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Learning Activity Sheet No. 3

Topic : CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING
Objective of Financial Reporting

Learning Objectives: After reading this Learning Activity Sheet, YOU

MUST be able to:
1. Know the nature of the Revised Conceptual Framework.
2. Describe the purpose and usefulness of a Conceptual Framework.
3. Understand the authoritative status of a Conceptual Framework.
4. State the objective of financial reporting.
5. Discuss the limitations of financial reporting.

Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Reporting is a complete,

comprehensive and single document promulgated by the International
Accounting Standards Board.

The Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users.

The Conceptual Framework provides the foundation for Standards that:

a. Contribute to transparency by enhancing international comparability

and quality of financial information.

b. Strengthen accountability by reducing information gap between the

providers of capital and the people to whom they have entrusted
their money.

c. Contribute to economic efficiency by helping investors to identify

opportunities and risks across the world.

Purposes of Revised Conceptual Framework

a. To assist the International Accounting Standards Board to develop

IFRS Standards based on consistent concepts.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: May, 2021

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b. To assist preparers of financial statements to develop consistent
accounting policy when no Standard applies to a particular
transaction or other event or where an issue is not yet addressed by
an IFRS.

c. To assist preparers of financial statements to develop accounting

policy when a Standard allows a choice of an accounting policy.

d. To assist all parties to understand and interpret the IFRS Standards.

Authoritative Status and Applicability

• The Conceptual Framework is not a PFRS. When there is a conflict

between the Conceptual Framework and a PFRS, the PFRS will
prevail.

• In the absence of a standard, management shall consider the

Conceptual Framework in making its judgment in developing and
applying an accounting policy that results in information that is
relevant and reliable.

• The Conceptual Framework is concerned with general-purpose

financial statements.

Users of Financial Information

1. Primary Users

a. Existing and Potential Investors and Owners

These parties provide the financial resources to keep the

business going. They decide whether to invest or not depending on
the estimated amount of income on the investment.

b. Existing and Potential Lenders and Creditors

Financial institutions use financial information to determine

the capacity of the business organization to pay its obligations and
their interests at the appropriate time.

2. Other Users

a. Customers

A business entity is a source of goods or services, and

customers are interested in assessing the entity’s ability to continue

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: May, 2021

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to provide those goods or services, especially if they have a long-
term involvement with, or are dependent on, the entity

b. Government and their Agencies

Governments and their agencies are interested in the

activities of a business entity because they are in various ways
responsible for the efficient allocation of economic resources. They
also need information to help in regulating the activities of business
entities, determining and applying taxation policies, and preparing
national income and similar statistics.

c. Employees

Employees and their representatives are interested in

evaluating the stability and profitability of their employer. They are
interested in information that helps them to assess the entity’s
ability to pay salaries and wages and to provide incentive
compensation and retirement and other benefits.

d. Public

A business entity may affect members of the public in a

variety of ways. For example, an entity may make a substantial
contribution to the local economy by providing employment
opportunities, patronizing local suppliers, paying taxes, and making
charitable contributions.

Scope of Revised Conceptual Framework

Broadly, the scope of revised conceptual framework consists of the

following:

1. Objective of financial reporting

2. Qualitative characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

Objective of Financial Reporting

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: May, 2021

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Financial reporting is a provision of financial information about an
entity to external users that is useful to them in making economic decisions
and for assessing the effectiveness of the entity’s management.

The principal way of providing financial information to external users is

through the annual financial statements.

However, financial reporting encompasses not only financial

statements but also other information such as financial highlights, summary
of important financial figures, analysis of financial statements and significant
ratios.

Financial reports also include nonfinancial information such as

description of major products and a listing of corporate officers and directors.

Overall objective: 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.

Secondary objective: to show the results of the stewardship of management

Specific Objectives of Financial Reporting

The Conceptual Framework places more emphasis on the importance

of providing information needed to assess the management stewardship of
the entity’s economic resources.

Accordingly, the specific objectives of financial reporting are:

a. To provide information useful in making decisions about providing

resources to the entity.

b. To provide information useful in assessing the cash flow prospects

of the entity.

c. To provide information about entity resources, claims and changes

in resources and claims.

Limitations of Financial Reporting

a. General purpose financial reports do not and cannot provide all the
information that existing and potential investors, lenders and other
creditors need.

These users need to consider pertinent information from other

sources, for example, general economic conditions, political events
and industry outlook.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: May, 2021

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b. General purpose financial reports are not designed to show the

value of an entity but the reports provide information to help the
primary users estimate the value of the entity.

c. General purpose financial reports are intended to provide common

information to users and cannot accommodate every request for
information.

d. To a large extent, general purpose financial reports are based on

estimate and judgment rather that exact depiction.

Management Stewardship

Information about how efficiently and effectively management has

discharged its responsibilities to use the entity’s economic resources helps
users to assess management stewardship of those resources.

Self – Check No. 3

Multiple Choice:

1. These users are interested in information about the profitability

and stability of an entity in order to assess the ability of the
entity to provide remuneration, retirement benefits and
employment opportunities.
a. Customers
b. Public
c. Governments and their agencies
d. Employees

2. These users are interested in information that enables them to

assess whether their loans, the related interest thereon, and
other amounts owing to them will be paid when due.
a. Lenders and other creditors c. Trade creditors
b. Borrowers d. Owners

3. What is the objective of financial reporting?

a. To provide information about the financial position, financial
performance and changes in financial position of an entity.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: May, 2021

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b. To prepare a statement of financial position, an income statement, a
statement of comprehensive income, a statement of cash flows and a
statement of changes in equity.
c. To provide financial information about an entity that is useful to
existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.
d. To prepare financial statements in accordance with all applicable
standards and interpretations.

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

a. The Conceptual Framework has the highest level of authority.
b. In the absence of a standard or an interpretation that specifically
applies to a transaction, the Conceptual Framework shall be followed.
c. In the absence of a standard or an interpretation that specifically
applies to a transaction, management shall consider the applicability of
the Conceptual Framework in developing and applying an accounting
policy that results in information that is relevant and reliable.
d. The Conceptual Framework applies only when the IASB develops new
standards.

5. Which is not a purpose of the Conceptual Framework?

a. To provide definitions of key terms and concepts.
b. To provide specific guidelines for resolving situations not covered by
existing accounting standards.
c. To assist accountants in selecting among alternative accounting and
reporting methods.
d. To assist IASB in the standard-setting process.

PREPARED BY: MR. RODEL E. CAHILIG, MSA | Updated: May, 2021