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Chapter 3 - Conceptual Framework

The conceptual framework establishes the fundamental concepts and principles that guide the preparation of financial statements. It is based on assumptions like going concern, which assumes the entity will continue operating for the foreseeable future, and accrual basis, which recognizes transactions when they occur rather than when payment is made. The qualitative characteristics that make financial information useful are relevance, materiality, faithful representation, substance over form, comparability, consistency, prudence, and the business entity concept.

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Syed Huzaifa Sami
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79 views

Chapter 3 - Conceptual Framework

The conceptual framework establishes the fundamental concepts and principles that guide the preparation of financial statements. It is based on assumptions like going concern, which assumes the entity will continue operating for the foreseeable future, and accrual basis, which recognizes transactions when they occur rather than when payment is made. The qualitative characteristics that make financial information useful are relevance, materiality, faithful representation, substance over form, comparability, consistency, prudence, and the business entity concept.

Uploaded by

Syed Huzaifa Sami
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter # 3 Conceptual Framework

Conceptual Framework is the basis upon which all the IFRSs are based on and hence determines
how financial statements are prepared and the information they contain. The framework is
based on few underlying assumptions which are as follows
Going Concern Assumption
The financial statement are prepared on the assumption that an entity is a going concern i.e. it
will continue to operate for the foreseeable future (at least for the next 12 months) and will not
go into liquidation.
If the going concern assumption is not followed, that fact must be disclosed, together with the
following information.
 The basis on which the financial statements have been prepared
 The reasons why the entity is not considered to be a going concern
Accrual Basis
The concept of accrual basis accounting suggest that the effect of all the transaction and other
events be recognized in then period in which they occur and not in the period in which the
related payments are paid and/or received.
Example
Mr. A purchase a computer on 14 December 20X0 for Rs.1,000. The period of accounting ends
at 31 December 20X0. Mr. A paid for the computer on 3 January 20X1.
As per the principles of accrual basis of accounting Mr. A will record the purchase on 14
December 20X0 even though the payment was made on 3 January 20X1 (i.e. next year)
Qualitative Characteristics of Financial Information
These are the attributes that make the information provided in financial statements useful to
the users. The attributes are as under
 Relevance
Relevant information is capable of making a difference in the decisions made by the user.
Hence the user should be provided with relevant information and in a timely manner.
Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value or both
 Materiality
Information is material if omitting it or misstating it could influence the decisions that
users make on the basis of financial information about a specific reporting entity.
An error which is too trivial to affect anyone's understanding of the accounts is referred
to as immaterial. In preparing accounts it is important to assess what is material and what
is not, so that time and money are not wasted in the pursuit of excessive detail.
 Faithful Representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena but must faithfully
represent the phenomena that it purports to represent.
To be a faithful representation information must be complete, neutral and free from
error.
 Substance Over Form
To provide a faithful representation, financial information must account for transactions
and other events in a way that reflects their substance and economic reality (in other
words, their true commercial impact) rather than their legal form. If there is a difference
between economic substance and legal form, the financial information should represent
the economic substance.
 Comparibility
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 date.
 Consistency
It refers to the use of the same methods for the same items (i.e. consistency of treatment)
either from period to period within a reporting entity or in a single period across entities.
 Prudence
Prudence involves allowing for some caution in preparing financial statements, by making
reasonable and sensible allowances in order to avoid overstating assets or income and to
avoid understating expenses or liabilities.
 Business Entity Cncept
Financial statements always treat the business as a separate entity from its owner(s)

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