The Conceptual Framework

for Financial Reporting

 The Conceptual Framework
 The Conceptual Framework sets out concepts that underlie the preparation
and presentation of financial statements.
 A complete set of financial statements consist of a:
 Statement of financial position
 Statement of profit or loss and other comprehensive income (some entities
separate this statement into two)
 Statement of changes in equity
 Statement of cash flows
 The purpose of the Conceptual
Framework is to:
 Assist the standard setters in the development of future accounting
standards
 Assist preparers of financial statements in applying the accounting
standards
 Assist auditors in forming an opinion on whether financial statements
comply with the accounting standards
 Assist users of financial statements in interpreting the information
contained in the financial statements prepared in compliance with
the accounting standards
The objective of general purpose
financial reporting
 Objective, usefulness and limitations of general purpose financial reporting
 Financial reporting provides the following financial information:
 Information that is useful in investment and credit decision making
 Information that is useful in assessing cash flow prospects
 Information about assets, liabilities and changes in them
 Objective of financial statements – present information about a reporting
entity’s financial position; its performance; changes in financial position and
others
 Users of financial statements
 Investors
 Lenders
 Creditors
 Employees
 Customers
 Government agencies and regulators
 The public

The information needs of the first 3 users are given more emphasis by the conceptual
framework because they do not have the power to require reporting entities to provide
information directly to them
Users of financial statements
Three groups of primary users:
1. investors,
 Existing and potential
 Interested in the performance, ability to pay dividends
 Need information to determine whether they should buy, sell or their
shared

2. lenders,
 Who actively lent to the entity
 Interested to know if the entity is solvent and liquid to repay the
borrowings and interest on borrowings

3. other creditors
 Those who have supplied goods and services on credit to the entity
 Interested in the ability to settle the amounts due to them; growth and
stability
Qualitative characteristics of useful
financial information

Two fundamental qualitative characteristics:

Relevance
Relevant of has predictive value or confirmatory value
or both
Relevant financial information is capable of making a
difference in decisions made by the users

 Faithful representation
Faithfully represent the actual situation
Should be complete, neutral and free from error
Application of fundamental qualitative
characteristics
Step 1:
To identify the economic phenomena that could be useful.
Step 2:
To identify the information about the phenomena that would be most relevant
Step 3:
To determine whether that information is available and can be faithfully
represented
 Four Enhancing Qualitative Characteristics:

1. Comparability
May enable comparisons between periods (current year and
previous year), between companies in the same industry
(Maybank and Public Bank), between companies from different
industries (Petronas and Digi) or between companies from
different countries (Malaysia Airlines and Singapore Airlines)
Can be achieved by using same methods consistently and
referring to the same accounting standards
2. Verifiability

 Enable users to reach an agreement that the value of a

company’s assets and liabilities falls within a certain range of values
3. Timeliness
 Refer to the need of accounting information to be made available
in time to influence decision-making
 The older the information, the less useful it is

4. Understandability
 Classifying, characterising and presenting information clearly and
concisely to make it understandable
 Users of financial information is assumed to be knowledgeable users
 Underlying assumption

 Going concerns – the entity will continue to be in

operation for the foreseeable future
 Elements of financial statements

Asset
An asset is
 a resource controlled by the entity
as a result of past events and
from which future economic benefits are expected to
flow to the entity.

Control refers to the risks and rewards associated with the

asset
An entity obtains an asset as a result of past transactions
/past events
Future economic benefit refers to potential to contribute
directly or indirectly, to the flow of cash or cash
equivalents
Liabilities
 A liability is the
 present obligation of the entity
 arising from past events,
 the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
 Present obligation is a responsibility to perform as a result of a binding contract
 Past events or transactions – purchase of goods
 Settlement of liability – involves giving up resources such as payment of cash
Equity
 Equity is the residual interest in the assets of the entity after deducting all its liabilities.
 Net asset value = (assets – liabilities)
 May classified into funds contributed by shareholders, retained earnings, reserves
Income
 Increases in economic benefits in the form of inflow of asset or decreases of liabilities that
result in increase in equity
 Income includes both revenue and gains.
 Revenue arises in the course of ordinary activities of an entity. Examples are sales, fees,
interests and dividends.
 Gains may not or may not arise from the ordinary activities of an entity. Gains increase
economic benefits such as those arising from the disposal of non-current assets. Income
also includes unrealised such as the surplus on the revaluation of non-current assets.
Expenses
 Decreases in economic benefits during the accounting period in the form of outflow of
assets or incurrence of liabilities that result in decreases in equity, other that those relating
to distribution to equity participants
 Expenses include both losses as well as expenses that arise in the ordinary course of the
business.
 Self-check: Determine whether each of the
following item is an asset, liability, equity, income or
expenses
 Ordinary shares issued
 Trademark
 Deposit received from customer
 Prepayment of rental
 Dividend received
 Depreciation charge
 Recognition
An item is recognised if:

a. it is probable that any economic benefit associated with

the item will flow to and from the entity; and

b. the item has a cost or value that can be measured with

reliability.
 Recognition of Assets

 An asset is recognised in the statement of financial

position when
• it is probable that the future economic benefits will flow
to the entity and
• the asset has a cost or value that can be measured
reliably.
• When an asset is recognised, an Asset account is
debited
• The contra account could be another asset or liability
account or both
 Recognition of Liabilities
 A liability is recognised in the statement of financial position when
• it is probable that an outflow of economic resources will
settle present obligation and
• the amount can be measured reliably.
• When a liability is recognised, a liability account is
credited
 Recognition of Income

 Income is recognised in the statement of profit or loss

and other comprehensive income when an increase in
future economic benefits related to an increase in an
asset or a decrease of a liability has arisen that can be
measured reliably.
 MFRS 15 – establish principles an entity shall apply
income/revenue
 When an income is recognised, an income account is
credited
 Recognition of Expenses

 Expenses are recognised in the statement of profit or loss

and other comprehensive income when a decrease in
future economic benefits related to a decrease in an
asset or an increase of a liability has arisen and the
amount can be measured reliably.
 Measurement

The following are the measurement bases discussed in the

Framework:
Historical cost
 Assets are recorded at the amount of cash or cash
equivalent paid or the fair value of the consideration
given to acquire them. Liabilities are recorded at the
amount of proceeds received in exchange for the debt.
Current cost
 Assets are carried at the amount of cash or cash
equivalent that would be paid if the asset were
acquired currently. Liabilities are carried at the
discounted value or cash equivalent that would be
required to settle the debt currently.
Realisable value
 Assets are carried at the amount of cash or cash
equivalent that could currently be obtained by selling
the asset in an orderly disposal. The liabilities are carried
at their settlement values being undiscounted amounts
of cash that need to be paid in the course of business.
Present value
 Assets are carried at the discounted value of the future
cash inflows that the items are expected to generate in
the normal course of business. Liabilities are carried at
the discounted value of the future net cash outflows
required to settle the liabilities in the normal course of
business.
 Capital and capital maintenance
concepts
 Capital can be the net assets of an entity or the amount
of capital contributed by the owners plus increases in
the net assets that remain in the entity.

 Capital can be expressed as money invested or

purchasing power invested. It can also be expressed in
terms of productive capacity.

 The capital maintenance approach measures income

by comparing the net assets at two points in time.
 For example, if the net assets at the beginning of the year are
RM200,000 and the net assets at the end of the year are
RM240,000, the closing capital represents opening capital of
RM200,000 and an increase of RM40,000.
Financial Capital
 Under this concept, the profit is the difference in money terms
between the opening and closing capital excluding any
contributions from and distribution to owners.
 In the above example, if there are no capital contribution and
no withdrawals of capital then the profit for the year is
RM40,000. if the owners withdraw all their profits of RM40,000,
the capital remaining will be RM200,000. therefore, the opening
capital is maintained.

Physical/ Operating Capital

 Under this concept, profit is earned only if the operating
capacity at the end of the period exceeds that of the
beginning of the period. Adjustments are made to the net
assets for all price changes.
Conceptual framework FRS for inventory FRS for PPE FRS for intangibles

Objective;
Qualitative
characteristics
Underlying assumption;

Elements of financial Specific Specific definition for Specific definition for

statements definition for PPE intangibles
inventory

Recognition Specific Specific recognition Specific recognition

recognition criteria criteria
criteria

Measurement bases Specific criteria Specific criteria on useful Specific criteria on useful
on valuation lives, depreciation life, amortisation
 Exercises
1. Categorise each of the items below according to the category of elements in the
financial statements:
 Loss on sale of machinery
 Retained earnings
 Rental revenue
 Prepaid insurance
 Advanced payment by customers
 Share premium
 Depreciation
 Patent
 Trade payables
 Gain on sale of marketable securities
2. When should asset be recognised?
On 1 June 2015, Wawasan Sdn Bhd ordered a van to be used for delivery of
goods to customer. Wawasan paid RM60,000 for the van on 7 June 2015 and
took delivery of the van on 15 June, 2015. When should Wawasan recognise
the van as an asset? Show the relevant journal entries.

3. On 6 June 2015, Wawasan Sdn Bhd delivered goods with an invoice

amount of RM3,800 to Gemilang Sdn Bhd. Payment for the goods was
received from Gemilang on 1 June 2015. How should this transaction be
recorded? Show the relevant journal entries.