The Conceptual Framework for Financial Reporting

Conceptual framework:
In July 1989 the old IASC produced a document called Framework for the preparation and presentation of financial
statements. In 2010 this was updated to ‘The Conceptual Framework for Financial Reporting. The Conceptual
Framework is the basis upon which all IASs and IFRSs are developed and it therefore determines how financial
statements are prepared and the information they contain.
The Conceptual Framework for Financial Reporting
Purposes of the Conceptual Framework:
The purposes of the framework is:

a) to assist the Board in the development of future IFRSs and in its review of existing IFRSs.
b) to assist the Board in promoting harmonization of regulations, accounting standards and procedures relating to the
presentation of financial statements by providing a basis for reducing the number of alternative accounting
treatments permitted by IFRSs.
c) to assist national standard-setting bodies in developing national standards.
d) to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the
subject of an IFRS.
e) to assist auditors in forming an opinion as to whether financial statements conform with IFRSs.
f) to assist users of financial statements in interpreting the information contained in financial statements prepared in
conformity with IFRSs.
g) to provide those who are interested in the work of IASB with information about its approach to the formulation of
IFRSs.
The Conceptual Framework for Financial Reporting
The objective of financial statements
To provide information about the financial position, performance and changes in financial position
of an entity that is useful to a wide range of users in making decisions.

Underlying assumption
Going concern – the financial statements are prepared on the basis that an entity will continue in
operation for the foreseeable future.
The Conceptual Framework for Financial Reporting
Fundamental qualitative characteristics of financial statements
 Relevance - to be useful, information must be relevant to the decision making needs of the user. Information is relevant
if it is material (size and nature).

 Faithful Representation - to be useful must faithfully represent the phenomena that it purports to represent, which is
only possible if accounted for substance and economic reality.
 Neutral -free from bias
 Complete -includes all necessary information, descriptions and explanations.
 Free from error -in the descriptions and processes the financial information is produced
The Conceptual Framework for Financial Reporting
Enhancing qualitative characteristics

 Understandability – assuming users have a reasonable knowledge of business and a willingness to study information
with reasonable diligence, the financial statements should be readily understandable to users.

 Comparability – users must be able to compare the financial statements of an entity from period to period and from
company to company

 Timeliness - Information produced quickly makes it more useful as a basis for current decisions.

 Verifiability - Information needs to be supported by representation (either written or verbal) to allow us to confirm its
validity.
The Conceptual Framework for Financial Reporting
The elements of financial statements
 Asset -is a resource controlled by the enterprise as a result of past events and from which future economic benefits are
expected to flow to the enterprise.

 Liabilities - are an entity’s obligations to transfer economic benefits as a result of past transactions or events.
 Equity - is the residual amount found by deducting all liabilities of the entity from all of the entity’s assets.

 Income - is increases in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity
participants.

 Expenses - are decreases in economic benefits during the accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity
participants.
The Conceptual Framework for Financial Reporting
Recognition of the elements of financial statements

To recognize an element of the financial statements it must meet all three of the following criteria:
 Meets the definition of an element
 Probable future economic benefit will flow to or from the entity
 The item can be measured reliably

Measurement of the elements of financial statements

 Historical cost - cash price or fair value at acquisition or obligation. Most commonly used but widely criticized
 Current cost - what would be the cash price today
 Realizable value - what could be realized/satisfied today
 Present value - discounted future cash flows