with all
relevant Standards and Interpretations.
D. Qualitative characteristics are non-quantitative aspects of an entity’s position and
performance and changes in financial position.

ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 34