A conceptual framework is like a constitution: it is a "coherent system of interrelated objectives
and fundamentals that can lead to consistent standards and that prescribes the nature, function,
and limited of financial accounting and financial statements."
Rationale for Conceptual Framework
Standard setting should build on an established body of concepts and objectives.
Such a framework should increase financial statement users' understanding of and
confidence in financial reporting, and that it enhance the comparability of different
companies' financial statements.
By referring to an existing framework, it should be possible to solve new and emerging
practical problems more quickly.
Development of Conceptual Framework
1976 FASB issued a three-part discussion memorandum entitled "Conceptual Framework
for Financial Accounting and Reporting: Elements of financial statement and their
Figure 2-1 on pg. 39
First level (Objectives) - Accountings Goals and Purposes: These are the
conceptual framework building blocks.
Second Level (Qualitative characteristics) - Qualitative (a) accounting information
useful and the elements (b) of financial statements.
Third Level (Foundational principles) - Used in establishing and applying
Objective of Financial Reporting
General Purpose Financial Statements: useful information presented to ket users in a manner
whereby benefits exceed costs.
(a) Qualitative Characteristics of useful information
Fundamental Qualitative Characteristics
Makes a difference in a decision
It has Predictive Value
It has feedback/confirmatory value
Materiality: How important a piece of information is.
Reflects the underlying economic substance of an event or transaction.
Referred to as transparency.
Is complete, neutral, and free from material error.
Completeness: Should include all information necessary to portray the
underlying events and transactions. Neutrality: Information cannot be selected to favour one set of interested
parties over another.
Management Best Estimate: To portray the economic reality of realized or
Freedom from material error means that the information must be reliable.
Enhancing Qualitative Characteristics
Includes comparability, verifiability, timeliness, and understandability.
Enables users to identify the real similarities and differences in economic
When knowledgeable, independent users achieve similar results or reach
consensus regarding the account for a particular transaction.
Information should be available to decision makers before it loses its ability to
influence their decisions.
Users need to have reasonable knowledge of business and financial
accounting matters in order to understand the information in financial
Tradeoffs: A tradeoff exists when a company decides to temporarily sacrifice of
financial reporting in order to more effectively present information.
Cost versus Benefits: The cost of providing the information must be weighed
against the benefits that can be had from using the information.
(b) Elements of Financial Statements
There is some economic benefit to the entity.
The entity has control over that benefit.
The benefits result from a past transaction or event.
They represent a present duty or responsibility.
The duty or responsibility obligates the entity, leaving it little or no discretion to avoid it.
the transaction or event results form a past transaction or event.
Constructive Obligations: are obligations that arise through past or present practice that
signals that the company acknowledges a potential economic burden.
Equitable Obligations: arise due to moral or ethical considerations.
Example: Care given to an employee who is being downsized…
May be further categorized as financial (regarding contractual obligations to deliver cash or
other financial assets), or non-financial (everything else).
Is a residual interest in an entity that remains after deducting its liabilities from its assets.
Equity is the ownership interest. Revenues
Increases in economic resources.
Result from ordinary activities.
Decreases in economic resources.
Result from an entity's ordinary revenue-generating-activities
Gains are increases in equity (net assets) from an entity's peripheral or incidental
Losses are decreases in equity (net assets) from an entity's peripheral or incidental
(example, a real-estate company who usually collects rent from its properties, but then
decides to sell their buildings for a gain or loss.)
The financial statements include the following items:
Income statement and/or statement of comprehensive income
Statement of financial position
Statement of retained earnings or changes in shareholders' equity
Statement of cash flows
Comprehensive income: A relatively new income concept and includes more than the traditional
notion of net income. It includes net income and other comprehensive income.
Other Comprehensive income is made up of revenues, expenses, gains, and losses that
are recognized in comprehensive income, but excluded from net income.
Unrealized holding gains and losses on certain securities and property, plant, and
equipment (revaluation method).
Certain gains and losses related to foreign exchange instruments, foreign
operations, and certain types of hedges.
Certain gains and losses related to remeasurement of defined benefit plans and
liabilities measured at fair value.
**Comprehensive income does not exist under ASPE.**
* The third level of the conceptual framework. These concepts explain which, when, and how
financial elements and events should be recognized, measured, and presented/disclosed by
the accounting system.
The 10 foundational principles and assumptions:
1. Economic entity assumption
2. Control 3. Revenue recognition and realization principles
4. Matching principle
5. Periodicity assumption
6. Monetary unit assumption
7. Going concern assumption
8. Historical cost principle
9. Fair value principle
10. Full disclosure principle
Recognition deals wight he act of including something on the entity's statement of financial
position or income statement.
Historically, elements of financial statements have been recognized when:
They meet the definition of an element (for example, a liability),
They are probably, and
They are reliably measurable.
Under IFRS, "probable" is defined as "more likely that not" (interpreted as greater
than 50%. Under ASPE, it is defined as "likely". Greater losses and liabilities likely to
occur under IFRS due to the perceived lower threshold.
Derecognition is the act of taking something off the statement of financial position or
Economic Entity Assumption and Control
Allows us to identify an economic activity with a particular unit of accountability.
Parent and subsidiary companies are separate legal entities, for for accurate
reporting standards, they are considered the same Economic Entity.
Allow the company to group particular financial statement elements