Chapter 2

Conceptual Frameworks for Financial Reporting

Business Plan
- Need to do planning prior to launching a product/service
- Assessment of Demand
o Consider the structure of the market (ex. incomes, needs, tastes)
o One product wont likely satisfy the entire market
o Need to be selective about choosing a target market and understanding the needs of
potential customers
Understanding the needs will help identify the overall strategic goal/objective
and desirable product characteristics of the new product
- Supply planning
o Need to identify the potential product components that will help meet customer needs
o Then begin the more specific product design
Needs to take the technological and economic feasibility of the designs
o Throughout the planning process, numerous simplifying assumptions that support the
analysis would have been made
Cant take every data point into account, use summary statistics and assume
that these statistics are representative of the whole population

Components of the IFRS Conceptual Framework

Users and their needs
- Set of users according to the IFRS existing and potential investors, lenders, and other
creditors
- IFRS focuses on parties that have provided financial resources to the enterprise in the past and
those who may decide to do so in the future
- Better accommodate the needs of this group of potential users
- Customers and employees arent included
- Many investors and creditors are not in a position to demand more information then what is
available in general purpose financial statements required by laws and regulations
 Objectives of
Financial Reporting
- The
objective of
general
purpose
financial reporting (financial reports publicly available) is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders, and other creditors
in making decisions about providing resources to the entity
- Those decisions involve buying, selling, or holding equity and debt instruments, and providing or
settling loans and other forms of credit
Investment and Lending Decisions
- Financial reports should help investors and creditors decide whether to invest or lend to the
reporting entity (other decision contexts are not primary concern in IFRS
Amount, timing, and uncertainty of cash flows
- Investment and lending decisions largely depend on the cash flows that the investor or lender
expect to receive relative to the cash flows that they contribute to the enterprise
- The value of the cash flows to the investor/lender depend on amount of cash flow, timing, and
uncertainty (risk)
Information on the entitys resources, claims, and performance
- Users need information about the entitys resources, claims against the entity, and the entitys
performance
- Entitys resources useful for predicting future cash inflows
- Claims against the entity help predict future cash outflows
- Past performance help predict future performance (affects future cash inflows and outflows)
o Performance doesnt need to be measured with cash flows
- Accrual accounting: includes economic events when they happen rather than only when cash
exchange occurs

Qualitative Characteristics
- Qualitative characteristics: lists the desirable characteristics of financial reports that help to
meet users information needs
 - 6 qualitative characteristics either fundamental or enhancing characteristics
- Fundamental qualitative characteristics: must be present for information to be useful for
decision making
o Relevance and representational faithfulness essential
- Enhancing qualitative characteristics: affect the informations degree of usefulness
o Understandability, comparability, verifiability, and timeliness desireable
Fundamental qualitative characteristics
- Financial information needs to be both relevant and representationally faithful
- Relevance: ability to influence users economic decisions
- If it has confirmatory value provides feedback about past events, or if it has predictive value
for future outcomes
- Materiality: whether the omission or misstatement of a particular piece of information about a
reporting entity would influence users economic decisions
- Immaterial if an item has little relevance that it would not change decisions
- Matter of professional judgement
- Representational faithfulness: extent to which financial information reflects the underlying
transactions, resources, and claims of an enterprise
- Completeness: inclusion of all material items in the financial statements
- Neutrality: extent to which information is free from bias
- Free from error: extent to which information is absent of errors or omissions
Enhancing Qualitative Characteristics
- Understandability: ease with which users are able to comprehend financial reports
- Comparability: ability to compare one set of financial statements with another
- Verifiability: degree to which different people would agree with the chosen representation in
the financial reports
- Timeliness: how soon the information becomes available to decision makers

Elements of Financial Statements

Recognition
- Recognition: process of presenting an item in the financial statements (instead of disclosing in
the notes)
- Recognition criteria and measurement bases are choices made by standard setters among
several alternatives
- Accounting elements are recognized in the financial statements if the future inflows or outflows
of resources are probably and the amounts are reasonably measurable
Measurement
- Measurement: quantification of the amounts to be reported on the financial statements
- Historical cost: amount of cash/cash equivalents paid or received in a transaction most
commonly used measurement basis
- Current cost: amount of cash/cash equivalents that would be paid to purchase an asset or to
extinguish a liability currently
- Realizable value: amount of cash/cash equivalents that could be obtained from selling an asset
- Present value: discounted value of future cash inflows or outflows expected in the normal
course of business

Constraints
- Cost constraint: the cost of reporting financial information should not exceed the benefits that
can be obtained from using the information
Assumptions
Going Concern
- Financial statements prepared assuming the reporting entity will continue operating in the
foreseeable future
Financial Capital Maintenance
- Capital maintenance: amount of resources required to ensure the economic sustainability of an
entity (needed to operate in the foreseeable future)
- Two ways to define:
- Physical: requires an entity to be capable of producing as much at the end of the period as at the
beginning, measured in physical quantities (ex. cars)
- Financial: requires the entity to have as much resource in monetary items at the end of a period
as it did at the beginning of that period
- Effect of inflation and deflation

Example PAGE 40

Financial information prepared on other bases

- Ex. many companies report pro forma measures of income in addition to net income amount
required under IFRS
- Removes certain items (ex. Financing costs, depreciation, costs of restructuring the company

Other Conceptual Frameworks

- Accounting Standards for Private Enterprise (ASPE)
- Similar to IFRS
- Main difference is the length of the frameworks (IFRS is 2 to 3 times longer)

Standard Setting: Internationally in Canada

Standards Internationally
- IFRS are standards issued by the International Accounting Standards Board (IASB)
- More than 100 countries around the world use IFRS
- IFRS has authority in a country if that country has legislation or regulation that required the use
of IFRS
Standards in Canada