Conceptual Framework for Financial Reporting

Conceptual Framework for Financial Reporting

• Underpins IFRS and IAS Standards.
• Guiding principles for preparing financial statements when no specific standard exists.
• Aims to promote consistency among accounting standards.
• Provides a reference point for preparers.

Purpose of the Conceptual Framework

• Assists the International Accounting Standards Board (IASB) when developing and revising standards—ensuring consistency.
• Helps preparers when an IFRS standard is not applicable or offers choices.
• Enables better understanding of IFRS Standards for all parties.
• Not a standard itself but provides a foundation.

Objective of Financial Reporting

• Provide information to present and potential investors, lenders, and creditors to support economic decisions.
• Evaluate entity's future cash flows.
• Evaluate management's stewardship of economic resources.

Qualitative Characteristics of Useful Financial Information

• Fundamental characteristics:
  • Relevance: Information influences decisions of users; considers materiality (items significantly impacting user decisions).
  • Faithful representation: Economic substance over legal form, complete, neutral, and free from error. Emphasizes prudence (avoiding overstatement).
• Enhancing characteristics:
  • Comparability: Enables year-over-year and cross-entity comparisons.
  • Timeliness: Information is current for decision-making.
  • Verifiability: Independent validation of a depiction's accuracy.
  • Understandability: Clear and concise presentation.

Cost Constraint

• Weighs the benefits of information reporting against the costs of producing it. This impacts standards development.

Financial Statements and Reporting Entity

• Financial statements: Show assets, liabilities, equity, income, and expenses. Structured in a statement of financial position and other statements like cash flow. Based on going concern assumption.
• Reporting entity: Prepares financial statements on its own or legally. Combined financial statements for multiple entities not parent/sub. Consolidated financial statements for a parent company and its subsidiaries—presenting them as a single economic entity. Unconsolidated statements also useful but incomplete.

Elements of Financial Statements

• Assets: Present economic resource controlled.
• Liabilities: Present obligation to transfer economic resource.
• Equity: Residual interest in net assets.
• Income: Increases in assets or decreases in liabilities increasing equity.
• Expenses: Decreases in assets or increases in liabilities decreasing equity.
• Other changes: Contributions and distributions to equity holders; exchanges not changing equity.

Recognition and Derecognition

• Recognition: Included in statements when it provides relevant and faithful information, meeting specific criteria of each IFRS standard; considers measurement uncertainty and probability of resource flow.
• Derecognition: Removal from financial statements when loss of control or no present obligation. Considering retained exposure to variations.

Measurement

• Bases: Historical cost and current value (fair value, value-in-use, current cost). Relevant measurement maximizes usefulness. Considers item characteristics and future cash flows.

Presentation and Disclosure

• Effective presentation and disclosure: Striking a balance between flexibility and comparability—entity-specific information preferred but comparing across entities important. Classification of components should provide more relevant information if they have different characteristics.
• Offsetting: Usually not allowed as it can hide relevant information.

Fair Value Measurement

• Definitions: Fair value and active market defined.
• Hierarchy: Fair value hierarchy described.
• Principles: Highest and best use, most advantageous, and principal market principles defined.
• Valuation technique circumstances: When an entity might use a valuation technique.