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A conceptual foundation for the
preparation and appraisal of accounting
Primary Purpose of the
Conceptual Framework

O Primarily the purpose of the Framework is to

assist the Board of IASB in:
O (i) developing future IFRSs and reviewing
existing IFRSs
O (ii) promoting harmonisation of regulations by
providing a basis for reducing the number of
alternative accounting treatments permitted by
Other purposes of the Conceptual
O To assist national standard setting bodies in developing national
O To assist preparers of financial statements in applying IFRSs and in
dealing with topics that have yet to form the subject of an IFRS
O To assist auditors in forming an opinion as to whether financial
statements conform with IFRS
O To assist users of financial statements in interpreting information
contained in financial statements prepared in conformity with
O The Framework covers the following areas, and requires them to be
applied to accounting events and transactions that an entity may
O The objective of financial statements
O The underlying assumptions
O The qualitative characteristics of useful information
O The definition, recognition and measurement of elements
O The concepts of capital and capital maintenance
The Objective of Financial
O To provide information about:
O (i) the financial position
O (ii) the financial performance
O (iii) changes in financial position of an entity
O (iv) that is useful to a wide range of users in making
economic decisions
O This information should also show the results of
management’s stewardship (accountability for
resources entrusted to it)
O This information should enable users to evaluate:
O (i) the ability of an entity to generate cash and cash
O (ii) the timing and certainty of their generation (of cash)
Financial Position
O Affected by:
O (i) economic resources control
O (ii) financial structure
O (iii) liquidity and solvency
O (iv) capacity to adapt to changes
O Presented in the form of:
O The Statement of Financial Position (SOFP)
formerly known as the Balance Sheet
Financial Performance
O In particular profitability
O To predict capacity to generate cash flows
from an existing resource base
O To form judgements about effectiveness
with which additional resources might be
O Reflected in the form of:
O The Statement of Comprehensive Income
which was formerly known as the Trading,
Profit and Loss Account
Changes in Financial Position
O To assess investing, financing and operating
O To assess ability to generate cash and cash
equivalents and needs to utilise those cash
O Reflected in the:
O Statement of Changes in Equity (SOCIE)
Underlying Assumption
O Going concern assumes that the entity will
continue in operation for the foreseeable
O Therefore, there is neither the intention nor
the need to liquidate or curtail materially the
scale of operations.
O There is only one underlying assumption of
financial statements – going concern.
Elements of Financial
O Elements of financial statements are broad classes of the
financial effects of transactions grouped according to their
economic characteristics.
O Asset – a resource controlled by an entity, as a result of past
events, from which future economic benefits are expected to
O Liability – a present obligation of the entity arising from past
O Equity – the residual interest, in the assets of the entity after
deducting all its liabilities
O Income – increases in economic benefits during the
accounting period
O Expenses – decreases in economic benefits during the
accounting period.
Qualitative Characteristics
O Qualitative characteristics of financial
statements are the attributes that make
information provided therein useful to
primary users
O The 2 fundamental qualitative
characteristics are:
O (i) Relevance
O (ii) Faithful representation
Qualitative characteristics –
Enhancing characteristics
O Comparability
O Verifiability
O Timeliness
O Understandability