Financial Reporting

Contents
IFRS Framework........................................................................................................................... 2
INTRODUCTION ....................................................................................................................... 2
REGULATORY FRAMEWORK .................................................................................................... 2
CONCEPTUAL FRAMEWORK .................................................................................................... 5
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION ............................................ 6
PRINCIPAL ELEMENTS OF FINANCIAL STATEMENTS................................................................ 9

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IFRS Framework
INTRODUCTION

In the context of financial reporting, the term framework can be used in two different ways:

1. This is a regulatory or institutional framework which embraces the IFRS standard-setting

process and the general legal context in which IFRS standards are used;

2. This is a set of generally accepted theoretical principles which should be kept in mind
when designing new accounting standards or when applying them in practice.

REGULATORY FRAMEWORK

When we consider the legal environment, there are elements that are usually in place and
which tend to impact companies’ accounting and financial reporting processes:

_ National laws;
_ European Union or other regulations;
All these elements make
_ Securities exchange rules; up the regulatory
_ Tax regulations; and framework in which
_ Accounting principles. companies operate

Key goal: To ensure that users of financial statements receive information which is good
enough to enable them to make sensible economic decisions.

There are strong tendencies for accounting regulation from around the world to become
unified and harmonised, which brings about multiple benefits :

− If financial information coming from different countries is prepared on a consistent basis, it

makes reading and interpreting the numbers, and doing business, a lot easier;

− The preparation of financial information for various stakeholders uses up less resources.
Also, consolidating the results coming from different parts becomes easier, if all countries
follow the same rules;

− For investors, harmonisation makes it easier to compare different entities and make fully
informed investment decisions; and

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− Harmonisation makes it easier to control tax statements, therefore limiting tax avoidance.

However, there are considerable barriers that make the full harmonisation of accounting
standards an improbable, if not impossible task:

− Individual countries typically have their own social, political and economic contexts;

− The legal systems of different countries vary widely, so some harmonised solutions are not
easily transferable to all countries concerned; and

− Developing a full set of harmonised accounting rules and making companies adopt them is
a very costly process.

The four institutions which are at the very heart of the IFRS standard-setting process are
described below:

1. The International Accounting Standards Board (IASB) . This body is at the very centre of the
standard-setting process having sole responsibility for issuing International Financial Reporting
Standards (IFRS):

a. The goal of the IASB is to develop a single set of high-quality understandable and
enforceable accounting standards.

b. The IASB lacks the legal authority to enforce compliance with the standards that
it develops, making it necessary to cooperate closely with national authorities.

2. The International Financial Reporting Standards Foundation (IFRS Foundation) . This body
acts as a supervisory body to the IASB and is responsible for oversight and governance of the
Board’s activities. Its objective is the development of a set of global accounting standards of
high quality as well as promoting the widespread application of those standards.

3. The IFRS Interpretations Committee or IFRS IC . This body issues guidance on accounting
topics, where divergent interpretations of the standards exist, or where there are new issues
which are not specifically dealt with in the standards. However, before any of the
interpretations issued by the IFRS IC become binding, they first need to be approved by the
IASB.

4. The IFRS Advisory Council (IFRS AC) . The role of this body is to provide a forum for the IASB
to consult a wide spectrum of stakeholders who might be affected by the work of the Board.

The typical sequence for the development of a new International Financial Reporting Standard
is as follows:

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 1. The IASB identifies a topic that should be covered and appoints a committee from its
members to work on the subject;

2. When the work reaches a stage deemed advanced enough, a discussion paper may be
issued by the IASB to encourage comments from a wider audience;

3. The IASB publishes a so-called exposure draft for public comment. The exposure draft is
also the first draft version of the proposed standard; and

4. Following the receipt of comments, the IASB publishes the final text of the new IFRS.

INTERNATIONAL SUSTAINABILITY STANDARDS BOARD (ISSB)

The International Sustainability Standards Board (ISSB) was created by the IFRS Foundation in
November 2021, with the main purpose to develop a worldwide standard for sustainability
reporting. The main motivation for this was the growing interest in ESG (environmental, social,
and governance) issues in the global capital and financial markets, and the need for a
standardised reporting framework.

The ISSB and the IASB, both are the standard-setting bodies under the umbrella of the IFRS
Foundation. Where IASB is concerned with IFRS Accounting Standards for financial reporting,
the ISSB is concerned with IFRS Sustainability Disclosure Standards.

In simpler other words, ISSB does the same for sustainability disclosures, that the IASB has done
for financial accounting.

The IFRS Foundation states on their official website that ISSB has set out four key objectives:

1. to develop standards for a global baseline of sustainability disclosures;

2. to meet the information needs of investors;
3. to enable companies to provide comprehensive sustainability information to global capital
markets; and
4. to facilitate interoperability with disclosures that are jurisdiction-specific and/or aimed at
broader stakeholder groups.

The ISSB is committed to delivering standards that are cost-effective, decision-useful and
market informed.

• The standards are developed with efficiency in mind, helping companies to report what is
needed globally to investors across markets globally.

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• The standards are designed to provide the right information, in the right way, to support
investor decision-making and facilitate international comparability to attract capital.
• A company can avoid double-reporting by applying the ISSB’s standards. When jurisdictional
requirements build on the global baseline, companies are able to meet jurisdictional
requirements while benefiting from the efficiency and comparability of the global baseline.

CONCEPTUAL FRAMEWORK

The conceptual framework is a set of generally accepted theoretical principles that guide the
bodies that design financial reporting standards and help users to apply them in practice.

There are two main approaches to how financial reporting may be designed and regulated:

A. The principles-based approach: Under this approach, the goal is to lay down the general
principles that should universally govern financial accounting, making a link between the
objectives of financial reporting and those general principles; and

B. The rules-based approach: This approach is based on detailed regulations which all
companies must uniformly follow and which leave very little space for independent
interpretation.

The main advantages (they are also disadvantages of the rules-based system) of having a
conceptual framework and following a principles-based approach are:

− Transactions or issues are not specifically addressed in the standards. A conceptual

framework provides meaningful guidance on how to deal with them, allowing preparers of
financial statements to develop suitable accounting solutions;

− Having a conceptual framework helps avoid “fire-fighting” - a practice of developing

accounting standards in response to specific situations or issues;

− Accounting standards based on a conceptual framework are thought to be more difficult to

circumvent;

− Having a clear view of governing principles enhances the credibility of financial reporting
and the accounting profession; and

− With transparent principles laid down, it is less likely that the standard-setting process will
be influenced by vested interests or lobby groups.

The goals of the Conceptual Framework are:

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− To help the IASB in its task of developing future IFRSs and reviewing the existing body of
standards;

− To help the IASB promote harmonisation by reducing the number of alternative accounting
treatments permitted by IFRS;

− To help national standard-setting bodies in the development of national standards;

− To help those who prepare financial statements in applying IFRS and in dealing with areas
where there are no relevant standards in place;

− To help users of financial statements in interpreting the financial information which they
encounter;

− To help auditors form an opinion on whether financial statements conform with IFRS; and

− To provide information to all parties who may be interested in the work of the IASB.

The overarching objective of the framework is to provide help and support to the various
stakeholders who come into contact with financial statements prepared under IFRS.

Note: The framework is not itself a standard. In the rare cases where a conflict might occur
between it and a specific IFRS, it is the IFRS which prevails over the framework.

The four main areas for which the conceptual framework attempts to provide guidance are:

1. The objective of financial reporting. The objective is to provide financial information

about the reporting entity that is useful to existing and potential investors and lenders
in making decisions about providing resources to the entity;

2. The qualitative characteristics of financial information;

3. The definitions, as well as the recognition and measurement rules applicable to the
principal elements of financial statements;

4. The concepts of capital and capital maintenance.

QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

Qualitative characteristics can generally be thought of as those attributes which make financial
information useful from the perspective of fulfilling its declared objective.

The framework identifies two kinds of qualitative characteristics:

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1. Fundamental: These characteristics are composed of just two items:

a. Relevance: Financial information is relevant if it is capable of making a difference to the

decisions made by its users. The framework introduces the concepts of predictive and
confirmatory value:

i. On the one hand, if information has predictive value, it helps users predict a
company’s future performance;

ii. On the other hand, if the information has confirmatory value, it provides
feedback about how accurate past evaluations of performance actually were.

b. Faithful representation: The information should faithfully represent the financial situation
and economic performance of the company. According to the framework, faithful
representation is associated with all of the following characteristics:

i. It should be complete , meaning it should include all necessary descriptions and

explanations;

ii. It should be neutral or free from bias, meaning that it should not be manipulated
or

phrased in such a way that it is received and interpreted in an

unduly favourable or unfavourable manner; and

iii. It should be free from error , but taking note of the materiality rule. Information is
considered material if omitting or misstating it could influence the decisions of
users of financial information about a specific reporting entity.

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2. Enhancing: These characteristics constitute a more varied collection comprising
comparability, verifiability, timeliness and understandability:

a. Comparability may be interpreted in two ways:

i. The financial statements of one entity may be compared over time in order to
identify trends in its financial performance;

ii. The financial statements of various entities may be compared in order to evaluate
their relative performance.

These forms of comparability may be achieved using two important tools:

1. Consistency: Refers to the use of the same accounting treatment for similar
items, either from period to period within a single reporting entity, or in a single
period but across entities; and

2. Disclosure: Refers to the fact that companies are required to disclose various
pieces of information, including the accounting policies which they employ in the
preparation of financial statements.

b. Verifiability means that financial information should be capable of being confirmed;

c. Timeliness relates to making information available to users in time for it to be capable of

influencing their decisions; and

d. Understandability means that the information contained in the financial statements is

assumed to be prepared for users who have a reasonable knowledge of business and
economic activities and are able to review and analyse economic information diligently.

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PRINCIPAL ELEMENTS OF FINANCIAL STATEMENTS

Financial statements are normally prepared on the assumption that the entity in question is a
going concern. This is an underlying presumption that the company will continue its operations
for the foreseeable future and that it has neither the intention nor the need to liquidate or
reduce the scale of its operations materially.

The framework mentions five key elements, splitting them into two categories:

1. Elements related to the measurement of financial position . This category includes:

a. Assets: A present economic resource controlled by the entity as a result of past events. You
should remember that:

i. Legal ownership is not a prerequisite for the recognition of an asset in the

statement of financial position;

ii. For each asset reported in the statement of financial position, there must have
been a past event, which made the recognition of that asset possible; and

iii. An asset must be of value to the reporting entity, so it must be a resource which
the company expects to convert into a flow of benefits of one kind or another.

b. Liabilities: A present obligation of the entity to transfer an economic resource as a result of

past events. You should remember that:

i. A liability may only be recognised as a result of a past transaction or event;

ii. The settlement of an obligation recognised as a liability typically entails giving up

valuable resources; and

iii. Present obligation is a duty or responsibility to act or perform in a certain way.

Present obligations may actually arise in two ways:

1. Legal obligations, as they result from binding contracts which are legally enforceable, or from
statutory requirements; and

2. Constructive obligations, which are the result of past behaviour, established practice or
business custom.

c. Equity: This is the residual interest in the assets of the entity after deducting all of its
liabilities.

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2. Elements related to the measurement of performance. This category includes:

a. Income: This is defined as increases in assets or decreases in liabilities that result in

increases in equity, other than those relating to contributions from equity participants.

b. Expenses: These are decreases in assets or increases in liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.

Note: The intention of the framework is to indicate that income and expenses are a reflection
of changes in the value of assets and liabilities, and as a consequence, in the value of equity as
well.

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