QUICK PREVIEW:
CONCEPTUAL FRAMEWORK
PURPOSE & STATUS
8 CHAPTERS
PURPOSE
CONTENT
q Assist the Board (IASB)
q Chapter 1: Objective of financial
q Assist preparers of financial
q Chapter 2: Qualitative characteristics of
- Develop IFRS
statements
- Develop accounting policies
q Assist all other parties
- Understand & interpret IFRS
STATUS
q Provides concepts & guidance
q Not a Standard
q Does not override any Standard
reporting
useful financial information
q Chapter 3: Financial statements & the
reporting entity
q Chapter 4: Elements of financial
statements
5: Recognition & derecognition
6: Measurement
7: Presentation & disclosure
8: Concepts of capital & capital
maintenance
q Chapter
q Chapter
q Chapter
q Chapter
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THE CONCEPTUAL FRAMEWORK
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THE CONCEPTUAL FRAMEWORK
• Purpose:
– to assist the Board to develop IFRS Standards
(Standards) based on consistent concepts, resulting
in financial information that is useful to investors,
lenders and other creditors
– to assist preparers of financial reports to develop
consistent accounting policies for transactions or
other events when no Standard applies or a Standard
allows a choice of accounting policies
– to assist all parties to understand and interpret
Standards
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• Status:
– provides concepts and guidance that underpin the
decisions the Board makes when developing
Standards
– not a Standard
– does not override any Standard or any requirement
in a Standard
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STRUCTURE & CONTENT OF THE
CONCEPTUAL FRAMEWORK
CHAPTER 1: THE OBJECTIVE
OF FINANCIAL REPORTING
• Structure & content:
– The Framework is structured into 8 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
• What:
– Sets out:
• the objective of general purpose financial
reporting,
• what information is needed to achieve that
objective and
• who the primary users of financial reports are.
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CHAPTER 1: THE OBJECTIVE
OF FINANCIAL REPORTING
• Objective of general purpose financial
reporting:
– To provide financial information that is useful to users in
making decisions relating to providing resources to the
entity.
• Information needed:
– About the entity’s:
• economic resources,
• claims against the entity and
• changes in those resources and claims.
– How efficiently and effectively management has
discharged its responsibilities to use the entity’s
economic resources – management’s stewardship.
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CHAPTER 1: THE OBJECTIVE
OF FINANCIAL REPORTING
• Primary users of financial reports:
– Existing and potential:
• investors,
• lenders and
• other creditors.
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
CHAPTER 2: QUALITATIVE
CHARACTERISTICS
• What:
– For information to be useful it must both be:
• relevant and
• provide a faithful representation of what it purports
to represent.
– Relevance and faithful representation are the
fundamental qualitative characteristics of useful
financial information.
• Fundamental qualitative characteristics:
– Relevance:
• capable of making a difference to the decisions made
by users.
• financial information is capable of making a difference
in decisions if it has:
– predictive value or
– confirmatory value .
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
– Faithful representation:
• information must faithfully represent the substance
of what it purports to represent.
• a faithful representation is, to the maximum extent
possible,
– complete
– neutral and
– free from error
• a faithful representation is affected by level of
measurement uncertainty.
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• Enhancing qualitative characteristics:
– Four qualitative characteristics enhance the usefulness
of information:
• Comparability
• Verifiability
• Timeliness
• Understandability
– These cannot make information useful if that
information is irrelevant or not faithfully represented.
• cannot make non-useful information useful.
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
CHAPTER 2: QUALITATIVE
CHARACTERISTICS
– Comparability
• Users need to compare financial statements of:
– an entity through time – to identify trends;
– different entities – to evaluate relative financial
position, performance and changes in financial
position.
• Comparability requires consistent:
– measurement, and
– display of financial effect of like transactions
and other events.
• Implication:
– Users must be informed of:
» accounting policies
» changes in policies and
» effects of such changes.
– Financial statements must show:
» corresponding information for preceding
(ie previous) periods.
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
– Verifiability
• Means knowledgeable, independent observers can
reach a consensus that a particular representation
has a fundamental quality of faithfulness.
• Verifiability may be:
– Direct (e.g. through physical inspection), or
– Indirect (e.g. using a model, formula or technique).
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– Timeliness:
• Information available in time for users to make
decisions:
– Older information is generally less useful,
although it can still be useful in identifying and
assessing trends.
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
CHAPTER 2: QUALITATIVE
CHARACTERISTICS
– Understandability:
• Users are assumed to have:
– a reasonable knowledge of business and
economic activities and accounting, and
– a willingness to study information with
reasonable diligence (ie they are expected to
have a level of financial expertise).
• Information about complex matters should not be
excluded on the ground that it may be too difficult
for certain users to understand.
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CHAPTER 2: QUALITATIVE
CHARACTERISTICS
Faithful representation
Enhancing characteristics:
Comparability
Verifiability
Timeliness
• The benefits obtained
from financial information
should exceed the cost
of obtaining and
providing it.
• Information should not
be provided if the cost is
not worth the benefit.
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CHAPTER 3: FINANCIAL STATEMENTS &
THE REPORTING ENTITY
Fundamental qualitative characteristics
Relevance
• Cost constraint:
– The benefit of providing the information needs to
justify the cost of providing and using the information.
Understandability
• Reporting entity:
– an entity that is required, or chooses, to prepare
financial statements
– not necessarily a legal entity- could be a portion of an
entity or comprise more than one entity.
• Financial statements:
– a particular form of financial reports that provide
information about the reporting entity’s assets,
liabilities, equity, income and expenses
Cost constraint
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CHAPTER 3: FINANCIAL STATEMENTS &
THE REPORTING ENTITY
– Consolidated financial statements:
• provide information about assets, liabilities, equity,
income and expenses of both the parent and its
subsidiaries as a single reporting entity
– Unconsolidated financial statements:
• provide information about assets, liabilities, equity,
income and expenses of the parent only
– Combined financial statements:
• provide information about assets, liabilities, equity,
income and expenses of two or more entities that
are not all linked by a parent‑ subsidiary
relationship
CHAPTER 4: ELEMENTS OF FINANCIAL
STATEMENTS
• Five elements of financial statements:
– Assets
For reporting
– Liabilities
financial position
– Equity
For reporting
– Income
financial performance
– Expenses
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CHAPTER 4: ELEMENTS OF FINANCIAL
STATEMENTS
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CHAPTER 4: ELEMENTS OF FINANCIAL
STATEMENTS
o Definitions:
Asset
Liability
Equity
q 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
q A present obligation of the entity to transfer an
economic resource as a result of past events
• An obligation is a duty or responsibility
that the entity has no practical ability to avoid
q The residual interest in the assets of the entity
after deducting all its liabilities
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Income
q Increases in assets, or decreases in liabilities,
• result in increases in equity, other than
those relating to contributions from holders
of equity claims
Expenses
q Decreases in assets, or increases in liabilities,
• result in decreases in equity, other than
those relating to distributions to holders of
equity claims
Although income and expenses are defined in terms of
changes in assets and liabilities, information about income
and expenses is just as important as information about
assets and liabilities.
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CHAPTER 5: RECOGNITION &
DERECOGNITION
CHAPTER 5: RECOGNITION &
DERECOGNITION
• Recognition:
– 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.
– Recognition appropriate if it results in both:
• relevant information about assets, liabilities, equity,
income and expenses and
• faithful representation of those items.
Recognition criteria
Relevance
Faithful representation
Whether recognition of an item
results in relevant information may
be affected by, for example:
• low probability of a flow of
economic benefits
• existence uncertainty
Whether recognition of an item
results in a faithful representation
may be affected by, for example:
• measurement uncertainty
• recognition inconsistency
• presentation and disclosure of
resulting income, expenses and
changes in equity
Cost constraint
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CHAPTER 5: RECOGNITION &
DERECOGNITION
• Cost constrains recognition decisions, just as it constrains other
financial reporting decisions
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CHAPTER 5: RECOGNITION &
DERECOGNITION
• Derecognition:
– The removal of all or part of a recognised asset or
liability from an entity’s statement of financial position.
– When to derecognise:
• An asset?
• A liability?
Derecognition normally occurs
For an asset:
qwhen the entity loses control of
all or part of the recognised asset
For a liability:
qwhen the entity no longer has a
present obligation for all or part
of the recognised liability
Derecognition aims to faithfully represent both:
qany assets and liabilities retained after the transaction that led to the
derecognition
qthe change in the entity’s assets and liabilities as a result of that
transaction.
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CHAPTER 6: MEASUREMENT
CHAPTER 6: MEASUREMENT
• Historical cost measurement bases:
– Information derived, at least in part, from the price of
the transaction or other event that gave rise to the
item being measured
– Historical cost of assets is:
• reduced if they become impaired
– Historical cost of liabilities is:
• increased if they become onerous
– One way to apply a historical cost measurement basis
to financial assets and financial liabilities is to measure
them at amortised cost.
• Measurement bases:
– Historical cost
– Current value
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CHAPTER 6: MEASUREMENT
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CHAPTER 6: MEASUREMENT
• Current value measurement bases:
– Information updated to reflect conditions at the
measurement date
– Current value measurement bases include:
• Fair value:
– the price that would be received to sell an asset,
or paid to transfer a liability, in an orderly
transaction between market participants at the
measurement date
– reflects market participants’ current
expectations about the amount, timing and
uncertainty of future cash flows
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• Value in use (for assets), fulfilment value (for
liabilities):
– reflects entity-specific current expectations about
the amount, timing and uncertainty of
future cash flows
• current cost:
– reflects the current amount that would be:
1. paid to acquire an equivalent asset
2. received to take on an equivalent liability
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CHAPTER 6: MEASUREMENT
CHAPTER 6: MEASUREMENT
• Factors to consider in selecting measurement
bases:
– Relevance and faithful representation,
• the aim is to provide information that is useful to
investors, lenders and other creditors.
Historical cost
measurement bases
qinclude :
• amortised cost
Current value
measurement bases
qinclude :
• fair value,
• value in use (for assets),
fulfilment value (for liabilities)
• current cost
Factors to consider in selecting a measurement basis
Relevance
Faithful representation
qcharacteristics of the asset or liability
qcontribution to future cash flows
qmeasurement inconsistency
qmeasurement uncertainty
Cost constraint
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CHAPTER 7: PRESENTATION &
DISCLOSURE
• Cost constrains recognition decisions, just as it constrains other
financial reporting decisions
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CHAPTER 7: PRESENTATION &
DISCLOSURE
• The statement of profit or loss:
– The primary source of information about an entity’s
financial performance for the reporting period
– Could be:
• a section of a single statement of financial
performance or
• a separate statement
– The statement(s) of financial performance include(s) a
total (subtotal) for profit or loss
– In principle, all income and expenses are classified
and included in the statement of profit or loss.
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• Other comprehensive income:
– In exceptional circumstances, the Board may decide to
exclude from the statement of profit or loss:
• income or expenses arising from a change in current
value of an asset or liability and include those income
and expenses in other comprehensive income.
– The Board may make such a decision when doing so
would result in the statement of profit or loss providing:
• more relevant information or
• a more faithful representation.
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CHAPTER 7: PRESENTATION &
DISCLOSURE
CHAPTER 7: PRESENTATION &
DISCLOSURE
• Recycling:
– In principle, income and expenses:
• included in other comprehensive income in
one period
• are recycled to the statement of profit or loss
in a future period when doing so results in the
statement of profit or loss providing more relevant
information or a more faithful representation
– When recycling does not result in the statement of
profit or loss providing more relevant information or a
more faithful representation,
• the Board may decide income and expenses
included in other comprehensive income are not to
be subsequently recycled.
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CHAPTER 8: CONCEPTS OF CAPITAL &
CAPITAL MAINTENANCE
CHAPTER 8: CONCEPTS OF CAPITAL &
CAPITAL MAINTENANCE
q Concepts of capital:
o Financial concept of capital:
• Capital (ie money invested) is synonymous with the
net assets or equity of the entity.
• This concept of capital is adopted by most entities
in preparing financial statements.
o Physical concept of capital:
• Capital is regarded as the productive capacity of
the entity based on operating capability (e.g. units
of output per day).
o These two concepts give rise to the concept of capital
maintenance.
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q Selecting concepts of capital:
o This should be based on the needs of the users of an
entity’s financial statements.
• financial concept of capital:
- if users are mainly concerned with the
maintenance of nominal invested capital or the
purchasing power of invested capital.
• physical concept of capital:
- if users are mainly concerned with operating
capability of the entity.
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CHAPTER 8: CONCEPTS OF CAPITAL &
CAPITAL MAINTENANCE
q Concepts of capital maintenance and
determination of profit:
o Financial capital maintenance:
• profit is earned only if:
- the financial (or money) amount of the net
assets at the end of the period exceeds the
financial (or money) amount of net assets at
the beginning of the period,
- after excluding any distributions to, and
contributions from, owners during the period.
• can be measured in either nominal monetary units
or units of constant purchasing power.
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CHAPTER 8: CONCEPTS OF CAPITAL &
CAPITAL MAINTENANCE
o Physical capital maintenance:
• profit is earned only if:
- the physical productive capacity (or operating
capability) of the entity (or the resources or
funds needed to achieve that capacity) at the
end of the period exceeds the physical
productive capacity at the beginning of the
period,
- after excluding any distributions to, and
contributions from, owners during the period.
• requires the adoption of the current cost basis of
measurement.
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CHAPTER 8: CONCEPTS OF CAPITAL &
CAPITAL MAINTENANCE
q Capital maintenance adjustments:
o The revaluation or restatement of assets and liabilities
results in increases or decreases in equity.
• While these increases or decreases meet the
definition of income and expenses, they are not
included in the income statement under certain
concepts of capital maintenance.
• But these items are included in equity as capital
maintenance adjustments or revaluation reserves.
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