A GUIDE TO INTERNATIONAL FINANCIAL REPORTING (12th Ed)

Stainbank, Razak & Jankeeparsad

THE IASB’S CONCEPTUAL FRAMEWORK

Chapter 2

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THE IASB’s CONCEPTUAL FRAMEWORK

STUDY OBJECTIVES:

1. BACKGROUND

2. PURPOSE AND STATUS OF THE CONCEPTUAL FRAMEWORK

3. CONCEPTUAL FRAMEWORK – AT A GLANCE

4. CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

5. CHAPTER 2: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

6. CHAPTER 3: FINANCIAL STATEMENTS AND THE REPORTING ENTITY

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THE IASB’s CONCEPTUAL FRAMEWORK

STUDY OBJECTIVES: continued

7. CHAPTER 4: THE ELEMENTS OF FINANCIAL STATEMENTS

8. CHAPTER 5: RECOGNITION AND DERECOGNITION

9. CHAPTER 6: MEASUREMENT

10. CHAPTER 7: PRESENTATION AND DISCLOSURE

11. CHAPTER 8: CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

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1. BACKGROUND

1.1 What is the conceptual framework (CF) for financial reporting?

The IASB’s conceptual framework sets out /codifies the:

objectives, concepts, general principles and limits of financial reporting

1.2 Putting the CF into perspective:

COMPETING IASB’s ACCOUNTING

ACCOUNTING CONCEPTUAL STANDARDS
THEORIES FRAMEWORK (IFRSs)

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1. BACKGROUND

1.3 What is a concept?

 a general idea or abstract notion about something; or
 a unit of knowledge about something constructed from its characteristics
 eg. concept of relevance, an asset, income, a lease, a group, or accrual concept

1.4 What is concept/framework-based learning?

 structuring one’s learning to emphasise the basic and bigger ideas behind the topic,
 by making connections, links and relationships, and
 essentially, addressing the ‘WHY’ question/issue of what accountants do
 a method of learning IFRSs that flow from an understanding of the objectives and
concepts underlying external financial reporting and financial statements

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1. BACKGROUND

1.5 Why should you adopt concept/framework-based learning in accounting?

 to develop your accounting knowledge and accounting skills
 so that you can apply your knowledge of concepts to IFRSs and practical situations
 the ability to conceptualise helps one to more easily assimilate, remember and
apply the large volume of accounting rules and requirements
 assists in the exercise of judgements and estimates

1.6 Previous Conceptual Framework

 IASB’s conceptual framework first issued in 1989
 partially updated in 2010
 latest update was in March 2018
 note that the Financial Accounting Standards Board (in the US) also has a (similar)
conceptual framework

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 2. PURPOSE AND STATUS OF THE
CONCEPTUAL FRAMEWORK

2.1 Purpose of the CF

To assist the IASB develop IFRSs based on consistent
concepts, that result in financial information useful to
investors, lenders and other creditors

To assist preparers of financial reports develop consistent

accounting policies when no IFRSs apply or IFRSs allow a
choice of accounting policies

To assist all parties to understand and interpret the IFRSs

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2. PURPOSE AND STATUS OF THE
CONCEPTUAL FRAMEWORK
2.2 What are accounting standards?
 mandatory pronouncements comprising the specific rules and guidance on
accounting policies, methods and techniques
 IASB’s standards are International Financial Reporting Standards (IFRS)

2.3 Link between framework, standards and accounting policies / methods

 together provide a coherent body of accounting knowledge
 It is vital to know how IFRSs build from the conceptual framework!

ACCOUNTING
CONCEPTUAL ACCOUNTING POLICIES/
FRAMEWORK STANDARDS METHODS

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 2. PURPOSE AND STATUS OF THE
CONCEPTUAL FRAMEWORK
2.4 CF assists the IASB to develop IFRSs

IFRSs on:
CONCEPTUAL IFRSs on:
Assets &
Liabilities FRAMEWORK Performance

IFRSs on: IFRSs on:

Presentation Group
of FS IFRSs on: Accounting
Pervasive
issues

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3. CONCEPTUAL FRAMEWORK – AT A
GLANCE
3.1 CF is not an accounting standard/IFRS
 it does not override any standard
 or any requirement in a standard

3.2 There are the eight chapters in the CF

 objective of financial reporting
 qualitative characteristics of useful financial information
 financial statements and the reporting entity
 elements of financial statements
 recognition and derecognition
 measurement
 presentation and disclosure
 concepts of capital and capital maintenance

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4. CHAPTER 1: OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING

4.1 Let’s first consider who are the users of financial statements

Who are the users

identified in the CF?

Existing and potential Existing and Existing and potential

investors potential lenders other creditors

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4. CHAPTER 1: OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING
4.2 Objective of general-purpose financial reporting:

To provide that is useful to in making decisions

financial existing and relating to
information potential investors, providing
about the lenders and other resources to the
reporting entity creditors entity

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4. CHAPTER 1: OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING

4.3 Which decisions of users are catered for in the CF?

Users’ decisions involve

decisions on:
(3 aspects)

Buying, selling or Providing or settling Voting/otherwise

holding equity/debt loans and other influencing
instruments forms of credit management’s actions

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4. CHAPTER 1: OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING

4.4 What do users assess to make their decisions?

To make their
decisions, users make
two assessments

Management’s
Prospects for future net
stewardship of the
cash inflows to the entity
entity’s resources

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4. CHAPTER 1: OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING

4.5 To make both assessments, users need certain information!

To make both
assessments, users need
information about:

The economic resources of the How efficiently and effectively

entity, claims against the entity management has discharged its
and changes in those resources responsibility to use the entities
and claims resources

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4. CHAPTER 1: OBJECTIVE OF GENERAL
PURPOSE FINANCIAL REPORTING
4.6 Information required to achieve objective of financial reporting:
 financial position – i.e. entity’s economic resources and claims
 changes in economic resources and claims
 financial performance reflected by accrual accounting
 financial performance reflected by past cash flows
 changes in economic resources & claims not resulting from financial performance
 assessing management’s stewardship helps predict use of resources in future

4.7 Limitations of general purpose financial reporting:

 does not/cannot provide ALL the information needed
 does NOT show the value of the entity
 based on estimates, judgements, models rather than exact depictions

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5. CHAPTER 2: QUALITATIVE
CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION

Fundamental qualitative characteristics (2)

• Relevance
• Faithful representation

Enhancing qualitative characteristics (4)

• Comparability
• Verifiability
• Timeliness
• Understanding

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5. CHAPTER 2: QUALITATIVE
CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION

Relevance

 information is relevant if it is capable of making a difference to users’ decisions

 such information is capable of making a difference if it has predictive value or
confirmatory value

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5. CHAPTER 2: QUALITATIVE
CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION

Faithful representation

 information should faithfully represent the substance of what it purports to

represent
 is to the maximum extent possible, complete, neutral and free from error

 is affected by the level of measurement uncertainty

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5. CHAPTER 2: QUALITATIVE
CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
Other concepts related to Qualitative characteristics. Discuss:

Materiality – if omission /misstatement could influence decisions

Prudence – the exercise of caution when making judgements

Measurement Uncertainty – does not prevent information from being useful

The Cost Constraints on Useful financial reporting – cost vs benefits

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6. CHAPTER 3: FINANCIAL STATEMENTS
AND THE REPORTING ENTITY

Chapter 3 describes:
 objective/scope of financial statements
 the reporting entity

Financial Statements - Issues: Reporting Entity – Issues:

1. Objective and scope 1. Notion of an entity
2. Reporting period 2. Not necessarily legal entity
3. Viewed from reporting entity 3. Consolidated FS
perspective 4. Unconsolidated FS
4. Going concern assumption

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6. CHAPTER 3: FINANCIAL STATEMENTS
AND THE REPORTING ENTITY

Objective and scope of financial statements

• a particular form of financial report that provide financial information
about an entity’s assets, liabilities, equity, income and expenses
• is decision-useful in assessing the prospects for future net cash inflows
• useful in assessing management’s stewardship of entity’s economic
resources

Reporting period
• financial statements are prepared for a specified period of time (the
reporting period)

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6. CHAPTER 3: FINANCIAL STATEMENTS
AND THE REPORTING ENTITY

Reporting entity
• an entity that is required, or chooses, to prepare financial statements
• is not necessarily a legal entity – could be a portion of an entity or comprise
more than one entity
• ‘boundary’ of a reporting entity – determined by considering user info needs

Consolidated and unconsolidated financial statements

• Consolidated FS provide information about assets, liabilities, income and
expenses of both the parent + subsidiaries as a single reporting entity
• ‘Unconsolidated’ financial statements and ‘combined' financial statements

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

Elements relating to: Elements relating to:

Financial position Financial performance

Asset Income

Liability Expenses

Equity

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

is a present economic resource An economic resource:

• is a right
Asset
• that has the
potential
controlled by the entity • to produce
economic benefits

as a result of past events

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

7.1 What are the three key aspects to the definition of an asset?
Three key aspects of the
definitions of assets
/economic resources

Potential to
Right produce economic Control
benefits

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

Right Potential to produce EB Control

• may or may not • EB need not be • control links an
correspond to certain, or even likely economic resource to
obligation of another • probability of EB may an entity
party be low • entity controls if it has
• may be established by • economic resource is the present ability to
contract, legislation or the present right, , not direct the use of the
in other ways the future EB that the economic resource
• not all entity‘s rights right can produce • control usually arises
are assets of entity • incurring expenditure from ability to enforce
• may be uncertain a versus acquiring asset legal rights, but not
right exists always

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

is a present obligation of an entity

Liability
An obligation is a:
• duty or responsibility
• that the entity has no
to transfer an economic resource practical ability to
avoid

as a result of past events

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

7.2 What are the three key aspects to the definition of a liability?
Three criteria must be
satisfied for a liability to
exist

entity has an transfer of an present obligation as a

obligation economic resource result of past events

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

Obligation Transfer of economic Present obligation -

resource result of past events
• is a duty /responsibility • transfer of ER need • Exists only if entity has
that an entity has no not be certain, or already obtained EB or
practical ability to avoid even likely taken action , and
• not necessary to know • probability of transfer entity will/may have
identity of other party of ER may be low to transfer an ER it
• may be legal obligation • entity has obligation would otherwise not
or constructive oblig to transfer ER until have to
• entity has no practical settled, transferred • enactment of
ability to avoid if can be or replaced legislation does not in
done only by liquidation itself give rise to a PO

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS
7.3 Other concepts relating to assets and liabilities

Unit of account – is the rights/obligations or group of rights and/or obligations

to which the recognition criteria and measurement concepts are applied

Executory contract – is a contract that is equally unperformed. It establishes a

combined right and obligation to exchange economic resources

Substance of contractual rights and contractual obligations – to

represent the rights and obligations on contracts faithfully, financial statements
report their substance

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

Note:
is the residual interest in the • refers to claims that
assets of the entity
Equity
are not liabilities
• may be different
classes of equity
claims
• Definition of equity
After deducting all its liabilities applies to all
reporting entities, eg
trusts and p/ships too

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

increases in assets, or
decreases in liabilities
Income

that results in increases in

equity

other than those relating to

contributions from holders of equity
claims

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7. CHAPTER 4: THE ELEMENTS OF
FINANCIAL STATEMENTS

are decreases in assets, or

increases in liabilities
Expenses

that results in decreases in

equity

other than those relating to distributions

from holders of equity claims

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8. CHAPTER 5: RECOGNITION AND
DERECOGNITION

The Recognition Process

• is the process of capturing for inclusion in the statements of financial position
or financial performance an item that meets the definition of an element
• involves depicting an element in one of those statements in words and by a
monetary amount
• those statements depict the elements in structured summaries
• links elements, the statement of financial position and the statement of
financial performance
• initial recognition of assets & liabilities may result in the matching of income
and expenses, although matching is not the objective of the CF

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8. CHAPTER 5: RECOGNITION AND
DERECOGNITION

Recognition Criteria
• only items that meet the definition of an element are recognised in the
statement of financial position/financial performance, as the case may be
• not all items that meet the definition one of the elements are recognised
(entity may need to provide information about item in notes)
• The recognition criteria refer explicitly to the qualitative characteristics of
useful information
• recognition is only appropriate if it results in relevant information about, and
faithful representation of, the asset, liability and any resulting income ,
expenses or changes in equity

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8. CHAPTER 5: RECOGNITION AND
DERECOGNITION

Recognition Criteria
Relevance Faithful representation
Whether recognition of an item results Whether recognition of an item results
in relevant information may be in a faithful representation may be
affected by: affected by:
• existence uncertainty • measurement uncertainty
• low probability of a flow of economic • recognition inconsistency (accounting
benefits mismatch)
• presentation and disclosure
Cost constrains recognition decisions, just as it constrains financial reporting generally

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8. CHAPTER 5: RECOGNITION AND
DERECOGNITION

Derecognition
Refers to the removal of all or part of a recognised asset or liability from the
statement of financial position
Derecognise an asset when: Derecognise a liability when:
entity loses control of all or part of the entity no longer has a present
recognised asset obligation for all/part of the
recognised liability
Derecognition aims to faithfully represent both:
• any assets and liabilities retained after the transaction that led to the derecognition
• the change in the entity’s assets and liabilities as a result of the transaction/event

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9. CHAPTER 6: MEASUREMENT

Measurement
• is the quantification of elements recognised in the financial statements in
monetary terms
The chapter
• describes various measurement bases and the information they provide
• sets out the information provided by particular measurement bases
• discusses factors to consider when selecting a measurement basis
• discusses the measurement of equity
• deals with cash-flow-based measurement techniques

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9. CHAPTER 6: MEASUREMENT

Measurement Bases
(two basic systems)

Current value
Historical cost
- fair value
- historical cost
- value in use ( for assets)
- amortised cost
- fulfilment value (liabilities)
- current cost

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9. CHAPTER 6: MEASUREMENT

Measurement bases
Historical cost
• provides monetary information derived from the price of the transaction/other
event that gave rise to the item being measured
• does not reflect changes in values, unless an asset is impaired or a liability
becomes onerous
• one way to apply historical cost stem to assets & liabilities is amortised cost
Current value
• provides monetary information which is updated to reflect conditions at
measurement date
• because of updating, it reflects changes in values since the previous date
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9. CHAPTER 6: MEASUREMENT

• the price that will be received to sell an asset/paid to

transfer a liability, in an orderly transaction between
Fair value market participants at measurement date
• determined by direct observation or indirectly, using
measurement techniques
• is the present value of cash flows an entity expects to
Value in use/ derive from use of the asset/transfer to fulfil a liability
• reflects entity-specific expectations rather than
fulfilment value market assumptions about future cash flows

• is the cost of an equivalent asset at measurement date

• or the consideration that would be received for an
Current cost equivalent liability
• is an entry value, unlike FV/VIU which are exit values

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9. CHAPTER 6: MEASUREMENT

Information provided by particular measurement bases

• Historical cost – may be relevant to users as it is derived from the transaction

price and may provide useful information which have both confirmatory and
predictive values
• Fair value – may have predictive value because FV reflects market participant’s
current expectations about the amount, timing and uncertainty of future CFs
• Value in use/ fulfilment value – have predictive value in that they provide
information about the present value of the estimated cash inflows/outflows
• Current cost – may be relevant because it reflects the cost of an equivalent
asset or the consideration for an equivalent liability

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9. CHAPTER 6: MEASUREMENT

Factors to consider when selecting particular measurement bases

• necessary to consider the nature of the information that measurement basis
will produce in both statements of financial position and of performance
• no single factor determines which measurement basis is selected
• the qualitative characteristics play a role in the selection of the measurement
basis
• to be useful to users, information provided by a measurement basis must be
relevant and be a faithfully representation
• Information must also be comparable, verifiable, timely and understandable
• consider both initial measurement and subsequent measurement

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9. CHAPTER 6: MEASUREMENT

Factors to consider in selecting a measurement basis

Relevance
Relevance of information provided by a measurement basis is affected by:
Characteristics of the asset or liability Contribution to future cash flows
• the variability of cash flows • whether cash flows are produced
directly or indirectly in combination
with other economic resources
• sensitivity of the value to market • the nature of the business activities
factors/other risks of the entity

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9. CHAPTER 6: MEASUREMENT

Factors to consider in selecting a measurement basis

Faithful representation
The faithful representation of information provided by a measurement basis is
affected by:
Measurement inconsistency Measurement uncertainty
(accounting mismatch)
• measurement inconsistencies for • does not necessarily prevent the use
related assets & liabilities may not of a measurement basis if it is
faithfully represent the financial relevant
position / performance • but if too high, select different basis

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9. CHAPTER 6: MEASUREMENT

Other related factors in the selection of measurement basis

Enhancing qualitative characteristics and the cost constraint – cost
constrains the selection of a measurement basis, just as it constrains other
financial reporting decisions

Factors specific to initial measurement – using the same measurement

basis for initial measurement and subsequent measurement avoids
income/expenses solely because of a change in the basis

More than one measurement basis – in most cases, it is most

understandable to use a single measurement basis both for the asset/liability in the
statement of financial position & for income/expenses in statement of performance

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9. CHAPTER 6: MEASUREMENT

Measurement of equity

• Total carrying amount (CA) of equity is not measured directly

• It equals the total of the CA of all recognised assets less the total of the CA of all
recognised liabilities
• CA of equity not equal to market value of the equity claims on the entity
• CA of equity not equal to amount the could be raised on sale of entity
• CA of equity not equal to amount that could be raised selling all assets and settling
all liabilities
• May be appropriate to measure directly, the CA of some component of equity
• Total CA of individual class/component of equity may be negative

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9. CHAPTER 6: MEASUREMENT

Cash-flow-based measurement techniques

• These are not measurement bases, but techniques to apply measurement bases
• For example, if the measurement basis is fair value, this technique reflects the
factors applicable to the fair value measure
• Outcome uncertainties arise from uncertainties about the amount or timing of
cash flows
• In measuring assets/liabilities, consider possible variations in the estimated cash
flows in selecting a single amount from within a range
• Different central estimates are: ‘expected value’, ‘maximum amount that is more
likely than not to occur’ and the ‘most likely outcome’ approaches.

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10. CHAPTER 7: PRESENTATION AND
DISCLOSURE

Presentation and disclosure

chapter deals with:

Classification
of: Aggregation:
Presentation *Assets & May make
Presentation & and disclosure
disclosure as liabilities information
objectives more useful –
communication & principles *Equity
tools summarises
*Income & information
expenses
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10. CHAPTER 7: PRESENTATION AND
DISCLOSURE

Presentation and disclosure as communication tools

• Information about assets, liabilities, equity, income and expense is communicated

through presentation and disclosure in financial statements
• Effective communication make the information more relevant and contributes to a
faithful representation; also enhances understandability and comparability
• Effective communication requires:
focusing on objectives & Aggregating
principles (not rules) Classifying information information
Similar/dissimilar items

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10. CHAPTER 7: PRESENTATION AND
DISCLOSURE

Presentation and disclosure objectives and principles

• To facilitate effective communication , a balance is needed between giving entities

flexibility & requiring information that is comparable
• Including presentation & disclosure objectives in Standards supports effective
communication in financial statements by assisting entities to identify useful
information
• Entity-specific information is more useful than standardised or ‘boilerplate’
information
• Duplication of information in different parts of financial statements make them
less understandable

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10. CHAPTER 7: PRESENTATION AND
DISCLOSURE

Classification

• Classification is the sorting of assets, liabilities, equity, income and expenses on

the basis of shared characteristics for presentation & disclosure purposes
• The classification of assets & liabilities is applied to the unit of account selected for
an asset or liability. It may sometimes be appropriate to separate them into
components, for example short-term and long-term
• May be necessary to classify equity claims with different characteristics separately
• Income and expenses are classified and included either in profit or loss, or in other
comprehensive income (OCI)
• Items included in OCI may or may not be reclassified to profit or loss in Standards

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11. CHAPTER 8: CONCEPS OF CAPITAL AND
CAPITAL MAINTENANCE

Concepts of capital
(two concepts)

Financial concept of capital

* capital is seen as the net assets Physical concept of capital
or equity of entity * capital is seen as the productive
* concerned with the capacity of the entity
maintenance of nominal * concerned with the operating
invested capital or the capability of the entity
purchasing power

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11. CHAPTER 8: CONCEPS OF CAPITAL AND
CAPITAL MAINTENANCE

• a profit is only earned if the financial (or money)

amount at year-end exceeds the financial (or money)
Financial capital amount of net assets at beginning of year (excluding
owner’s contributions / distributions)
maintenance • measured in either nominal monetary units or units
of constant purchasing power

• a profit is earned only if the productive capacity (or

operating capability) at year-end exceeds the physical
Physical capital productive capacity at beginning of year (excluding
owners contributions/distributions)
maintenance • physical productive capacity = resources or funds
needed to achieve that capacity

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