Conceptual Framework For
Financial Reporting
(Revised – 2018)
Eight 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
Purpose
Help preparers develop consistent accounting policies in absence of applicable
standard
Assist all parties to understand and interpret standards
Assist the Board to develop IFRS Standards (Standards) based on consistent concepts,
resulting in financial information
Advantages
Financial statements are more consistent with each other.
A proactive approach in determining best policy.
Less open to criticism of political/external pressure.
A principles based approach.
Some standards concentrate on effect on statement of
financial position; others on statement of profit or loss.
Disadvantages
A single conceptual framework cannot suit all users.
Variety of standards devised for different purposes.
Preparing and implementing standards is still difficult with a
framework.
Conceptual Framework For
Financial Reporting
(Revised – 2018)
Chapter 2 – Qualitative characteristics of useful
financial information
Fundamental Qualitative Characteristics
Relevance: Can make a difference in the decisions made by users if information has
predictive value, confirmatory value, or both.
Materiality is an entity-specific aspect of relevance.
Faithful representation: Information must be complete, neutral and free from material
error
Enhancing Qualitative Characteristics
Comparability
Comparison with similar information about other entities and with similar information
about the same entity for another period or another date:
Verifiability
It helps to assure users that information represents faithfully the economic phenomena it
purports to represent. Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement
Enhancing Qualitative Characteristics
Timeliness
It means that information is available to decision-makers in time to be capable of
influencing their decisions.
Understandability
Classifying, characterising and presenting information clearly and concisely. Information
should not be excluded on the grounds that it may be too complex/difficult for some
users to understand
Conceptual Framework For
Financial Reporting
(Revised – 2018)
Chapter 4 – The elements of financial statements
Asset
Liability
Equity
Income
Expenses
Chapter 4 – The elements of financial statements
Asset
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
Liability
A present obligation of the entity to transfer an economic resource as a result of past
events. An obligation is a duty of responsibility that the entity has no practical ability to
avoid
Conceptual Framework For
Financial Reporting
(Revised – 2018)
Chapter 5 – Recognition and derecognition
Recognition is ‘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’.
Derecognition is ‘the removal of all or part of a recognised asset of liability from an
entity’s statement of financial position’.
Derecognition normally occurs:
For an asset, when the entity loses control of all or part of the recognised asset
For a liability, when the entity no longer has a present obligation for all or part of the
recognised liability
Chapter 6 – Measurement
Two categories of measurement basis:
Historical cost measurement basis
Current value measurement basis
Chapter 6 – Measurement
Historical cost measurement basis
Historic cost measures provide information about elements that is derived from the
historical price of the transaction or event that gave rise to the item being considered for
measurement
Chapter 6 – Measurement
Current value measurement basis
Current value measures provide monetary information about elements, using information
updated to reflect conditions at the measurement date.
Measurement bases may include fair value, value in use, fulfilment value and current
cost.
Historical Cost Accounting
Assets are recorded at the amount they originally cost, and liabilities are recorded at the
proceeds received in exchange for the obligation.
Advantages
Simple to understand
Figures are objective, reliable and verifiable
Results in comparable financial statements
Less possibility for manipulation
Chapter 6 – Measurement
Disadvantages:
The carrying value of assets substantially different to market value
Inflation ignored
Physical capital not maintained
Certain ratios are distorted
Gain/loss of inflation on monetary items ignored
Comparability not accurate as past figures are not restated for the effects of inflation
Historical Cost Accounting
Selection of a measurement basis
Relevance
Faithful representation
Chapter 8 – Concepts of capital and capital
maintenance
Carried forward and unchanged
Inclusion due to importance in financial reporting
The Regulatory Framework For
Financial Reporting
Standard Setting
The Process:
1. Setting the agenda
2. Planning the project
3. Development and publication of Discussion Paper
4. Development and publication of Exposure Draft
5. Development and publication of an IFRS Standard
6. Procedures after a Standard is issued
Regulatory Framework
International Financial Reporting Standards Foundation (IFRS Foundation):
Responsible for governance of standard setting process.
Regulatory Framework
IFRS Foundation oversees, funds, appoints and monitors the operational effectiveness of:
Principles Vs Rules Based Accounting
Rules Based Accounting System:
Likely to be very descriptive
Relies on series of detailed rules or accounting requirements that prescribe how financial
statements should be prepared
Less flexible, but often more comparable and consistent
Can lead to looking for ‘loopholes’
Principles Vs Rules
Principles Based Accounting System:
Relies on GAAP that are conceptually based and are normally underpinned by a set of
key objectives
More flexible
Require judgment and interpretation which could lead to inconsistencies between
reporting entities and manipulation
IFRS are often regarded as a principles-based system.
