CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

 The conceptual framework for financial reporting is prepared by IFRS foundation. Financial reports are based on conventions, models, assumptions, judgment instead of the actual figures/exact depictions. The framework serves as a common guide in making such depictions. In other words, it provides the basis upon which assumptions, judgments are made by Accountants.

The conceptual framework covers the following:

1. The objective of financial reporting;

2. The qualitative characteristics of useful financial information;

3. The definition, recognition and measurement of elements of financial statement.

Purpose of the Conceptual Framework

The purpose of the Conceptual Framework is to:

(a) Assist the International Accounting Standard Board to develop standards that are based on consistent concepts;

(b) Assist national standard-setting bodies in developing national standards;

(c) Assist auditors in forming an opinion on whether financial statements comply with IFRs;

(d) Assist all parties to understand and interpret Standards.

Qualitative Characteristics of Useful Financial Information

Financial reports are used by external parties such as investors, bankers, creditors etc., in making decision on providing economic resources to the entity. Therefore, the report should be dependable and not misleading as in the case of ENRON where management prepared financial report that misled investors and eventually led to the Company’s collapse.

According to the conceptual framework, financial information is useful if it is relevant and faithfully represent what it purport to represent.

Relevance

Relevant financial information is capable of making a difference in the decisions made by users. For a financial information to make a difference, it should have predictive value, confirmatory value or both. Predictive value means users can use the information to estimate or determine the future performance or outcome of an entity. Financial information has confirmatory value if its confirms prediction that was made in the past.

Faithful Representation

This is where financial information represent faithfully/truthfully(without deception, omissions) the substance of the phenemonon/transaction that its purport to represent. Faithful financial information means the information is:

(a) Complete: it includes all relevant information with nothing withheld or hidden.

(b) Neutral: the information is not biased.

(c) Free from error: there are no errors or omissions in the report.

Enhancing Qualitative characteristics of Financial Information

These are:

(a) Comparability

(b) Verifiability

(c) Timeliness

(d) Understandability

Comparability

Comparability requires comparison between two or more items. It allows users to understand the similarities or differences between items in financial statements. For information to be comparable, like things must look alike and different things must look different.

Verifiability

Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a true representation.

Timeliness

Timeliness means having the information available to users in time to be capable of influencing their decision. Generally, the older the information is, the less useful it is.

Understandability

This means classifying, characterising and presenting information clearly and concisely.

MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTS

The Conceptual Framework allows the following measurement techniques:

1. Historical Cost: Assets are measured at the amount of cash paid, or at the fair value of the consideration given to acquire them. Liabilities are measured at the amount of proceeds received in exchange of the obligation;

2. Current Cost:  Assets are measured at the amount that would be paid to purchase the same or similar asset currently. Liabilities are measured at the amount that would be required to settle the obligation currently.

3. Realizable value. Assets are measured at the amount that could be obtained by selling them. Liabilities are measured at the amount that would be required to settle them currently.

Present Value: Assets are measured at the value of the future net cash inflows that the item is expected to generate, discounted to a present value. Liabilities are measured at the discounted present value of the expected cash outflows that will be made to settle the liability.