IASB Conceptual Framework

YouTube videoLoad YouTube video

YouTube videoLoad YouTube video

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.

1 Objective of financial reporting

‘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

2.1 Fundamental qualitative characteristics

• Relevance – information that makes a difference to decisions made by users. Relevant information is that which is PREDICTIVE (of what may happen in the future), CONFIRMATORY (of what has happened in the past), and companies must have a policy as to what may or may not be MATERIAL.

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

2.2 Enhancing qualitative characteristics

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

• Verifiability – if information is verifiable, one would expect two professional accountants to agree that the numbers tie back to what is really happening (the economic phenomena).

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

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

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

3 Elements of financial statements

• Assets

  • Present economic resource

  • Controlled

  • Past events

• Liabilities

  • Present obligation

  • Transfer an economic resource

  • Past events

• Equity

  • Residual interest in assets less liabilities

• Income

  • Increase in asset

  • Reduction in liability

• Expense

  • Reduction in asset

  • Increase in liability

4 Recognition and derecognition

Recognition – the process of including an item in the financial statements and is appropriate if it results in relevant and faithful representation, provided that the cost of inclusion does not outweigh the benefit. Note that there is no requirement of probability. Under the Framework, it is conceivable that possible elements could be recognised.

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

5 Measurement

5.1 Historic cost

This has the advantage of being easily verifiable.

5.2 Current value

1. Fair value – the price at which an asset would be sold or a liability settled. Sometimes known as an EXIT PRICE.

2. Current cost – the replacement cost of an asset in an equivalent condition. Sometimes known as an ENTRY PRICE.

6 Presentation and disclosure

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 may be appropriate to recognise it through other comprehensive income.

Reclassification of other comprehensive income to profit or loss is allowable if it gives more relevant information. This happens in rare circumstances (e.g. cash flow hedges) which will be covered later in these notes.

7 Conflicts between Framework and Accounting Standards

Where the Framework conflicts with accounting standards, the relevant accounting standard will take priority.

For example:

Provisions (e.g. for reorganisation) are recognised if PROBABLE (IAS 37). The Framework says that liabilities should be recognised subject to relevance and faithful representation, but does not refer to probability.

Goodwill is recognised in the SOFP (IFRS 3). It might be argued that it is not an asset at all if applying the definition in the Framework – it does not appear to be an ‘economic resource controlled by the entity’.