Conceptual Framework for Financial Reporting

Purpose of the Conceptual Framework

• Prescribes concepts for general purpose financial reporting.
• Aims to provide useful information based on common needs of majority users.
• Helps International Accounting Standards Board (IASB) in developing consistent accounting standards.
• Provides guidance for preparers in developing accounting policies when standards are not available or when there is a choice.
• Conceptual Framework should be followed unless there is a conflict with the Philippine Financial Reporting Standards (PFRS) which prevails.

Objectives of General Purpose Financial Reporting (GPFR)

• Provide financial information about the reporting entity useful for decision-making by primary users.
• Primary users include investors and creditors who cannot demand information directly.

Primary Users

• Users of financial statements who do not have direct access to information (e.g., investors, creditors).
• Financial statements must meet common needs of these users.

Qualitative Characteristics of Useful Financial Information

Fundamental Characteristics

1. Relevance
   • Information must be capable of making a difference in decision-making.
   • Has predictive value and confirmatory value.
2. Faithful Representation
   • Information must represent what it purports to represent: true, correct, and complete.
   • Includes completeness, neutrality, and freedom from error.

Enhancing Characteristics

• Improve the usefulness of information:

1. Comparability
   • Helps users identify similarities and differences.
2. Verifiability
   • Different users can reach consensus on the representation of the information.
3. Timeliness
   • Information must be available to influence decisions.
4. Understandability
   • Users should have a reasonable knowledge of business activities to analyze the information.

Elements of Financial Statements

1. Assets
   • Present economic resources controlled by the entity, resulting from past events.
2. Liabilities
   • Present obligations of the entity to transfer economic resources, resulting from past events.
3. Equity
   • Residual interest in the assets after deducting liabilities.
4. Income
   • Increases in assets or decreases in liabilities resulting in increases in equity.
5. Expenses
   • Decreases in assets or increases in liabilities resulting in decreases in equity.

Recognition Criteria

• Recognition involves including an item in financial statements that meets the definition of an element (asset, liability, equity, income, or expense).
• Items must provide useful information based on qualitative characteristics: relevance and faithful representation.

Measurement Bases

1. Historical Cost
   • Amount paid to acquire an asset, including transaction costs.
2. Fair Value
   • Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.
3. Value in Use
   • Present value of expected future cash flows from the use of an asset.
4. Current Cost
   • Cost of an equivalent asset at the measurement date.

Presentation and Disclosure

• Effective communication requires:
  • Classifying information by grouping similar items.
  • Aggregating information while avoiding excessive detail or summarization.
• Ensure that disclosed information is relevant and understandable.

Concepts of Capital and Capital Maintenance

• Capital is regarded as invested money or purchasing power.
• Autonomous capital refers to the entity's productive capacity.

Conclusion

• The discussion covered the purposes, objectives, primary users, qualitative characteristics, elements, recognition criteria, measurement bases, and presentation/disclosure aspects of the conceptual framework for financial reporting.