Summary

Summary The Conceptual Framework Part 1

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Course
Financial Accounting 1 (ACCN1010)

Institution
University Of The Witwatersrand (wits)

The Conceptual Framework sets the foundation for the International Financial Reporting Standards (IFRS). This document provides in-depth and concise information on the purpose and objective of financial reporting. The document summarises the qualitative and enhancing characteristics of useful fina...

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Uploaded on January 15, 2024
File latest updated on January 16, 2024
Number of pages 7
Written in 2023/2024
Type Summary

conceptual framework

Institution
University of the Witwatersrand (wits)
Course
Financial Accounting 1 (ACCN1010)

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Conceptual Framework of Financial
Statements

,CHAPTER 1: Objective of general purpose accounting (1.1 -1.11)

• It provides useful info to primary users to make economic decisions.
• Primary users = existing/ potential
• Decisions involving:

a. Buying, selling or holding equity and debt instruments.

b. Providing or settling loans and other forms of credit.

c. Exercising rights to vote on, or otherwise influence, managements' actions that
affect the use of the entity's economic resources.

• Decisions above depend on returns that existing & potential investors, lenders and
other creditors expect.
o Example:
Dividends, principal and interest payments or market price increases. Investors’,
lenders’ and other creditors’ expectations about returns depend on their
assessment of the amount, timing and uncertainty of (the prospects for) future
net cash inflows to the entity and on their assessment of management’s
stewardship of the entity’s economic resources. Existing and potential investors,
lenders and other creditors need information to help them make those
assessments.

• To make the assessments described, existing and potential investors, lenders and
creditors need info abt:

a. Economic resources of the entity + claims against the entity & changes in those
resources and claims.

b. How efficiently and effectively the entity's management and governing board have
discharged their responsibilities to use the entity's economic resources.

• For people who do not have access to all financial info (Don’t have access to tailor-
made FS).
• Not designed to show value of reporting entity, they provide information to help
primary users.
• Management is also interested in financial information about the entity.
o However, does not rely on general purpose financial reports.
o Able to obtain info internally.
• Regulators and members of public other than investors, lenders and creditors find
general purpose reports useful.
• Large extent = reports are based on estimates, judgements and models.

, Economic resources and claims (1.12-1.14)

• General purpose financial reports provide information about the financial position
of a reporting entity.
• which is information about the entity’s economic resources and the
claims against the reporting entity.
• Also provide info about the effects of transactions.
• And events that change a reporting entity's economic resources and claims.

• Info about the nature and amounts of reporting entity's economic resources and
claims = help identify reporting entity's strengths and weaknesses.
• Help users assess = liquidity and solvency, its need for additional financing and how
successful it would be in obtaining financing.
• Help users assess management stewardship.
• Info about priorities and payment requirements of existing claims = help users
predict future cash flow.

Changes in economic resources and claims (1.15-1.16)

= result from entity's financial performance + other transactions or events (issuing debt or
equity instruments).
= info contained in Statement of profit and loss (performance) and statement of change in
equity (other trans)

2 types of changes:

• Information about a reporting entity's performance = helps users understand the
return the entity has produced on its economic resources.
• Info about the return the entity produced = help assess management stewardship
of the entity's economic resources.
• Info about the variability and components of that return = important in assessing
uncertainty of future cash flows.
• Info about past financial performance = how management discharged stewardship
responsibilities = predict entity's future returns on its economic resources.

Financial performance reflected by accrual accounting (1.17)

Depicts the effects of transactions or events are recognised in the period in which the
effects occur even if relating cash transactions take place in different periods.

This is important because:
• Info about a reporting entity's economic resources and claims and changes in
economic resources and claims during a period provides better basis for assessing
entity's past and future performance rather than info solely about cash receipts and
payments during that period.

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