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IASB Conceptual Framework

VIVA Subject Guide
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The IASB Framework provides the underlying rules, conventions and definitions that underpin the preparation of all financial statements prepared under International Financial Reporting Standards (IFRS).

  • Ensures standards developed within a conceptual framework

  • Provide guidance on areas where no standard exists

  • Aids process to improve existing standards

  • Ensures financial statements contain information that is useful to users

  • Helps prevent creative accounting

The revised IASB Conceptual Framework was issued in March 2018 and the new areas included are as follows:

  • Measurement basis

  • Presentation and disclosure

  • Derecognition

Whilst updates have been made to the following:

  • Definitions of assets/liabilities

  • Recognition of assets/liabilities

And clarification on:

  • Measurement uncertainty

  • Prudence

  • Stewardship

  • Substance over form

1 Objective of financial reporting

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‘Provide information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity’

The decisions made by users will involve:

  • Investment decisions

  • Financing decisions

  • Voting, or influencing management actions

The users will be assessing the management’s stewardship of the entity alongside its prospects for the future, which will require the following information:

  • Economic resources of the entity

  • Claims against the entity

  • Changes in the entity’s economic resources and claims.

  • Efficiency and effectiveness of management

2 Qualitative characteristics – make information useful

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Fundamental qualitative characteristics

  • Relevance – information that makes a difference to decisions made by users (nature and materiality)

  • Faithful information – must faithfully represent the substance of what it represents, and is therefore complete (helps understand and includes descriptions and explanations), neutral (no bias, and therefore supported by the exercise of prudence) and free from error. Measurement uncertainty will impact the level of faithful representation.

Enhancing qualitative characteristics

  • Comparability – identify similarities/differences between entities and year-on-year

  • Verifiability – assures the information represents the economic phenomena it represents

  • Timeliness – information is less useful the longer it takes to report it

  • Understandability – user have a reasonable knowledge of business and activities

Keep the two lists above apart. Relevance and faithful representation are the two fundamental characteristics; comparability, verifiability, timeliness and understandability are the four enhancing ones. A statement that offers relevance or faithful representation as an enhancing characteristic is wrong for that reason alone, and this is the way the point is most often set.

A cost constraint applies in ensuing that the information is useful, in that the benefit of obtaining the information should outweigh the cost of obtaining it.

3 Financial statements and the reporting entity

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Reporting entity

Is the entity that is required to prepare financial statements and does not necessarily have to be a legal entity.

Financial statements

Report the entities assets, liabilities, income and expenses for:

  • Consolidated financial statements

  • Un-consolidated financial statements

  • Combined financial statements

    • Prepared for the entity as a whole

    • Entity is a going concern and will continue to do so

4 Elements of financial statements

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  • Assets

    • Present economic resource

    • Controlled

    • Past events

  • Liabilities

    • Present obligation

    • Transfer an economic resource

    • Past event

  • Equity

    • Residual interest in assets less liabilities

  • Income

    • Increase in asset

    • Reduction in liability

  • Expense

    • Reduction in asset

    • Increase in liability

5 Recognition and derecognition

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Recognition – the process of including an item in the financial statements and is appropriate if it results in relevant and faithful representation

Derecognition – the removal of all or part of an asset (loss of control)/liability (no obligation)

6 Measurement

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Historical cost

Current value

Price of the transaction that gave rise to the item

Provides updated information to reflect conditions at the measurement date

Fair value

Value in use (assets)/Fulfilment value (liabilities)

Current cost

7 Presentation and disclosure

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Statement of profit or loss is the primary source of information for a company’s performance, which includes all income and expense. If the income and expense arises from changes in current value then it can be recognised though other comprehensive income.

Reclassification of other comprehensive to profit or loss is allowable if it gives more relevant information.

Practice question

The IASB’s Conceptual Framework for Financial Reporting identifies characteristics that make financial information faithfully represent what it purports to represent.

Which TWO of the following are characteristics of faithful representation?

  1. Accruals

  2. Completeness

  3. Going concern

  4. Neutrality

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Example 2 – Framework

The following accounting standards were examined in Financial Accounting:

  • IAS 2 Inventories

  • IAS 16 Property, plant and equipment

Apply the principles outlined in the IASB Framework to the accounting standards above.

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IAS 2 Inventories

Definition (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.

Measurement - Valued at lower of cost and net realisable value

IAS 16 Property, plant and equipment

Definition (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.

Definition (depreciation) - Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

Measurement – Historic cost or fair value (revaluation model)

Disclosure – Gains on revaluation recognised though profit or loss (prudence)

Practice question

Assume an economy is growing and prices are rising regularly.

Which TWO statements are false when historical cost accounting is compared with current value accounting?

  1. Historical cost profit is understated compared with current value profit.

  2. Capital employed measured at historical cost is understated compared with capital employed measured at current value.

  3. Historical cost profit is overstated compared with current value profit.

  4. Capital employed measured at historical cost is overstated compared with capital employed measured at current value.

Example 4 – Conceptual Framework

The Conceptual Framework for Financial Reporting of the International Accounting Standards Board is based upon principles as opposed to rules.

Which of the following two statements are true?

TRUE/FALSE – The principles contained in the Conceptual Framework override any IFRS Standard that exists

TRUE/FALSE – If the Conceptual Framework is revised this automatically leads to changes to the IFRS Standards

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Example 4 - Conceptual Framework

Neither of the statements are true.

The Conceptual Framework is not an accounting standard and although it assists the IASB develop IFRSs it does not override and IFRS Standards as these give the specific rules on how to treat an item within the financial statements.

The Conceptual Framework can also be updated (as it was when there were changes to the assumptions etc.) but this does not automatically lead to changes to the IFRS Standards because any change in standards has to go through the due process. This would involve updating their agenda for the new project with the aim of amending the IFRS Standard.

Practice questions

IASB Conceptual Framework

10 questions

Answer the questions one at a time. Your progress is saved so you can leave and come back.

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