PRINCIPAL-BASED / RULES BASED APPROACH

CONTRACTUAL FRAMEWORK APPROACH

-Used by IASB -Used in the US
-A coherent system of interrelated objectives
and fundamental principles
-A framework which prescribes the nature,
function and limits of financial accounting and
financial statements
-Based upon a conceptual framework such as -‘Cookbook’ approach
the IASB’s Framework -Accounting standards are a set of rules which
-Accounting standards are set on a basis of the companies must follow
conceptual framework
-It avoid ‘fire- fighting’ problem

Framework guidance regards to:

 The objective of financial reporting

 The qualitative characteristics of financial information
 The definition, recognition and measurement of the elements in the financial statement
 Concepts of capital and capital maintenance

Purpose of framework:

o Help the IASB in their role of developing future IFRSs and in reviewing existing IFRSs
o Help the IASB in promoting harmonisation by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs
o Help national standard-setting bodies in developing national standards
o Help those preparing financial statements to apply IFRSs and also to deal with areas where
there is no relevant standard
o Help auditors when they are forming an opinion as to whether financial statements conform
with IFRSs
o Help users of financial statements when they are trying to interpret the information in
financial statements which have been prepared in accordance with IFRSs
o Provide information to other parties that are interested in the work of the IASB about its
approach to the formulation of IFRSs

Objective of financial reporting:

The objective of financial reporting is to provide financial information about the reporting entity that
is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity
Framework qualitative characteristics:

(1) Fundamental qualitative characteristics

 Relevance
 Faithful representation
-Completeness
-Neutrality (free from bias)
-Free from error
(2) Enhancing qualitative characteristics
 Comparability (consistency & disclosure)
 Verifiability
 Timeliness
 Understandability