You are on page 1of 4

The IFRS conceptual framework was first published in 1989 with the aim of setting a theoretical

framework upon which the IFRS standards are based on. In 2010 the International Accounting Standards
Board issued a newer version of the conceptual framework with an update to the qualitative
characteristics of financial statements. The updation of the conceptual framework is still an ongoing
process and new chapters when released will replace the existing chapters in the framework.

Purpose and Scope

The IASB states that the purpose of conceptual framework is to establish the concepts that form the
basis of preparation and presentation of financial statement for external users. In addition, conceptual
framework will be able to assist the board in developing future IFRS standards and review existing
standards. It will also provide assistance to the board in promoting a universal way for the presentation
of financial statements. Moreover the conceptual framework will be able to assist government bodies
for standard setting, preparers of financial statements and auditors in dealing with IFRS standards.

The conceptual Framework covers the following areas:

a) The objective of financial reporting

b) Underlying assumptions
c) Qualitative charasterisitcs of financial information
d) The definition, recognition and measurement of the elements of the elements from which
financial statements are constructed.
e) Concepts of capital and capital maintenance.

The objective of financial reporting

Chapter 1 of the Conceptual Framework discusses the objective of general purpose financial reporting.
The objective acts as a foundation for the conceptual framework on which the rest of the aspects are
built upon.

General Purpose financial reporting should be able to provide the users with financial information about
the reporting entity in order to make informed decisions.

The financial report must provide potential investors creditors and lenders with information in order to
assess the prospect of future net cash inflows.

The statement should represent the resources held by the entity, claims against them and the efficiency
and effectiveness on the use of its resources.

General purpose financial reports allow its users to estimate the value of the reporting entity instead of


Estimates and judgements are widely used in the preparation of financial stamens, the conceptual
Framework identifies the underlying concepts that form the basis of these estimates and judgments.\

The financial strengths and weakness of an entity can be identified by reviewing the information on the
nature of its economic resources and claims against the entity. The users can then analyze the reporting
entity liquidity and solvency
Accrual basis of accounting matches the expenses and income to the period in which they were incurred
or earned. The conceptual framework categorized this under underlying assumptions. However, in the
new 2010 revised conceptual framework it is stated under objectives section.

Accrual accounting must be used in the preparation of financial statements. This provides a better
reflection of an entity’s financial performance over a period of time than compared to reporting on the
cash receipts and payments of the entity.

Statement of financial performance allows users to analyze the ability of the entity to generate net cash
inflows from its operation.

The cash flows of an entity reflected in the financial statements allows its users to generate future cash
flows and assess its financial and investing activities.

Qualitative Characteristics

The Qualitative characterizes of financial statements are qualities that makes it useful to its users.

IASB’s conceptual framework identifies faithful representation and relevance as the fundamental
characteristics that financial information must carry in order to be considered useful. In addition, the
conceptual framework determines four qualitative characteristics i.e. comparability verifiability
timeliness and understandability that enhances the usefulness of financial information.


Relevant information is explained by the conceptual framework as “the information that is capable of
making a difference in the decision made by its users”.

Financial information is considered to be relevant if it has predictive value or confirmatory value.

Information with predictive value van be utilized as a n inputs to the predict future outcomes. On the
other hand, financial information that has confirmatory value will provide feedback about previous
evaluation. Often times information may possess both predictive and confirmatory values. For example,
the current year revenue could be used to predict the revenue for the following year. The same in
formation could also be used to compare last years prediction on expected revenue.


According to the conceptual framework an information is considered material if the omission or

misstatement could affect the decision of the users of the financial information about a specific entity

Materiality is specific for each entity and nature and extent of items should be taken into account within
the context of an entity.

Faithful Representation
For a financial information to be useful it must faithfully represent the economic phenomena that it
intents to represent. A perfectly faithful representation would be complete, neutral and free from error.

A complete representation will include all the necessary information for a user to perceive the
phenomena being depicted

A neutral representation is without any bias in the selection or presentation of financial information.

The description of phenomenon must be free from any errors or omissions and the process of producing
financial information must be error free.

Comparability is one the most important qualitative characteristics of financial information. It allows the
users of the financial statements to recognize and compare the similarities and differences among other
entities or with the information about the same entity from a different period. In order to achieve
comparability, it is very important that the financial information was produced using a consistent
approach within the entity and across all entities.

Verifiability is a qualitative characteristic that the conceptual framework considers to enhance the
usefulness of the financial information. Independent external observers who are qualified and
knowledgeable gives assurance to the users that the information was faithfully represented.

Timeliness of an information is crucial for users in order to make informed decisions. The conceptual
framework observes that generally older information is less useful than currently relevant information.
However, some old information can be useful for the identification and assessment of future trends.

An information that is presented clearly and concisely by proper classification and characterization
makes it understandable to its users. The conceptual framework acknowledge that the users of financial
reports have reasonable knowledge of the activities relating to economics and business. However, in
case the reports contain complex technical information the user may need to seek help from a financial
adviser to fully comprehend the reports.

The conceptual framework advocates that the qualitative characteristics must be used to the maximum
extent possible to enhance the information. However, it also notes that the qualitative characteristics
alone cannot make an irrelevant or unfaithfully represent information useful.

Financial reporting comes with a cost and the cost versus benefits must be taken into account when
producing financial reports. The IASB board considers the cost constraint when proposing a standatrd
and asses whether reporting the information justifies its cost. Often times different reporting
requirement may be relevant to different entities. For example the IASB board has designed standards
specific for small and medium enterprises.

Going Concern

Financial statements are prepared on the assumption that the entity is a going concern and will continue
to operate for the foreseeable future. This indicates that the entity has neither the intention not the
need to liquidate or decrease its scale of operation. In the event that such an intention or need arises
the financial statements may be prepared on a different basis which should be disclosed in the financial


Financial statements portray the financial effects of transactions and other events by grouping them into
broad classes according to their economic characteristics. These broad classes are termed the elements
of financial statements. The elements directly related to the measurement of financial position in the
balance sheet are assets, liabilities and equity. The elements directly related to the measurement of
performance in the income statement are income and expenses. The statement of changes in financial
position usually reflects income statement elements and changes in balance sheet elements;
accordingly, this Conceptual Framework identifies no elements that are unique to this statement.

The financial effects of transactions are depicted in the financial statements by organizing them into
broad classes according to their economic characteristics. The conceptual framework identifies these
broad classes as elements of financial statements.