Finance Essentials: Conceptual Framework Made Simple

Conceptual Framework for Financial Reporting
The Conceptual Framework details concepts that underlie the preparation and presentation of financial statements for external users. It includes (i) the objective, (ii) qualitative characteristics, (iii) constraints, (iv) elements, (v) general requirements, and (vi) convergence. 

Objective 
Is where centrally, all the other aspects of the framework flow. It helps provide useful financial information in making decisions. Information needed about companies’ financial positions are (i) resources and financial obligations, (ii) financial performance, and (iii) cash positioning/use.

Qualitative Characteristics
Two fundamental qualitative characteristics are: (i) relevance, ensures that material information helps confirm or correct past evaluations in a decision making context; and (ii) faithful representation, where information is complete (all information necessary helps understand economic phenomenon), neutral (without bias), and free from error. Characteristics that enhance the usefulness of relevant and faithfully represented information are (i) comparability, (ii) verifiable, (iii) timeliness, and (iv) understandable.

Constraints 
The ideal situation would be able to report maximum usefulness by exhibiting all “enhancing” qualitative characteristics, but it may be necessary to make trade-offs to best ensure relevance and faithful representation. Therefore, there must be cost/benefit consideration.

Elements 
Elements in measuring financial positions are assets, liabilities, and equities, while measuring performance are revenues and earnings. A financial statement element should be recognized if (i) probable future economic benefit is associated with the item and (ii) item has a cost measured with reliability. 

The following are measurement methods in determining an element’s amount: 
·  Historical Cost
· Amortized Cost 
· Current Cost
· Realizable Value
· Present Value
· Fair Value 

General Requirements
· Financial Statements includes (i) financial position (Balance Sheet), (ii) comprehensive income (Income Statement and Other Comprehensive Income), (iii) changes in equity, and (iv) cash flows (Cash Flow Statement). Other required financial statements needed are “notes”, which summarizes accounting policies and disclosures. 
· General Features include (i) fair presentation, (ii) going concern (assumes the company would be in business and effectively not have liquidity issues), (iii) accrual basis (financial statements are done with accrual accounting), (iv) materiality and aggregation, (v) no offsetting, (vi) frequency of reporting, (vii) comparative information, and (iix) consistency.
· Structure and Content includes (i) classified statement of financial position (minimum requirements of line items), (ii) minimum information on the face of the financial statements, (iii) minimum information in the notes (i.e. minimum requirements for disclosures), and (iv) comparative information. ​​