Gerard takes a tour of the common elements found in the conceptual framework for financial reporting.

1. LO 2: Common elements in the
conceptual frameworks
1 Created by Dr G. L. Ilott, CQUniversity Australia

2. 2 Created by Dr G. L. Ilott, CQUniversity Australia

3. What is a reporting entity? And why does it
matter?
The type of entity (or organisation) dictates the form of reporting that
entity is expected to produce.
The CF is focused only on the production of general purpose financial
reports (GPFRs). Therefore the definition of reporting entity limits the
application of the CF and its resulting accounting standards.
A reporting entity is therefore one that must produce GPFRs. It has users
of those reports who depend upon them for their financial decision-
making.
3 Created by Dr G. L. Ilott, CQUniversity Australia

4. Who are the users of general purpose financial reports?
• They are external to the entity.
• They cannot command their own private reports from the entity.
• Consist of primary users:
• Actual & potential investors,
• Lenders & other creditors.
• Other users:
• Regulators
• Other members of public, and
• Anyone else who find the GPFRs useful.
4 Created by Dr G. L. Ilott, CQUniversity Australia

5. Assumptions about users of GPFRs
They are assumed to have:
• reasonable knowledge to be able to read & interpret the reports, and
• Skills to be able to review & analyse the information diligently.
By making these assumptions, the CF can allow for more technical
presentation of financial report. If they had assumed, for example, a
primary school level of education, then you can imagine how different
the presentation of financial reports might be.
5 Created by Dr G. L. Ilott, CQUniversity Australia

6. The objective of GPFRs
The objective of financial reporting has changed over time.
• Historically, the focus has been on stewardship, allowing users to assess and
judge the effectiveness & integrity of management in their use and investment in
the firm's assets.
• Focus is on past actions and predicting future cash flows as a result of
management actions.
• In more recent times, the objective has shifted to a 'decision usefulness' approach.
• Focus in on providing sufficient information to allow users to make informed
decisions about investing and other activities.
6 Created by Dr G. L. Ilott, CQUniversity Australia

7. 7 Created by Dr G. L. Ilott, CQUniversity Australia

8. The recognition principles
An item is considered an element of a financial statement if:
1. It is probable that any future economic benefit will flow either to or
from the entity because of it, and
2. The item has a cost or value that can be measured reliably.
8 Created by Dr G. L. Ilott, CQUniversity Australia

9. The measurement principles
Measurement has been problematic. Assets & Liabilities are allowed to
be measured in a variety of ways.
This directly impacts upon income.
Measurement is considered the most underdeveloped area of the
conceptual framework.
9 Created by Dr G. L. Ilott, CQUniversity Australia

10. The elements of financial reporting
The elements are:
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
10 Created by Dr G. L. Ilott, CQUniversity Australia

11. 1. Assets
Assets are resources controlled by the entity as a result of past events,
from which future economic benefits are expected to flow to the
entity.
Note:
• There must be future economic benefits, under the control of the
entity.
• It must be as a result of a transaction that has already occurred.
11 Created by Dr G. L. Ilott, CQUniversity Australia

12. 2. Liabilities
A liability is a present obligation arising from past events which is
expected to result in an outflow of economic benefits from the entity.
Note:
• It is expected that economic benefits will flow from the entity to
other parties in the future.
• There must be a present obligation resulting from a past
transaction.
12 Created by Dr G. L. Ilott, CQUniversity Australia

13. 3. Equity
Equity has the simplest definition in the CF:
Equity is simply equates to net assets, that is, the residual value of
assets once liabilities are deducted.
13 Created by Dr G. L. Ilott, CQUniversity Australia

14. 4. Income
The definition of income in the CF is consistent with the main focus
being on assets & liabilities as the drivers of value.
Income represents the net increase in benefits to the firm due to the
increase in value of assets or decrease in liabilities during the period.
This excludes contributions to equity.
14 Created by Dr G. L. Ilott, CQUniversity Australia

15. 5. Expenses
Expenses represent the decrease in economic benefits to the firm in
the form of outflows or depletions of assets, or the increases in
liabilities. This excludes distributions to equity holders.
15 Created by Dr G. L. Ilott, CQUniversity Australia

16. One more thing…
In the next presentation, we will examine the expected benefits of
adopting a CF, and consider some of the criticisms of the conceptual
framework.
16 Created by Dr G. L. Ilott, CQUniversity Australia