Conceptual Framework For

Financial Reporting
(Revised – 2018)
Eight Chapters

 Chapter 1 – The objective of financial reporting

 Chapter 2 – Qualitative characteristics of useful financial information

 Chapter 3 – Financial statements and the reporting entity

 Chapter 4 – The elements of financial statements

 Chapter 5 – Recognition and derecognition

 Chapter 6 – Measurement

 Chapter 7 – Presentation and disclosure

 Chapter 8 – Concepts of capital and capital maintenance

Purpose

 Help preparers develop consistent accounting policies in absence of applicable

standard

 Assist all parties to understand and interpret standards

 Assist the Board to develop IFRS Standards (Standards) based on consistent concepts,

resulting in financial information

Advantages

 Financial statements are more consistent with each other.

 A proactive approach in determining best policy.
 Less open to criticism of political/external pressure.
 A principles based approach.
 Some standards concentrate on effect on statement of
financial position; others on statement of profit or loss.
Disadvantages

 A single conceptual framework cannot suit all users.

 Variety of standards devised for different purposes.
 Preparing and implementing standards is still difficult with a
framework.
Conceptual Framework For
Financial Reporting
(Revised – 2018)
Chapter 2 – Qualitative characteristics of useful
financial information

Fundamental Qualitative Characteristics

 Relevance: Can make a difference in the decisions made by users if information has

predictive value, confirmatory value, or both.

Materiality is an entity-specific aspect of relevance.

 Faithful representation: Information must be complete, neutral and free from material

error
Enhancing Qualitative Characteristics

 Comparability

 Comparison with similar information about other entities and with similar information

about the same entity for another period or another date:

 Verifiability

 It helps to assure users that information represents faithfully the economic phenomena it

purports to represent. Verifiability means that different knowledgeable and independent

observers could reach consensus, although not necessarily complete agreement

Enhancing Qualitative Characteristics

 Timeliness

 It means that information is available to decision-makers in time to be capable of

influencing their decisions.

 Understandability

 Classifying, characterising and presenting information clearly and concisely. Information

should not be excluded on the grounds that it may be too complex/difficult for some

users to understand
Conceptual Framework For
Financial Reporting
(Revised – 2018)
Chapter 4 – The elements of financial statements

 Asset

 Liability

 Equity

 Income

 Expenses
Chapter 4 – The elements of financial statements

 Asset

 A present economic resource controlled by the entity as a result of past events. An

economic resource is a right that has the potential to produce economic benefits

 Liability

 A present obligation of the entity to transfer an economic resource as a result of past

events. An obligation is a duty of responsibility that the entity has no practical ability to

avoid
Conceptual Framework For
Financial Reporting
(Revised – 2018)
Chapter 5 – Recognition and derecognition

 Recognition is ‘the process of capturing, for inclusion in the statement of financial

position or the statement(s) of financial performance, an item that meets the definition of

an asset, a liability, equity, income or expenses’.

 Derecognition is ‘the removal of all or part of a recognised asset of liability from an

entity’s statement of financial position’.

Derecognition normally occurs:

 For an asset, when the entity loses control of all or part of the recognised asset

 For a liability, when the entity no longer has a present obligation for all or part of the

recognised liability
Chapter 6 – Measurement

 Two categories of measurement basis:

 Historical cost measurement basis

 Current value measurement basis

Chapter 6 – Measurement

 Historical cost measurement basis

 Historic cost measures provide information about elements that is derived from the

historical price of the transaction or event that gave rise to the item being considered for

measurement
Chapter 6 – Measurement

 Current value measurement basis

 Current value measures provide monetary information about elements, using information

updated to reflect conditions at the measurement date.

 Measurement bases may include fair value, value in use, fulfilment value and current

cost.
Historical Cost Accounting

Assets are recorded at the amount they originally cost, and liabilities are recorded at the

proceeds received in exchange for the obligation.

Advantages

 Simple to understand

 Figures are objective, reliable and verifiable

 Results in comparable financial statements

 Less possibility for manipulation

Chapter 6 – Measurement
Disadvantages:
 The carrying value of assets substantially different to market value
 Inflation ignored
 Physical capital not maintained
 Certain ratios are distorted
 Gain/loss of inflation on monetary items ignored
 Comparability not accurate as past figures are not restated for the effects of inflation
Historical Cost Accounting

 Selection of a measurement basis

 Relevance

 Faithful representation
Chapter 8 – Concepts of capital and capital
maintenance

 Carried forward and unchanged

 Inclusion due to importance in financial reporting

The Regulatory Framework For
Financial Reporting
Standard Setting

The Process:

1. Setting the agenda

2. Planning the project

3. Development and publication of Discussion Paper

4. Development and publication of Exposure Draft

5. Development and publication of an IFRS Standard

6. Procedures after a Standard is issued

Regulatory Framework

International Financial Reporting Standards Foundation (IFRS Foundation):

Responsible for governance of standard setting process.

Regulatory Framework

IFRS Foundation oversees, funds, appoints and monitors the operational effectiveness of:
Principles Vs Rules Based Accounting

Rules Based Accounting System:

 Likely to be very descriptive

 Relies on series of detailed rules or accounting requirements that prescribe how financial

statements should be prepared

 Less flexible, but often more comparable and consistent

 Can lead to looking for ‘loopholes’

Principles Vs Rules

Principles Based Accounting System:

 Relies on GAAP that are conceptually based and are normally underpinned by a set of

key objectives

 More flexible

 Require judgment and interpretation which could lead to inconsistencies between

reporting entities and manipulation

IFRS are often regarded as a principles-based system.