It explains the IASB’s conceptual framework and the advantages and disadvantages of such a framework. It also gives vivid explanation on the contents of the conceptual framework

1. CONCEPTUAL
FRAMEWORK
IASB’s Conceptual framework
ABSTRACT
It explains the IASB’s conceptual framework
and the advantages and disadvantages of
such a framework. It also gives vivid
explanation on the contents of the
conceptual framework
Author: Andrew Rutherford Torgbor Okoe CA
Tel. no:(+233) 0550516336
Email: andrewsokoe@gmail.com
LEARNING OBJECTIVE
By the end of the lesson, you should be able
to:
1. Explain the purpose of the conceptual
framework.
2. Explain the advantages and
disadvantages of the Conceptual
framework.
3. Explain the Qualitative characteristics
of a useful financial information.
4. Explain the Elements of the financial
statements.
5. Explain the Recognition criteria and
the measurement bases.
6. Explain the concept of capital
maintenance.

2. CONCEPTUAL FRAMEWORK 1
T. A. Rutherford’s
LEARNING MEDIA
CONCEPTUAL FRAMEWORK
Article I. Explanation of Conceptual framework
Conceptual is derive from the word concept which means an idea, an opinion or a belief. A framework
can be said to be a structure, skeleton or a scaffold. Like all religious organizations, Accountants have
their own beliefs about the do’s and don’ts when preparing Financial statements. These beliefs or ideas
have been well arranged like a skeleton or a scaffold. Based on this beliefs, new accounting laws are set
and the old laws are reviewed. If you want to be an Accountant, then, you should belief in the
conceptual framework and defend it.
A conceptual framework is a statement of generally accepted theoretical principles which form the
frame of reference for financial reporting. These theoretical principles provide the basis for the
development of new accounting standards and the evaluation of those already in existence.
Article II. Purpose of the Conceptual framework
1. To assist the IASB in the development of Future IFRS and the review of existing IFRS.
2. To assist the IASB in promoting harmonization by reducing the number of alternative
treatments permitted by IFRS.
3. To assist national standard setters in developing national standards.
4. To assist preparers of financial Statements in apply IFRS and in dealing with topics that have yet
to form the subject of an IFRS.
5. To assist auditors in form an opinion as to whether financial statement comply with IFRS.
6. To assist users of financial statements in interpreting the information contained in financial
statements prepared in compliance with IFRS.1
7. To provide those who are interested in the work of the IASB with information about its
approach to the formulation of IFRSs
Since we live in an imperfect world and humans are also imperfect, anything we do have
implications- Advantages and Disadvantages.
Article III. Advantages of a Conceptual framework
1. It standardizes accounting practice.
2. There is lack of Political interference and it is less open to criticism.
3. With the help of the conceptual framework, standard produced concentrate on both profit or
loss and the valuation of assets.
Article IV. Disadvantages of a Conceptual framework
1. A single framework may not be suitable for all users.

3. CONCEPTUAL FRAMEWORK 2
T. A. Rutherford’s
LEARNING MEDIA
2. A variety of accounting standards are produced, each with a different purpose
3. With or without the framework, the task of preparing and implementing the standards is not
easy.
Article V. Qualitative characteristics of useful financial information
Financial information produced by Accountants should have certain qualities.
Fundamental Qualities
1. Relevance: A useful financial information must have a predictive value and a confirmatory value.
2. Faithful Representation: It has to be to complete, neutral, and free from error. Transactions
should be accounted for according to its substance and economic reality.
Enhancing Qualities
3. Comparability: There should be consistency in the application of accounting methods and
policies. Accounting policies used should be disclosed and corresponding information for
preceding/previous periods should be shown.
4. Verifiability: A financial information is useful if different knowledgeable and independent
observers could reach a consensus that the information has been faithful represented. This
assures users that the information present is complete, neutral and free from error.
5. Timeliness: A useful financial information should be prepared and publish on time. This will help
users of financial statements to make sound economic decisions.
6. Understandability: It must be classified, characterized and presented clearly and concisely.
Article VI. Elements of the financial statement
The following are category of items you should expect to find in any financial statement.
1. Assets: It is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
The existence of an asset is not reliant on physical form or legal ownership, for example
intangible and leased items qualify as assets.
2. Liabilities: It is a present obligation of an entity arising from past events, the settlement of
which is expect to result in an outflow from the entity of resources embodying economic
benefits.
Liabilities must arise from past events or transactions; a future commitment does not result in a
liability.
3. Equity: It is the residual interest in the assets of the entity after deducting all of its liabilities.
It is important to note that the measurement of equity depends on the measurement of assets
and liabilities; it is not related to the market value of the company.
4. Income: It is increases in economic benefits during the accounting period in the form of inflows
or enhancement of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
The definition therefore includes both revenue and gains, both realized and unrealized.

4. CONCEPTUAL FRAMEWORK 3
T. A. Rutherford’s
LEARNING MEDIA
5. Expenses: they are decreases in economic benefits during the accounting period in the form of
out flows or depletion of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
The definition includes both realized and unrealized expenses and losses.
Article VII. The Recognition criteria
This question comes to mind when preparing financial statements:
“what items should be recorded in the financial statement?”
The recognition criteria can help you to answer this question. All items recorded in the financial
statements should meet the criteria.
1. It meets the definition of an element of the financial statement.
2. It should be probable that future economic benefit will flow to/from the entity.
3. The item has a cost/value that can be measured with reliability
Article VIII.Measurement Bases
After determining items that can be recorded in the financial statements, another question comes to
mind: “At what cost or value should the items be recorded?”
Only one measurement base can be used for a category of items. An IFRS also may determine the
measurement base to use for a category of items.
Measurement bases include:
1. Historical cost
 Assets are recorded at the amount of cash or cash equivalents paid to acquire them at
the time of acquisition.
 Liabilities are recorded at the amount of proceeds received in exchange for the
obligation or in some circumstances at the amount of cash or cash equivalents expected
to be paid to satisfy the liability in the normal course of business.
2. Current Cost
 Assets are recorded at the amount of cash or cash equivalents that would have to be
paid if the same or an equivalent asset was acquired currently.
 Liabilities are recorded at undiscounted amount of cash or cash equivalents that would
be required to settle the obligation currently.
3. Realisable (settlement) value
 Realisable value is the amount of cash or cash equivalents that could currently be obtain
by selling an asset in an orderly disposal.
 Settlement value is the undiscounted amounts of cash and cash equivalents expected to
be paid to satisfy the liabilities in the normal course of business.
4. Present value
It is the present discounted value of the future net cash flows in the normal course of business.

5. CONCEPTUAL FRAMEWORK 4
T. A. Rutherford’s
LEARNING MEDIA
Article IX. Capital Maintenance
The capital maintenance concept states that profit should not be recognised unless a business has at
least maintained the amount of it net assets during an accounting period. This concept excludes the
following cash inflows and outflows from that impact net assets:
 Increase in assets from the sale of stock to shareholders (increases cash).
 Decrease in assets from the payment of dividends or other distributions to shareholders (decreases
cash)
The capital maintenance concept can be skewed by inflation, since inflationary pressure will inevitably
increase net assets, even if the underlying amount of assets has not changed. Thus, it is more accurate
to adjust net assets for the effect of inflation in order to see if capital maintenance has occurred. This
issue is especially important if business operates in hyper-inflationary environment.
Technically, the capital maintenance concept means that the amount of net assets should be reviewed
for changes before determining profit generated during the accounting period. From a practical
perspective, this is rarely done - controllers simply calculate the amount of profit and do not review for
compliance with the capital maintenance concept at all.
There are two types of capital maintenance concept:
1. Financial capital maintenance. Under this concept, a profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets
at the beginning of the period, after excluding any distributions to, and contributions from, owners
during the period. Financial capital maintenance can be measured in either nominal monetary units or
units of constant purchasing power.
2. Physical capital maintenance. Under this concept a profit is earned only if the physical productive
capacity (or operating capability) of the entity (or the resources or funds needed to achieve that
capacity) at the end of the period exceeds the physical productive capacity at the beginning of the
period, after excluding any distributions to, and contributions from, owners during the period.

6. CONCEPTUAL FRAMEWORK 5
T. A. Rutherford’s
LEARNING MEDIA
1. Users of financial statements includes Shareholders, Managers, Employees, Suppliers (creditors),
Customers (debtors), Financial Institutions and Government.
2. Economic benefits are benefits that can be quantified in terms of money generated such as net
income, revenue, etc. It can also be money saved when a policy to reduce cost is implemented.
3. IFRS means International Financial Reporting Standards. These standards are produced and issued by
the International Accounting Standard Board (IASB). IFRS was adapted by Ghana effectively on 1 January
2007. By having voted to adopt IFRS Standards, the Council of the Institute of Chartered Accountants
(Ghana) publicly made a commitment for a single set of high quality global accounting standards.
4. Enhancement of assets is an improvement or increase in asset capacity. When this happens, the asset
can produce more cash inflows than it used to produce previously. This is not the same as repairs,
because repairs only maintain the current capacity of the asset.
5. Equity participants are the shareholders, owners of the entity.
6. Cash equivalents are asset or investment that can be converted into cash immediately. These
investments have a maturity date of three months or less. They include:
 bank accounts
 marketable securities
 Treasury bills
 Short-term government bonds
 Certificate of deposit
 Commercial paper
6. Obligation is a duty or responsibility to act or perform in a certain way. Obligations may be
legally enforceable as a consequence of a binding contract or statutory requirement. Obligations
also arise, however, from normal business practice, custom and a desire to maintain good
business relations or act in an equitable manner.
7. The Conceptual Framework for Financial Reporting was approved for issue by the fifteen
members of the International Accounting Standards Board.
-Sir David Tweedie (Chairman) -Stephen Cooper -Philippe Danjou
-Jan Engström -Patrick Finnegan -Robert P Garnett
-Gilbert Gélard -Amaro Luiz de Oliveira Gomes -Prabhakar Kalavacherla
-James J Leisenring -Patricia McConnell -Warren J McGregor
John T Smith -Tatsumi Yamada -Wei-Guo Zhang
Did you know?

7. CONCEPTUAL FRAMEWORK 6
T. A. Rutherford’s
LEARNING MEDIA
1. Which of the following would be classified as a liability?
A. Okoetech’s business manufactures a product under license. In 12months’ time the
license expires and Okotech will have to pay GH$50,000 for it to be renewed.
B. Tina purchased an investment 9 months ago for GH$120,000. The market for these
investments has fallen and Tina’s investment is valued at GH$90,000.
C. Nadia has estimated the tax charge on its profit for the year ended as GH$165, 000
D. Albert is planning to invest in new machinery and has been quoted a price of
GH$570,000.
1. Which of the following would correctly describe the net realisable value of a two-year old asset?
A. The original cost of the asset less two years depreciation.
B. The amount that could be obtained from selling the asset, less any cost of disposal.
C. The cost of an equivalent new asset less two years’ depreciation.
D. The present value of the future cash flows obtainable from continuing to use the asset.
2. The conceptual Framework identifies an underlying assumption in preparing financial
statements. This is:
A. Going concern
B. Materiality
C. Substance over form
D. Accruals
3. The Conceptual Framework identifies four enhancing qualitative characteristics of financial
information. For which of the characteristics is disclosure of accounting policies particularly
important?
A. Verifiability
B. Timeliness
C. Comparability
D. Understandability
4. Which of the following is not a purpose of the IASB’s Conceptual Framework?
A. To assist the IASB in the preparation and review of IFRS
B. To assist auditors in forming an opinion on whether financial statements comply with
IFRS
C. To assist in determining the treatment of items not covered by an existing IFRS.
D. To be authoritative where a specific IFRS conflicts with the conceptual framework.
5. Recognition is the process of including within the financial statements items which meet the
definition of an element according to the IASB’s Conceptual Framework for Financial Reporting.
Which of the following items should be recognized as an asset in the statement of financial
position of a company?
QUESTIONS

8. CONCEPTUAL FRAMEWORK 7
T. A. Rutherford’s
LEARNING MEDIA
A. A skilled and efficient workforce which has been very expensive to train. Some of the
staff are still in the employment of the company.
B. A highly lucrative contract signed during the year which is due to commence shortly
after the year end.
C. A government grant relating to the purchase of an item of plant several years ago which
has a remaining life of four years.
D. A receivable from a customer which has been sold (factored) to a finance company. The
finance company has full recourse to the company for any losses.
Queenster-MCQ case study
Information relevant to Questions 6-9
The Accountant of Queenster Enterprise is considering a number of transactions and events and
how they should be treated in accordance with the concepts and qualitative characteristics of
financial information as set out in the Conceptual framework.
During the year ended 31 March 2018, Queenster experienced the following transactions or
events.
i. Sold an asset to a finance company and leased it back for the remainder of its useful life.
The Accountant has decided that this should be treated as a secured loan.
ii. The company’s statement of profit or loss prepared using historical costs showed a loss
from operating its shops, but the company the company is aware that increase in the
value of its properties during the period far outweighed the operating loss.
iii. Inventory has up to this year been valued using FIFO but the accountant is considering
changing to the weighed average method for the year to 31 March 2018
6. The Accountant is aware that some of the member of the board of Queenster have little
understanding and he is worried about his presentation of the financial statement at the board
meeting.
How should he deal with the situation?
A. In doing his presentation, he should omit any complex issues, so that everyone can
understand what he is saying.
B. He should open his presentation with the advice that some of them may not understand
all of it.
C. He should classify, characterize and present the information clearly and precisely.
D. He should deliver his presentation just to those who are financially qualified
7. Which concept of qualitative characteristics has influenced the decision in (i) above?
A. Faithful representation
B. Verifiability
C. Accruals
D. Comparability
8. Because of the loss on operating the shops, the Accountant is considering the issue of going
concern. If it were decided that Queenster was no longer a going concern at 31 March 2018,
which of the following would apply in accordance with the conceptual framework?
A. Financial statements do not need to be prepared.

9. CONCEPTUAL FRAMEWORK 8
T. A. Rutherford’s
LEARNING MEDIA
B. All the assets should be liquidated.
C. The financial statement should be prepared on a different basis.
D. The financial statements should be prepared as normal and the going concern status
disclosed in the notes.
9. In applying the principle of comparability, how should the change of inventory valuation basis be
accounted for?
A. The changed should be disclosed.
B. The financial statements for 31 march 2018 should show both methods.
C. The notes should show what the profit would have been if the change had not taken
place.
D. The financial statements for the prior period as shown at 31 March 2018 should be
restated using the weighted average basis.

10. CONCEPTUAL FRAMEWORK 9
T. A. Rutherford’s
LEARNING MEDIA
ANSWERS
1. C This is a valid liability. Nadia has a present obligation to pay tax. This tax charge arises as a
result of past events- last year operations which was profitable. You can’t run away from paying
the tax. Economic benefits will flow out of the entity to settle the Tax charge.
o The license payment could be avoided by ceasing manufacturing. The amount of GH$
50,000 has to be paid next year, which will happen in the future. Tina can choose to stop
manufacturing or sell the business to someone else.
o The fall in value of the investment is a loss chargeable profit or loss.
o Planned expenditure does not constitute an obligation.
2. B The amount that could be obtained from selling the asset, less any costs of disposal
3. A The underlying assumption is going concern
4. C Comparability. Disclosure of accounting policies is particularly important when comparing
the results and performance of one entity against another which may be applying different
policies.
5. D Whenever there is a conflict between an IFRS and the Conceptual Framework, the IFRS takes
precedence.
6. D
7. C The Conceptual Framework requires information to be presented understandably, but
without omitting complex issues.
8. A Faithful representation. The substance of the transaction is likely to that of a secured loan.
9. C The financial statement should be prepared on a different basis. The basis of valuation of
assets will be affected.