2018
Conceptual Framework
Evolution of the IFRS Conceptual
Framework
1989
Mar. 2018
The Framework for the Preparation and
Presentation of the Financial Statements
was initially issued in 1989.
The final, completed version of the
Conceptual Framework was issued in
March 2018.
Amendments
by
the
International
Accounting Standards Board led to a new,
unfinished framework in September 2010,
renamed the Conceptual Framework for
Financial Reporting.
Sep. 2010
Objective of General-Purpose
Financial Reporting
The primary objective is to provide financial information
about the reporting entity that is useful to existing and
potential investors, lenders, and other creditors.
This information helps users make informed decisions, such
as trading equity and debt instruments or lending money.
General-purpose financial reports should present information about
economic resources and claims (financial position) and changes in
economic resources and claims resulting from the entity's financial
performance and other events.
Objective of General-Purpose
Financial Reporting
Financial performance is reflected by accrual
accounting, meaning the effects of transactions
are recognised when they occur, regardless of
related cash flows.
Information about past cash flows is crucial for
assessing management's ability to generate
future cash flows.
Qualitative Characteristics of
Financial Information
Financial information must possess certain qualitative
characteristics to be useful. There are two types:
• Fundamental and
• Enhancing.
Fundamental Characteristics
Relevance:
•Financial information is relevant if it is capable of making a difference in user
decisions.
•Material information should not be omitted, as materiality applies here.
Faithful Representation:
•Financial information must not only be relevant but must accurately represent what it
aims to represent.
•To achieve this, information must be complete, neutral, and free from error.
Financial information should possess both fundamental characteristics.
Enhancing Characteristics
Comparability:
• Information should be comparable across different entities and time periods.
Verifiability:
•Independent and knowledgeable observers should be able to verify the information.
Timeliness:
•Information must be available in time to influence user decisions.
Understandability:
•Information should be classified, presented clearly, and concisely.
Enhancing characteristics should be applied to the maximum possible extent.
Financial Statements and the Reporting
Entity
Financial statements provide relevant information by
recognising assets, liabilities, and equity in the statement of
financial position.
They also recognise income and expenses in the statement
of financial performance, and other changes in equity from
contributions and distributions to equity holders.
Financial reports are prepared for a specified reporting
period.
Financial Statements and the
Reporting Entity
The going concern assumption applies,
meaning an entity will continue
operations in the foreseeable future and
will not liquidate or materially curtail
operations.
If an entity is not a going concern, it should report
under different bases.
A reporting entity is an entity that must
or chooses to prepare financial
statements.
It can be a single entity, a portion of an entity (e.g., a
division), or more than one entity (e.g., parent and
subsidiary).
Financial Statements and the
Reporting Entity
Types of financial statements include:
• Consolidated: Parent and subsidiary provide
information as a single reporting entity.
• Unconsolidated: Parent alone provides
financial information.
• Combined: Reporting entity comprises two
or more entities not linked by a parentsubsidiary relationship.
Elements of Financial Statements
Elements relate to either financial
position or financial performance.
Elements of financial
position are:
Elements of financial
performance are:
•Assets
•Liabilities
•Equity
Income
Expenses
Elements of financial position
Asset:
Liabilities:
Equity:
A present economic
resource controlled by
the entity as a result of
past events.
A present obligation of
the entity to transfer an
economic resource as a
result of past events.
The residual interest in
the assets of the entity
after deducting all its
liabilities.
An economic resource
is a right that has the
potential to produce
economic benefits
An obligation is a duty
or responsibility that an
entity has no practical
ability to avoid
Recognition and Derecognition
Recognition
• The inclusion of an element into financial statements when it meets its
definition
• It links elements in the statement of financial position (assets minus
liabilities equals equity) and the statement of financial performance
(income minus expenses recognised in performance).
Derecognition
• The removal of all or part of a recognised asset or liability from an entity's
statement of financial position.
The framework sets criteria for both recognition and derecognition.
Recognition Criteria
Only items that meet the definition of an asset, a liability or equity are
recognised in the statement of financial position.
An asset or liability is recognised only if recognition of that asset or liability
and of any resulting income, expenses or changes in equity provides users of
financial statements with information that is useful, with:
Relevant information
Faithful representation
Recognition Criteria
• Relevant Information:
– Information about assets, liabilities, equity,
income and expenses is relevant to users of
financial statements.
– There is no uncertainty whether an asset or
liability exists.
– The probability of an inflow or outflow of
economic benefits is high.
Recognition Criteria
• Faithful representation
– Faithful representation may be affected by the
level of measurement uncertainty associated
with the asset or liability.
Measurement Bases
Measurement determines the monetary amount at which to recognise
elements of financial statements.
The framework discusses two basic
measurement bases:
Historical cost: The transaction price at the time of
initial recognition of the element.
Current value: Measures the element updated to
reflect conditions at the measurement date.
Current value includes fair value, value in use, and current cost.
The most important factor in selecting an appropriate measurement basis is
to ensure the financial information is relevant and provides a faithful
representation of financial performance and position.
Presentation and Disclosure
Presentation and disclosure are communication tools designed
to make financial information effective.
Effective communication requires focusing on presentation and
disclosure objectives and principles, rather than strict rules.
It involves classifying information so that similar items are
grouped and dissimilar ones are separated.
The framework addresses offsetting, classification of equity,
income and expenses, and aggregation of information.
Concepts of Capital and Capital
Maintenance
The framework explains two concepts of
capital: Financial capital and Physical capital.
Concepts of Capital and Capital
Maintenance
Financial capital is synonymous with the net assets or
equity of an entity.
Under financial capital maintenance, profit is earned only when the amount
of net assets at the end of the period is greater than at the beginning, after
excluding contributions and distributions to equity holders.
This can be measured in nominal monetary units or
units of constant purchasing power.
Concepts of Capital and Capital
Maintenance
Physical capital is the productive capacity of an entity,
based on metrics like units of output per day.
Under physical capital maintenance, profit is earned when the
physical productive capacity increases during the period, after
excluding movements with equity holders.
A main difference between these concepts is how the
entity measures profit.