The conceptual framework serves as a guiding light, outlining the fundamental concepts underlying financial accounting. Although it is not a standard in itself, it assists:
The International Accounting Standards Board (IASB) in developing new standards.
Preparers of financial statements in creating consistent and appropriate accounting policies when no specific standard applies to a particular transaction or when a choice exists among standards.
Users of financial statements in understanding and interpreting International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).
It is important to note that when developing an accounting policy for a transaction not explicitly addressed by IFRS, guidance from IFRS and IFRIC interpretations for similar transactions takes precedence over guidance from the framework.
Functions of the Conceptual Framework
- The framework defines the purpose, characteristics, types of reporting entities, and the financial statements. It:
- Identifies the elements of financial statements, including assets, liabilities, income, and expenses.
- Provides principles for the recognition, measurement, and presentation of these elements.
Structure of the Conceptual Framework
The framework is structured into eight chapters.
Chapter 1: The Objective of General Purpose Financial Reporting
The primary objective of financial reporting under IFRS is to provide useful information to users for making economic decisions. The information should be relevant, reliable, comparable, and understandable.
This chapter describes the purpose, limitations, and primary users of general-purpose financial statements.
" General purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help existing and potential investors, lenders and other creditors to estimate the value of the reporting entity. "
Chapter 2: Qualitative Characteristics of Useful Financial Information
Financial information should possess certain qualitative characteristics to be deemed useful. Two fundamental characteristics are:
Relevance: Information that influences users' decisions.
Faithful Presentation: Information that is accurate and unbiased.
The four enhancing characteristics are:
- Comparability
- Verifiability
- Timeliness
- Understandability
Chapter 3: Financial Statements and the Reporting Entity
This chapter defines general-purpose financial statements, reporting entities, and reporting periods. The framework specifies that financial information is provided in the statement of financial position, statement of financial performance, other statements, and notes. Financial statements are prepared for a specified period.
" Financial statements provide information about transactions and other events viewed from the perspective of the reporting entity as a whole, not from the perspective of any particular group of the entity’s existing or potential investors, lenders or other creditors."
Chapter 4: The Elements of Financial Statements
The framework defines five main elements of financial statements:
Asset: A present economic resource controlled by the entity as a result of past events, expected to generate future economic inflows.
Liability: A present obligation of the entity to transfer an economic resource as a result of past events.
Equity: The residual interest in the assets of an entity after deducting all its liabilities.
Income: An increase in assets or a decrease in liabilities that results in an increase in equity, excluding contributions from holders of equity claims.
Expense: A decrease in assets or an increase in liabilities that results in a decrease in equity, excluding distributions to holders of equity claims.
Chapter 5: Recognition and Derecognition
This chapter guides the recognition and measurement of items in financial statements, outlining the processes of adding and removing elements, such as assets or liabilities.
Chapter 6: Measurement
The framework identifies two measurement bases for quantifying the elements of financial statements in monetary terms: historical cost and current value.
Current value measurement bases include:
Fair Value: The exit price to sell an asset or settle a liability.
Value in Use: The present value of future cash flows from the use and disposal of an asset.
Current Cost: The cost of an equivalent asset.
Chapter 7: Presentation and Disclosure
The framework outlines principles for presenting and disclosing information in financial statements. It includes guidelines on the structure and format of financial statements, as well as the disclosure of additional information to enhance user understanding.
The framework assumes that the reporting entity is a going concern, meaning it will continue its operations in the foreseeable future, unless there is evidence to the contrary. This assumption significantly affects the preparation and presentation of financial statements.
Chapter 8: Concepts of Capital and Capital Maintenance
This chapter distinguishes between two financial concepts of capital:
Financial Capital: The net assets or equity of an entity.
Physical Capital: The operating capacity of the entity.
It specifies that the appropriate capital concept should be applied based on user needs, although some measurement difficulties may arise in operationalizing this concept.
Conclusion
Overall, the conceptual framework for IFRS provides a foundation for consistent and transparent financial reporting, ensuring that financial statements are prepared in a manner that is useful to users.
Further Resources
IFRS Navigator Conceptual Framework
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