The conceptual
framework 2018
D R . F E LI N ITA R . B A R R O G A ,C PA
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The revised Conceptual Framework for Financial
Reporting (Conceptual Framework), a
comprehensive set of concepts for financial
reporting issued in March 2018.
What is a Conceptual Framework ?
" Conceptual Framework for Financial Reporting" is a document which
provides the Concepts and Objective of General Purpose Financial
Reporting.
Source: https://www.accountingkuppiya.com/2019/10/accounting-lesson-02-conceptual.html
The IFRS Framework notes that general purpose financial reports
cannot provide all the information that users may need to make
economic decisions. They will need to consider pertinent
information from other sources as well.
The IFRS Framework notes that other parties, including prudential
and market regulators, may find general purpose financial reports
useful. However, these are not considered a primary user and
general purpose financial reports are not primarily directed to
regulators or other parties.
Information About A Reporting Entity's Economic Resources, Claims, And
Changes In Resources And Claims
Economic resources and claims
Information about the nature and amounts of a reporting entity's economic resources and claims assists users to
assess that entity's financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability to
obtain financing. Information about the claims and payment requirements assists users to predict how future cash
flows will be distributed among those with a claim on the reporting entity. [1.13]
A reporting entity's economic resources and claims are reported in the statement of financial position.
Changes in economic resources and claims
Changes in a reporting entity's economic resources and claims result from that entity's performance and from
other events or transactions such as issuing debt or equity instruments. Users need to be able to distinguish
between both of these changes
Financial performance reflected by accrual accounting
Information about a reporting entity's financial performance during a period,
representing changes in economic resources and claims other than those
obtained directly from investors and creditors, is useful in assessing the entity's
past and future ability to generate net cash inflows. Such information may also
indicate the extent to which general economic events have changed the entity's
ability to generate future cash inflows.
Financial performance reflected by past cash flows
Information about a reporting entity's cash flows during the reporting period also
assists users to assess the entity's ability to generate future net cash inflows and to
assess management’s stewardship of the entity’s economic resources. This
information indicates how the entity obtains and spends cash, including information
about its borrowing and repayment of debt, cash dividends to shareholders, etc.
The changes in the entity's cash flows are presented in the statement of cash flows.
Changes in economic resources and claims not resulting
from financial performance
Information about changes in an entity's economic resources and claims resulting
from events and transactions other than financial performance, such as the issue
of equity instruments or distributions of cash or other assets to shareholders is
necessary to complete the picture of the total change in the entity's economic
resources and claims.
The changes in an entity's economic resources and claims not resulting from
financial performance is presented in the statement of changes in equity.
Information about use of the
entity’s economic resources
Information about the use of the entity's economic resources also
indicates how efficiently and effectively the reporting entity’s
management has used these resources in its stewardship of those
resources. Such information is also useful for predicting how
efficiently and effectively management will use the entity’s
economic resources in future periods and, hence, what the
prospects for future net cash inflows are.
Fundamental Qualities
Enhancing qualities
Applying the enhancing qualitative characteristics
Enhancing qualitative characteristics should be maximized to the extent necessary.
However, enhancing qualitative characteristics (either individually or collectively)
cannot render information useful if that information is irrelevant or not
represented faithfully.
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general
purpose financial reporting. Reporting such information imposes costs and those
costs should be justified by the benefits of reporting that information. The IASB
assesses costs and benefits in relation to financial reporting generally, and not
solely in relation to individual reporting entities. The IASB will consider whether
different sizes of entities and other factors justify different reporting requirements
in certain situations.
Objective and scope of financial statements
The objective of financial statements is to provide information
about an entity's assets, liabilities, equity, income and expenses
that is useful to financial statements users in assessing the
prospects for future net cash inflows to the entity and in assessing
management's stewardship of the entity's resources.
This information is provided in the statement of financial position
and the statement(s) of financial performance as well as in other
statements and notes.
Reporting period
Financial statements are prepared for a specified period of time and provide
comparative information and under certain circumstances forward-looking
information.
Perspective adopted in financial statements and going concern assumption
Financial statements provide information about transactions and other events
viewed from the perspective of the reporting entity as a whole and are
normally prepared on the assumption that the reporting entity is a going
concern and will continue in operation for the foreseeable future.
The Reporting Entity
A reporting entity is an entity that is required, or chooses, to prepare
financial statements. It can be a single entity or a portion of an entity or
can comprise more than one entity. A reporting entity is not necessarily a
legal entity.
Determining the appropriate boundary of a reporting entity is driven by the
information needs of the primary users of the reporting entity’s financial
statements.
Consolidated and unconsolidated financial statements
Generally, consolidated financial statements are more likely to provide
useful information to users of financial statements than unconsolidated
financial statements.
Underlying assumption
The IFRS Framework states that the going concern assumption is an
underlying assumption. Thus, the financial statements presume that an
entity will continue in operation indefinitely or, if that presumption is not
valid, disclosure and a different basis of reporting are required.
This chapter defines the five elements of financial statements—an asset, a
liability, equity, income and expenses.
Main changes in the definition of an asset
Separate definition of an economic resource—to clarify that an asset is the economic
resource, not the ultimate inflow of economic benefits
deletion of ‘expected flow’—it does not need to be certain, or even likely, that
economic benefits will arise
Main changes in the definition of a liability
separate definition of an economic resource—to clarify that a liability is the obligation
to transfer the economic resource, not the ultimate outflow of economic benefits
deletion of ‘expected flow’—with the same implications as set out above for an asset
introduction of the ‘no practical ability to avoid’ criterion to the definition of
obligation
Revised definition of 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
Revised definition of 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
Although income and expenses are defined in terms of changes in assets
and liabilities, information about income and expenses is just as important
as information about assets and liabilities.
This chapter discusses criteria for including assets and liabilities in financial statements
(recognition) and guidance on when to remove them (derecognition).
