Conceptual Framework for Financial Reporting

• Conceptual Framework for Financial Reporting


  Describes the objective of, and the concepts for, general purpose financial reporting
• Purpose of the Conceptual Framework


  • Assist the International Accounting Standards Board to develop IFRS Standards based on consistent concepts
  • Assist preparers to develop consistent accounting policies
  • Assist all parties to understand and interpret the Standards
• The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework overrides any Standard or any requirement in a Standard.
• To meet the objective of general-purpose financial reporting, the Board may sometimes specify requirements that depart from aspects of the Conceptual Framework. If the Board does so, it will explain the departure in the Basis for Conclusions on that Standard.
• Objective of general-purpose financial reporting

  To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity
• Decisions that depend on the returns that existing and potential investors, lenders and other creditors expect


  • Buying, selling or holding equity and debt instruments
  • Providing or settling loans and other forms of credit
  • Exercising rights to vote on, or otherwise influence, management's actions that affect the use of the entity's economic resources
• Information needed by existing and potential investors, lenders and other creditors


  • The economic resources of the entity, claims against the entity and changes in those resources and claims
  • How efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's economic resources
• Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need.
• The Conceptual Framework establishes the concepts that underlie estimates, judgements and models used in financial reporting.
• Economic resources and claims

  Information about the nature and amounts of a reporting entity's economic resources and claims can help users to identify the reporting entity's financial strengths and weaknesses, assess its liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing, and assess management's stewardship of the entity's economic resources
• Changes in economic resources and claims


  Changes result from the entity's financial performance and from other events or transactions such as issuing debt or equity instruments
• Accrual accounting


  Depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period
• Qualitative characteristics of useful financial information


  • Relevance
  • Faithful representation
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
• Relevance


  Relevant financial information can make a difference in the decisions made by users
• Faithful representation


  Financial information must not only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it purports to represent
• Comparability


  Enables users to identify and understand similarities in, and differences among, items
• Verifiability


  Helps assure users that information faithfully represents the economic phenomena it purports to represent
• Timeliness


  Having information available to decision-makers in time to be capable of influencing their decisions
• Understandability


  Classifying, characterizing and presenting information clearly and concisely makes it understandable
• Cost is a pervasive constraint on the information that can be provided by financial reporting.
• Objective of financial statements

  • To provide financial information about the reporting entity's assets, liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and in assessing management's stewardship of the entity's economic resources
• Asset


  A present economic resource controlled by the entity as a result of past events
• 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 the entity after deducting all its liabilities
• Income


  Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims
• Expenses


  Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims
• Recognition


  The process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance
• Equity


  Shares of various types, issued by the entity; and some obligations of the entity to issue another equity claim
• Income and expenses are the elements of financial statements that relate to an entity's financial performance
• Users of financial statements need information about both an entity's financial position and its financial performance
• Recognition


  The process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income or expenses
• Recognition involves depicting the item in one of those statements—either alone or in aggregation with other items—in words and by a monetary amount and including that amount in one or more totals in that statement
• Carrying amount


  The amount at which an asset, a liability or equity is recognized in the statement of financial position
• The statement of financial position and statement(s) of financial performance depict an entity's recognized assets, liabilities, equity, income and expenses in structured summaries that are designed to make financial information comparable and understandable
• Recognition links the elements; the statement of financial position and the statement(s) of financial performance
• Only items that meet the definition of an asset, a liability or equity are recognized in the statement of financial position. Similarly, only items that meet the definition of income or expenses are recognized in the statement(s) of financial performance
• Not all items that meet the definition of one of those elements are recognized. Not recognizing an item that meets the definition of one of the elements makes the statement of financial position and the statement(s) of financial performance less complete and can exclude useful information from financial statements
• An asset or liability is recognized only if recognition of that asset or liability and of any resulting income, expenses or changes in equity provides users of financial statements with information that is useful
• Derecognition


  The removal of all or part of a recognized asset or liability from an entity's statement of financial position
• Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability