IASB Conceptual Framework for

Financial Reporting

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Conceptual Framework for Financial Reporting
• A conceptual framework is a statement of generally accepted theoretical
principles which form the frame of reference for financial reporting
• It is the basis for the development of new accounting standards and the
evaluation of those already in existence.
• It sets out the concepts that underlie the preparation and presentation of
financial statements for external users
• A conceptual framework will form the theoretical basis for determining which
events should be accounted for, how they should be measured and how they
should be communicated to the user.
• The Conceptual Framework is not an IFRS and so does not override any
individual IFRS. In the (rare) case of conflict between an IFRS and the Conceptual
Framework, the IFRS will prevail
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What is the Conceptual Framework?

Board Preparers All

• to develop • To understand and
• to develop consistent interpret Standards
Standards accounting policies
Addresses fundamental issues

What makes What are assets, liabilities,

What is the
financial equity, income and expenses,
objective of
information when should they be
financial
useful? recognised and how should
reporting?
they be measured, presented
and disclosed?

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 Role of the Conceptual
Framework
• Conceptual Framework sets out agreed concepts that underlie
financial reporting
– objective, qualitative characteristics, element
definitions, …
• IASB uses Conceptual Framework to set standards
– enhances consistency across standards
– enhances consistency over time as Board members
change
– provides benchmark for judgments
• Preparers use Conceptual Framework to develop accounting
policies in the absence of specific standard or interpretation

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 Scope of Conceptual Framework

• 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 de-recognition
• Chapter 6 – Measurement
• Chapter 7 – Presentation and disclosure
• Chapter 8 – Concepts of capital and capital maintenance

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 Chapter 1 - Objective of Financial Reporting

• The objective of general purpose 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. Those
decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of
credit.
 Chapter 1 - Objective of
Financial Reporting
Provide financial information useful to users in making
decisions
Users’ decisions involve decisions about
buying, holding or providing or settling
voting and influencing
selling equity or debt loans and other forms
management’s actions
instruments of credit
To make these decisions, users assess
prospects for future net cash management’s stewardship of the
inflows to the entity entity’s economic resources

To make both these assessments, users need information

about both
economic resources, claims and how efficiently and effectively
changes in those resources and management has discharged its
claims responsibilities

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 Underlying assumption

• Going concern: The entity is normally viewed as a going

concern, that is, as continuing in operation for the
foreseeable future. It is assumed that the entity has neither
the intention nor the necessity of liquidation or of
curtailing materially the scale of its operations.
Users of Financial information

• Consist of investors, employees, lenders, suppliers and

other trade creditors, customers, government and their
agencies and the public.

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 Chapter 2 - Qualitative Characteristics of Useful Financial
Information
• Conceptual Framework distinguishes between fundamental and enhancing
qualitative characteristics, for analysis purposes. Fundamental qualitative
characteristics distinguish useful financial reporting information from
information that is not useful or misleading.
• Enhancing qualitative characteristics distinguish more useful information
from less useful information

• The fundamental qualitative characteristics are relevance and faithful

representation.
• Relevance. Relevant information is capable of making a difference in the
decisions made by users. It is capable of making a difference in decisions if
it has predictive value, confirmatory value or both.
• The relevance of information is affected by its nature and its materiality.

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 Chapter 2 - Qualitative Characteristics of Useful
Financial Information

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 Enhancing Qualitative
Characteristics
• Comparability: like things look alike; different things look
different
• Verifiability: knowledgeable and independent observers could
reach consensus, but not necessarily complete agreement, that a
depiction is a faithful representation
• Timeliness: having information available to decision-makers in
time to be capable of influencing their decisions
• Understandability: Classify, characterize, and present
information clearly and concisely

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 Clarifying Aspects of Faithful
Representation
• Exercise of caution under conditions of uncertainty
Prudence • Does not allow for overstatement or understatement of
assets, liabilities, income or expenses
• Supports neutrality

• Arises when monetary amounts cannot be observed directly

Measurem
and need to be estimated
ent
• Does not prevent information from being useful
uncertainty
• If very high, may affect whether a sufficiently faithful
representation can be achieved

Substance • Economic substance of the underlying economic

over form phenomenon is normally the same as the legal form
• If not, need to represent the substance to provide
faithful representation
Chapter 3 - Financial Statements and the
Reporting Entity

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Chapter 4 - Elements of Financial Statements—Assets,
Liabilities and Equity

Financial Position elements

A present economic resource controlled by the entity as a

Asset result of past events
• An economic resource is a right that has the potential to
produce economic benefits
A present obligation of the entity to transfer an economic resource
Liability as a result of past events
• An obligation is a duty or responsibility that the entity has no
practical ability to avoid

The residual interest in the assets of the entity after

deducting all its liabilities
Equity • Financial Instruments with Characteristics of Equity
research project further explores how to distinguish
liabilities from equity
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 Elements of Financial Statements—Income and
Expenses

Financial Performance

Incom Increases in assets, or decreases in liabilities, that result in

increases in equity, other than those relating to contributions
e from holders of equity claims

Expen Decreases in assets, or increases in liabilities, that result in

decreases in equity, other than those relating to distributions to
ses holders of equity claims

Information about income and expenses is just as important as

information about assets and liabilities

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Chapter 5 - Recognition and De recognition

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 Recognition and De recognition

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 Chapter 6 - Measurement
Historical cost Current value
measurement bases measurement bases
• include amortised • include fair value, value in use,
cost fulfilment value and current cost
Selecting a measurement basis
Faithful
Relevance
representation
• characteristics of the asset • measurement
or liability inconsistency
• contribution to future cash • measurement
flows uncertainty
Information in both the statement of financial position
and the statement(s) of financial performance

Enhancing qualitative characteristics and cost

constraint
 Measurement

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 Measurement

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Chapter 7 - Presentation and Disclosure

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 Chapter 8: Concepts of Capital and
Capital Maintenance
• The Framework explains two concepts of capital:
• Financial capital – this is synonymous with the net assets
or equity of the entity. Under the financial maintenance
concept, the profit is earned only when the amount of net
assets at the end of the period is greater than the amount of
net assets in the beginning, after excluding contributions
from and distributions to equity holders.
• Physical capital – this is the productive capacity of the
entity based on, for example, units of output per day.
Here the profit is earned if physical productive capacity
increases during the period, after excluding the
movements with equity holders.

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