Conceptual Framework

Conceptual Framework
The Conceptual Framework for Financial Reporting
The Conceptual Framework was issued by the IASB in September 2010. It superseded the
Framework for the Preparation and Presentation of Financial Statements.
© IFRS Foundation A21

CONTENTS
paragraphs
FOREWORD
THE CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
INTRODUCTION
Purpose and status
Scope
CHAPTERS
1 The objective of general purpose financial
reporting
The reporting entity to be added
Qualitative characteristics of useful financial information
The Framework (1989): the remaining text
Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of the elements of financial statements
Concepts of capital and capital maintenance
OB1–OB21
2
3
4
QC1–QC39
4.1
4.2–4.36
4.37–4.53
4.54–4.56
4.57–4.65
APPROVAL BY THE BOARD OF THE CONCEPTUAL FRAMEWORK
2010
BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3
TABLE OF CONCORDANCE
A22 © IFRS Foundation
FOR THE ACCOMPANYING DOCUMENTS BELOW, SEE PART B OF THIS EDITION

Foreword
The International Accounting Standards Board is currently in the process of updating its
conceptual framework. This conceptual framework project is conducted in phases.
As a chapter is finalised, the relevant paragraphs in the Framework for the Preparationand
Presentation of Financial Statements that was published in 1989 will be replaced. When the
conceptual framework project is completed, the Board will have a complete,
comprehensive and single document called the Conceptual Framework forFinancial Reporting.
This version of the Conceptual Framework includes the first two chapters the Board published
as a result of its first phase of the conceptual framework project—Chapter 1 The objective of
general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial
information. Chapter 2 will deal with the reporting entity concept. The Board published an
exposure draft on this topic in March 2010 with a comment period that ended on
16 July 2010. Chapter 4 contains the remaining text of the Framework (1989). The table of
concordance, at the end of this publication, shows how the contents of the Framework
(1989) and the Conceptual Framework (2010) correspond.

Introduction
Financial statements are prepared and presented for external users by many entities
around the world. Although such financial statements may appear similar from country
to country, there are differences which have probably been caused by a variety of social,
economic and legal circumstances and by different countries having in mind the needs of
different users of financial statements when setting national requirements.
These different circumstances have led to the use of a variety of definitions of the elements
of financial statements: for example, assets, liabilities, equity, income and expenses. They
have also resulted in the use of different criteria for the recognition of items in the
financial statements and in a preference for different bases of measurement. The scope of
the financial statements and the disclosuresmade in them have also been affected.
The International Accounting Standards Board is committed to narrowing these
differences by seeking to harmonise regulations, accounting standards and procedures
relating to the preparation and presentation of financial statements. It believes that
further harmonisation can best be pursued by focusing on financialstatements that are
prepared for the purpose of providing information that is useful in making economic
decisions.
The Board believes that financialstatements prepared for this purpose meet the common
needs of most users. This is because nearly all users are making economic decisions, for
example:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
to decidewhen to buy, hold or sell an equity investment.
to assess the stewardshipor accountability of management.
to assess the abilityof the entity to pay and provideother benefits to its employees.
to assess the securityfor amounts lent to the entity.
to determine taxation policies.
to determine distributable profits and dividends.
to prepare and use national income statistics.
to regulate the activitiesof entities.
The Board recognises,however, that governments, in particular, may specify different or
additional requirements for their own purposes. These requirements should not, however,
affect financial statements published for the benefit of other users unless they also meet
the needs of those other users.
Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financialcapitalmaintenance
concept. Other models and concepts may be more appropriate in order to meet the
objective of providing information that is useful for making economic decisions although
there is at present no consensus for change. This Conceptual Framework has been developed
so that it is applicable to a range of accounting models and concepts of capital and capital
maintenance.
The Introduction has been carried forward from the Framework (1989). This will be updated
when the IASB considers the purpose of the Conceptual Framework. Until then, the purpose and
the status of the Conceptual Framework are the same as before.

Purpose and status
This Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the Conceptual
Framework is:
(a) to assistthe Board in the development of future IFRSs and in its review of existing
IFRSs;
(b) to assist the Board in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs;
(c) to assistnational standard-settingbodies in developing national standards;
(d) to assist preparers of financial statements in applying IFRSs and in dealing with
topicsthat have yet to form the subjectof an IFRS;
(e) to assist auditors in forming an opinion on whether financial statements comply
with IFRSs;
(f) to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs; and
(g) to provide those who are interested in the work of the IASB with information about
its approachto the formulation of IFRSs.
This ConceptualFramework is not an IFRS and hence does not define standards for any
particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides
any specific IFRS.
The Board recognisesthat in a limited number of cases there may be a conflict between the
Conceptual Framework and an IFRS. In those cases wherethere is a conflict,the requirements
of the IFRS prevail over those of the Conceptual Framework. As, however, the Board will be
guided by the Conceptual Framework in the development of future IFRSs and in its review of
existing IFRSs,the number of cases of conflict between the Conceptual Framework and IFRSs
will diminish through time.
The Conceptual Framework will be revised from time to time on the basis of the Board’s
experience of working with it.
Scope
The Conceptual Framework deals with:
(a) the objective of financial reporting;
(b) the qualitative characteristicsof useful financial information;
(c) the definition, recognition and measurement of the elements from which financial
statements are constructed; and
(d) concepts of capital and capital maintenance.

CHAPTER 1: THE OBJECTIVE OF GENERAL
PURPOSE
FINANCIAL REPORTING
paragraphs
OB1INTRODUCTION
OBJECTIVE, USEFULNESS AND LIMITATIONS OF GENERAL
PURPOSE FINANCIAL REPORTING
INFORMATION ABOUT A REPORTING ENTITY’S ECONOMIC
RESOURCES, CLAIMS, AND CHANGES IN RESOURCES AND
CLAIMS
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 and claims not resulting from
financial performance
OB2–OB11
OB12–OB21
OB13–OB14
OB15–OB21
OB17–OB19
OB20
OB21

Chapter 1: The objective of general purpose financial
reporting
Introduction
OB1 The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspectsof the Conceptual Framework—areporting entity
concept, the qualitative characteristics of, and the constraint on, useful financial
information, elements of financial statements, recognition, measurement,
presentation and disclosure—flow logically from the objective.
Objective, usefulness and limitations of general purpose financial
reporting
The objective of general purpose financial reporting* is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying, selling or holding equity
and debt instruments, and providing or settling loans and other forms of credit.
OB2
OB3 Decisions by existing and potential investors about buying, selling or holding
equity and debt instruments depend on the returns that they expect from an
investment in those instruments, for example dividends, principal and interest
payments or market price increases. Similarly, decisions by existing and
potential lenders and other creditors about providing or settling loans and other
forms of credit depend on the principal and interest payments or other returns
that they expect. Investors’, lenders’ and other creditors’ expectations about
returns dependon their assessmentof the amount, timingand uncertaintyof (the
prospects for) future net cash inflows to the entity. Consequently, existing and
potential investors, lenders and other creditors need information to help them
assess the prospects for future net cash inflows to an entity.
OB4 To assess an entity’s prospects for future net cash inflows, existing and potential
investors, lenders and other creditors need information about the resources of the entity,
claims against the entity, and how efficiently and effectively the entity’s management
and governing board† have discharged their responsibilities to use
the entity’s resources. Examples of such responsibilities include protecting the
entity’s resources from unfavourable effects of economic factors such as price and
technological changes and ensuringthat the entity complieswith applicablelaws,
regulations and contractual provisions. Information about management’s
discharge of its responsibilities is also useful for decisions by existing investors,
lenders and other creditors who have the right to vote on or otherwise influence
management’s actions.
* Throughout this Conceptual Framework, the terms financial reports and financial reporting refer to
general purpose financial reports and general purpose financial reporting unless specifically indicated
otherwise.
† Throughout this Conceptual Framework, the term management refers to management and the governing
boardof an entity unless specificallyindicated otherwise.

OB5 Many existing and potential investors,lenders and other creditorscannot 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. Consequently, they are the primary users to whom general purpose
financial reports are directed.
OB6 However, general purpose financial reports do not and cannot provide all of the
information that existing and potential investors, lenders and other creditors
need. Those users need to considerpertinent information from other sources,for
example, general economic conditions and expectations, political events and
political climate, and industry and company outlooks.
OB7 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.
OB8 Individual primary users have different, and possibly conflicting, information
needs and desires. The Board, in developing financial reporting standards, will
seek to provide the information set that will meet the needs of the maximum
number of primary users. However, focusing on common information needs does
not prevent the reporting entity from including additional information that is
most useful to a particular subset of primary users.
OB9 The management of a reporting entity is also interested in financial information
about the entity. However, management need not rely on general purpose
financial reports because it is able to obtain the financial information it needs
internally.
OB10 Other parties, such as regulators and members of the publicother than investors,
lenders and other creditors, may also find general purpose financial reports
useful. However, those reports are not primarily directed to these other groups.
OB11 To a large extent, financial reports are based on estimates, judgements and
models rather than exact depictions. The Conceptual Frameworkestablishes the
conceptsthat underlie those estimates, judgements and models. The conceptsare
the goal towards which the Board and preparers of financial reports strive.
As with most goals, the Conceptual Framework’s vision of ideal financial reporting is
unlikely to be achieved in full, at leastnot in the short term, becauseit takes time
to understand, accept and implement new ways of analysing transactions and
other events. Nevertheless, establishing a goal towards which to strive is essential
if financial reporting is to evolve so as to improve its usefulness.
Information about a reporting entity’s economic resources, claims,
and changes in resources and claims
OB12 Generalpurpose financial reports provideinformation about the financialposition
of a reporting entity, which is information about the entity’s economic resources
and the claims against the reporting entity. Financial reports also provide
information about the effects of transactions and other events that change a
reporting entity’s economic resources and claims. Both types of information
provideuseful input for decisionsabout providing resources to an entity.

Economic resources and claims
OB13 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. That information can help users to assess the
reporting entity’s liquidity and solvency, its needs for additional financingand
how successful it is likely to be in obtaining that financing. Information about
prioritiesand payment requirements of existing claims helps users to predict how
future cash flows will be distributed among those with a claim against the
reporting entity.
OB14 Different types of economic resources affect a user’s assessment of the reporting
entity’s prospects for future cash flows differently. Some future cash flows result
directly from existing economic resources, such as accounts receivable. Other
cash flows result from using several resources in combination to produce and
market goods or services to customers. Although those cash flows cannot be
identified with individual economic resources (or claims), users of financial
reports need to know the nature and amount of the resources availablefor use in
a reporting entity’s operations.
Changes in economic resources and claims
OB15 Changes in a reporting entity’s economic resources and claims result from that
entity’s financial performance (see paragraphs OB17–OB20) and from other
events or transactions such as issuing debt or equity instruments (see paragraph
OB21). To properly assess the prospectsfor future cash flows from the reporting
entity, users need to be able to distinguish betweenboth of these changes.
OB16 Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources.
Information about the return the entity has produced provides an indication of
how well management has discharged its responsibilities to make efficient and
effective use of the reporting entity’s resources. Information about the variability
and components of that return is also important, especially in assessing the
uncertainty of future cash flows. Information about a reporting entity’s past
financial performance and how its management discharged its responsibilities is
usually helpful in predicting the entity’s future returns on its economic
resources.
Financial performance reflected by accrual accounting
OB17 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. This is important because information
about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for
assessing the entity’s past and future performancethan information solely about
cash receipts and payments during that period.

OB18 Information about a reporting entity’s financial performance during a period,
reflected by changes in its economic resources and claimsother than by obtaining
additional resources directly from investors and creditors (see paragraph OB21),
is useful in assessing the entity’s past and future ability to generate net cash
inflows. That information indicatesthe extent to whichthe reporting entity has
increased its available economic resources, and thus its capacity for generating
net cash inflows through its operations rather than by obtaining additional
resources directly from investors and creditors.
OB19 Information about a reporting entity’s financial performance during a period
may also indicate the extent to which events such as changes in market prices or
interest rates have increased or decreased the entity’s economic resources and
claims, thereby affecting the entity’s ability to generate net cash inflows.
Financial performance reflected by past cash flows
OB20 Information about a reporting entity’scash flows during a period also helps users
to assess the entity’sabilityto generate future net cash inflows. It indicates how
the reporting entity obtains and spends cash, including information about its
borrowing and repayment of debt, cash dividends or other cash distributions to
investors, and other factors that may affect the entity’s liquidity or solvency.
Information about cash flows helps users understand a reporting entity’s
operations, evaluate its financing and investing activities, assess its liquidity or
solvency and interpret other information about financialperformance.
Changes in economic resources and claims not resulting from
financial performance
OB21 A reporting entity’s economic resources and claims may also change for reasons
other than financial performance, such as issuing additional ownership shares.
Information about this type of change is necessary to give users a complete
understanding of why the reporting entity’s economic resources and claims
changed and the implications of those changes for its future financial
performance.

CHAPTER 2: THE REPORTING
ENTITY
[to be added]

CHAPTER 3: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
paragraphs
INTRODUCTION
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
Fundamental qualitative characteristics
Relevance
Materiality
Faithful representation
Applying the fundamental qualitative characteristics
Enhancing qualitative characteristics
Comparability
Verifiability
Timeliness
Understandability
Applying the enhancing characteristics
THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING
QC1–QC3
QC4–QC34
QC5–QC18
QC6–QC11
QC11
QC12–QC16
QC17–QC18
QC19–QC34
QC20–QC25
QC26–QC28
QC29
QC30–QC32
QC33–QC34
QC35–QC39

Chapter 3: Qualitative characteristics of useful financial
information
Introduction
QC1 The qualitative characteristics of useful financial information discussed in this
chapter identify the types of information that are likely to be most useful to the
existing and potential investors, lenders and other creditorsfor making decisions
about the reporting entity on the basis of information in its financial report
(financial information).
QC2 Financial reports provide information about the reporting entity’s economic
resources, claims against the reporting entity and the effects of transactionsand
other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the
economic phenomena.) Some financial reports also include explanatory material
about management’s expectations and strategies for the reporting entity, and
other types of forward-looking information.
The qualitative characteristics of useful financial information* apply to financial
information provided in financial statements, as well as to financial information
provided in other ways. Cost, which is a pervasive constraint on the reporting
entity’s ability to provide useful financial information, applies similarly.
However, the considerations in applying the qualitative characteristics and the
cost constraint may be different for different types of information. For example,
applying them to forward-looking information may be different from applying
them to information about existing economic resources and claims and to
changes in those resources and claims.
QC3
Qualitative characteristics of useful financial information
QC4 If financial information is to be useful, it must be relevant and faithfully
represent what it purports to represent. The usefulness of financial information
is enhanced if it is comparable, verifiable, timely and understandable.
Fundamental qualitative characteristics
QC5 The fundamental qualitative characteristicsare relevance and faithful representation.
Relevance
QC6 Relevant financial information is capable of making a difference in the decisions
made by users. Information may be capable of making a difference in a decision
even if some users choose not to take advantage of it or are already aware of it
from other sources.
QC7 Financial information is capable of making a difference in decisions if it has
predictive value, confirmatory value or both.
* Throughout this Conceptual Framework, the terms qualitative characteristics and constraint refer to the
qualitative characteristics of, and the constraint on, useful financial information.

QC8 Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes. Financial information
need not be a prediction or forecast to have predictive value. Financial
information with predictive value is employed by users in making their own
predictions.
QC9 Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations.
QC10 The predictive value and confirmatory value of financial information are
interrelated. Information that has predictive value often also has confirmatory
value. For example, revenue information for the current year, which can be used
as the basis for predicting revenues in future years, can also be compared with
revenue predictions for the current year that were made in pastyears. The results
of those comparisons can help a user to correct and improve the processesthat
were used to make those previous predictions.
Materiality
QC11 Information is material if omitting it or misstating it could influence decisions
that users make on the basis of financial information about a specific reporting
entity. In other words, materiality is an entity-specific aspect of relevance based
on the nature or magnitude, or both, of the items to which the information
relates in the context of an individual entity’s financial report. Consequently, the
Board cannot specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation.
Faithful representation
QC12 Financial reports represent economic phenomena in words and numbers. To be
useful,financialinformation must not only represent relevant phenomena, but it
must also faithfullyrepresent the phenomenathat it purports to represent. To be
a perfectly faithful representation, a depiction would have three characteristics.
It would be complete,neutral and freefrom error. Of course, perfection is seldom, if
ever, achievable. The Board’s objective is to maximisethose qualities to the extent
possible.
QC13 A complete depiction includes all information necessaryfor a user to understand
the phenomenon being depicted, including all necessary descriptions and
explanations. For example, a complete depiction of a group of assets would
include, at a minimum, a description of the nature of the assets in the group, a
numerical depictionof all of the assets in the group, and a description of what the
numerical depiction represents (for example, original cost, adjusted cost or fair
value). For some items, a complete depiction may also entail explanations of
significant facts about the quality and nature of the items, factors and
circumstancesthat might affect their qualityand nature, and the processused to
determine the numerical depiction.

QC14 A neutral depiction is without bias in the selectionor presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised,
de-emphasised or otherwise manipulated to increase the probabilitythat
financial information will be received favourably or unfavourably by users.
Neutral information does not mean information with no purpose or no influence
on behaviour. On the contrary, relevant financial information is, by definition,
capable of making a difference in users’ decisions.
QC15 Faithful representation does not mean accurate in all respects. Free from error
means there are no errors or omissions in the description of the phenomenon,
and the processused to produce the reported information has been selected and
applied with no errors in the process. In this context, free from error does not
mean perfectly accurate in all respects. For example, an estimate of an
unobservable price or value cannot be determined to be accurate or inaccurate.
However, a representation of that estimate can be faithful if the amount is
described clearly and accurately as being an estimate, the nature and limitations
of the estimating process are explained, and no errors have been made in
selecting and applying an appropriate processfor developing the estimate.
QC16 A faithful representation, by itself, does not necessarily result in useful
information. For example, a reporting entity may receive property, plant and
equipment through a government grant. Obviously, reporting that an entity
acquired an asset at no cost would faithfully represent its cost, but that
information would probably not be very useful. A slightly more subtle example
is an estimate of the amount by which an asset’s carrying amount should be
adjusted to reflect an impairment in the asset’s value. That estimate can be a
faithful representation if the reporting entity has properly applied an appropriate
process, properly described the estimate and explained any uncertainties that
significantlyaffect the estimate. However, if the level of uncertainty in such an
estimate is sufficiently large, that estimate will not be particularly useful. In
other words, the relevance of the asset being faithfully represented is
questionable. If there is no alternativerepresentation that is more faithful, that
estimate may provide the best available information.
Applying the fundamental qualitative characteristics
QC17 Information must be both relevant and faithfully represented if it is to be useful.
Neither a faithful representation of an irrelevant phenomenon nor an unfaithful
representation of a relevant phenomenon helps users make good decisions.
QC18 The most efficient and effective process for applying the fundamental qualitative
characteristics would usually be as follows (subject to the effects of enhancing
characteristicsand the cost constraint, whichare not considered in this example).
First, identify an economic phenomenon that has the potential to be useful to
users of the reporting entity’s financial information. Second, identifythe type of
information about that phenomenon that wouldbe most relevant if itis available
and can be faithfully represented. Third, determine whether that information is
available and can be faithfully represented. If so, the process of satisfying the
fundamental qualitative characteristics ends at that point. If not, the processis
repeated with the next most relevant type of information.

Enhancing qualitative characteristics
QC19 Comparability, verifiability, timeliness and understandability are qualitative
characteristicsthat enhance the usefulnessof information that is relevant and
faithfully represented. The enhancing qualitative characteristics may also help
determine which of two ways should be used to depict a phenomenon if both are
considered equally relevant and faithfully represented.
Comparability
QC20 Users’ decisions involve choosing between alternatives, for example, selling or
holding an investment, or investing in one reporting entity or another.
Consequently, information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar
information about the same entity for another period or another date.
QC21 Comparability is the qualitative characteristicthat enablesusers to identify and
understand similarities in, and differences among, items. Unlike the other
qualitative characteristics, comparability does not relate to a single item.
A comparison requires at least two items.
QC22 Consistency, although related to comparability, is not the same. Consistency
refers to the use of the same methods for the same items, either from period to
period within a reporting entity or in a single period across entities.
Comparability is the goal; consistency helps to achievethat goal.
QC23 Comparability is not uniformity. For information to be comparable, like things
must look alike and different things must look different. Comparability of
financial information is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look different.
QC24 Some degree of comparability is likely to be attained by satisfying the
fundamental qualitative characteristics. A faithful representation of a relevant
economic phenomenon should naturally possess some degree of comparability
with a faithful representation of a similar relevant economic phenomenon by
another reporting entity.
QC25 Although a single economic phenomenon can be faithfully represented in
multiple ways, permitting alternative accounting methods for the same
economic phenomenon diminishes comparability.
Verifiability
QC26 Verifiability helps assure users that information faithfully represents the
economic phenomena it purports to represent. Verifiability means that different
knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful
representation. Quantifiedinformation need not be a singlepoint estimate to be
verifiable. A range of possibleamounts and the related probabilitiescan also be
verified.

QC27 Verification can be direct or indirect. Direct verification means verifying an
amount or other representation through direct observation, for example, by
countingcash. Indirect verificationmeans checkingthe inputsto a model, formula
or other technique and recalculating the outputs using the same methodology.
An example is verifying the carryingamount of inventory by checking the inputs
(quantities and costs) and recalculating the ending inventory using the same cost
flow assumption (for example, using the first-in, first-out method).
QC28 It may not be possible to verify some explanations and forward-looking financial
information until a future period, if at all. To help users decide whether they
want to use that information, it would normally be necessary to disclose the
underlying assumptions, the methods of compiling the information and other
factors and circumstancesthat support the information.
Timeliness
QC29 Timeliness means having information availableto decision-makers in time to be
capableof influencing their decisions. Generally, the olderthe information is the
less usefulit is. However, some information may continue to be timely long after
the end of a reporting period because, for example, some users may need to
identify and assess trends.
Understandability
QC30 Classifying, characterising and presenting information clearly and concisely
makes it understandable.
QC31 Some phenomena are inherently complex and cannot be made easy to
understand. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to
understand. However, those reports would be incomplete and therefore
potentially misleading.
QC32 Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the information
diligently. At times, even well-informed and diligent users may need to seek the
aid of an adviser to understand information about complex economic
phenomena.
Applying the enhancing qualitative characteristics
QC33 Enhancing qualitative characteristics should be maximised to the extent possible.
However, the enhancing qualitative characteristics, either individually or as a
group, cannot make information useful if that information is irrelevant or not
faithfully represented.
QC34 Applying the enhancing qualitative characteristics is an iterative process that
does not follow a prescribed order. Sometimes, one enhancing qualitative
characteristic may have to be diminished to maximise another qualitative
characteristic. For example, a temporary reduction in comparability as a result of
prospectively applying a new financial reporting standard may be worthwhile to
improve relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for non-comparability.

The cost constraint on useful financial reporting
QC35 Cost is a pervasive constrainton the informationthat can be provided by financial
reporting. Reporting financial information imposes costs, and it is important
that those costsare justified by the benefitsof reportingthat information. There
are several types of costs and benefits to consider.
QC36 Providers of financial information expend most of the effort involved in
collecting, processing, verifying and disseminating financial information, but
users ultimately bear those costs in the form of reduced returns. Users of
financial information also incur costs of analysing and interpreting the
information provided. If needed information is not provided, users incur
additional costs to obtain that information elsewhereor to estimate it.
QC37 Reportingfinancial information that is relevant and faithfully represents what it
purports to represent helps users to make decisions with more confidence. This
results in more efficient functioning of capitalmarkets and a lower cost of capital
for the economyas a whole. An individual investor, lender or other creditor also
receives benefits by making more informed decisions. However, it is not possible
for general purpose financial reports to provide all the information that every
user finds relevant.
QC38 In applying the cost constraint, the Board assesses whether the benefits of
reporting particular information are likely to justifythe costs incurred to provide
and use that information. When applying the cost constraint in developing a
proposed financial reporting standard, the Board seeks information from
providers of financial information, users, auditors, academics and others about
the expected nature and quantity of the benefits and costs of that standard.
In most situations, assessments are based on a combination of quantitative and
qualitative information.
QC39 Because of the inherent subjectivity, different individuals’ assessments of the
costs and benefits of reporting particular items of financialinformation will vary.
Therefore, the Board seeks to consider costs and benefits in relation to financial
reporting generally, and not just in relation to individual reporting entities. That
does not mean that assessmentsof costs and benefits always justify the same
reporting requirements for all entities. Differences may be appropriate because
of different sizes of entities, different ways of raising capital (publicly or
privately),different users’ needs or other factors.

CHAPTER 4: THE 1989 FRAMEWORK:
THE REMAINING TEXT
paragraphs
4.1
4.1
4.2–4.36
4.4–4.7
4.8–4.14
4.15–4.19
4.20–4.23
4.24–4.28
4.29–4.32
4.33–4.35
4.36
4.37–4.53
4.40
4.41–4.43
4.44–4.45
4.46
4.47–4.48
4.49–4.53
4.54–4.56
4.57–4.65
4.57–4.58
4.59–4.65
UNDERLYING ASSUMPTION
Going concern
THE ELEMENTS OF FINANCIAL STATEMENTS
Financial position
Assets
Liabilities
Equity
Performance
Income
Expenses
Capital maintenance adjustments
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS
The probability of future economic benefit
Reliability of measurement
Recognition of assets
Recognition of liabilities
Recognition of income
Recognition of expenses
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
Concepts of capital
Concepts of capital maintenance and the determination of profit

Chapter 4: The Framework (1989): the remaining text
Underlying assumption
Going concern
4.1 The financialstatements are normally prepared on the assumptionthat an entity
is a going concern and will continue in operation for the foreseeable future.
Hence, it is assumed that the entity has neither the intention nor the need to
liquidate or curtail materiallythe scale of its operations; if such an intention or
need exists, the financialstatements may have to be prepared on a different basis
and, if so, the basis used is disclosed.
The elements of financial statements
4.2 Financial statements portray the financial effectsof transactions and other events
by grouping them into broad classes according to their economic characteristics.
These broad classes are termed the elements of financial statements.
The elements directly related to the measurement of financial position in the
balance sheet are assets, liabilities and equity. The elements directly related to
the measurement of performance in the income statement are income and
expenses. The statement of changes in financial position usually reflects income
statement elements and changes in balance sheet elements; accordingly, this
Conceptual Framework identifies no elements that are unique to this statement.
4.3 The presentation of these elements in the balance sheet and the income
statement involves a process of sub-classification. For example, assets and
liabilities may be classified by their nature or function in the business of the
entity in order to display information in the manner most useful to users for
purposes of making economic decisions.
Financial position
4.4 The elements directly related to the measurement of financial position are assets,
liabilities and equity. These are defined as follows:
(a) An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expectedto flow to the entity.
(b) A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outf low from the entity of
resources embodying economic benefits.
The remaining text of the Framework for the Preparation and Presentation of Financial
Statements (1989) has not been amended to reflect changes made by IAS 1 Presentation of
Financial Statements (as revised in 2007).
The remaining text will also be updated when the Board has considered the elements of financial
statements and their measurement bases.

(c) Equity is the residual interest in the assets of the entity after deducting all
its liabilities.
4.5 The definitions of an asset and a liability identify their essential features but do
not attempt to specify the criteriathat need to be met before they are recognised
in the balancesheet. Thus, the definitions embraceitems that are not recognised
as assets or liabilities in the balancesheet becausethey do not satisfy the criteria
for recognition discussed in paragraphs 4.37–4.53. In particular, the expectation
that future economic benefits will flow to or from an entity must be sufficiently
certain to meet the probability criterion in paragraph 4.38 before an asset or
liability is recognised.
4.6 In assessingwhether an item meets the definition of an asset, liability or equity,
attention needs to be given to its underlying substance and economic reality and
not merely its legal form. Thus, for example, in the case of finance leases, the
substance and economic reality are thatthe lessee acquires the economic benefits
of the use of the leased asset for the major part of its useful life in return for
entering into an obligation to pay for that right an amount approximatingto the
fair value of the asset and the related finance charge. Hence, the finance lease
gives rise to items that satisfy the definition of an asset and a liability and are
recognised as such in the lessee’s balance sheet.
4.7 Balance sheets drawn up in accordancewith current IFRSs may include items that
do not satisfy the definitionsof an asset or liability and are not shown as part of
equity. The definitions set out in paragraph 4.4 will, however, underlie future
reviews of existing IFRSs and the formulation of further IFRSs.
Assets
4.8 The future economicbenefit embodied in an asset is the potential to contribute,
directly or indirectly, to the flow of cash and cash equivalents to the entity.
The potential may be a productive one that is part of the operating activities of
the entity. It may also take the form of convertibility into cash or cash equivalents
or a capability to reduce cash outflows, such as when an alternative
manufacturing processlowers the costs of production.
4.9 An entity usually employs its assets to produce goods or services capable of
satisfyingthe wants or needs of customers; because these goods or services can
satisfy these wants or needs, customers are prepared to pay for them and hence
contribute to the cash flow of the entity. Cash itself renders a service to the entity
because of its command over other resources.
4.10 The future economic benefits embodied in an asset may flow to the entity in a
number of ways. For example, an asset may be:
(a) used singly or in combination with other assets in the productionof goods
or services to be sold by the entity;
(b) exchanged for other assets;
(c) used to settle a liability; or
(d) distributed to the ownersof the entity.

4.11 Many assets, for example, property, plant and equipment, have a physical form.
However, physical form is not essentialto the existenceof an asset; hence patents
and copyrights, for example, are assets if future economic benefits are expected
to flow from them to the entity and if they are controlled by the entity.
4.12 Many assets, for example, receivables and property, are associated with legal
rights, including the right of ownership. In determining the existence of an asset,
the right of ownership is not essential;thus, for example, property held on a lease
is an asset if the entity controls the benefits which are expected to flow from the
property. Although the capacity of an entity to control benefits is usually the
result of legal rights, an item may nonetheless satisfy the definition of an asset
even when there is no legal control. For example, know-how obtained from a
development activity may meet the definition of an asset when, by keeping that
know-how secret, an entity controlsthe benefitsthat are expected to flow from it.
4.13 The assets of an entity result from past transactions or other past events. Entities
normally obtain assets by purchasing or producingthem, but other transactions
or events may generate assets; examples include property received by an entity
from government as part of a programme to encourage economic growth in an
area and the discovery of mineral deposits. Transactions or events expected to
occur in the future do not in themselves give rise to assets;hence, for example, an
intention to purchase inventory does not, of itself,meet the definition of an asset.
4.14 There is a close associationbetween incurring expenditure and generating assets
but the two do not necessarily coincide. Hence, when an entity incurs
expenditure, this may provide evidence that future economic benefits were
sought but is not conclusive proof that an item satisfying the definition of an
asset has been obtained. Similarly the absence of a related expenditure does not
preclude an item from satisfyingthe definition of an asset and thus becominga
candidate for recognition in the balance sheet; for example,items that have been
donated to the entity may satisfy the definition of an asset.
Liabilities
4.15 An essential characteristic of a liability is that the entityhas a present obligation.
An obligation is a duty or responsibility to act or perform in a certain way.
Obligations may be legally enforceable as a consequence of a binding contract or
statutory requirement. This is normally the case, for example, with amounts
payable for goods and services received.
normal business practice, custom and
relations or act in an equitable manner.
Obligations also arise, however, from
a desire to maintain good business
If, for example, an entity decides as a
matter of policy to rectify faults in its products even when these becomeapparent
after the warranty period has expired, the amounts that are expected to be
expended in respect of goods already sold are liabilities.
4.16 A distinction needs to be drawn between a present obligation and a future
commitment. A decision by the management of an entity to acquire assets in the
future does not, of itself, give rise to a present obligation. An obligation normally
arises only when the asset is delivered or the entity enters into an irrevocable
agreement to acquire the asset. In the latter case, the irrevocablenature of the

agreement means that the economic consequences of failing to honour the
obligation, for example, because of the existence of a substantial penalty, leave
the entity with little, if any, discretion to avoid the outflow of resources to
another party.
4.17 The settlement of a present obligation usually involves the entity giving up
resources embodying economic benefits in order to satisfy the claimof the other
party. Settlement of a present obligation may occur in a number of ways, for
example, by:
(a) payment of cash;
(b) transfer of other assets;
(c) provision of services;
(d) replacement of that obligationwith another obligation;or
(e) conversion of the obligationto equity.
An obligation may also be extinguished by other means, such as a creditor
waiving or forfeiting its rights.
4.18 Liabilitiesresult from past transactions or other past events. Thus, for example,
the acquisition of goods and the use of services give rise to trade payables(unless
paid for in advance or on delivery) and the receipt of a bank loan results in an
obligation to repay the loan. An entity may also recognisefuture rebates based on
annual purchasesby customers as liabilities; in this case, the sale of the goods in
the past is the transactionthat gives rise to the liability.
4.19 Some liabilities can be measured only by using a substantial degree of estimation.
Some entities describe these liabilities as provisions. In some countries, such
provisions are not regarded as liabilities because the concept of a liability is
defined narrowly so as to include only amounts that can be established without
the need to make estimates. The definition of a liability in paragraph 4.4 follows
a broader approach. Thus, when a provision involves a present obligationand
satisfiesthe rest of the definition, it is a liability even if the amount has to be
estimated. Examplesinclude provisions for payments to be made under existing
warranties and provisions to cover pension obligations.
Equity
4.20 Although equity is defined in paragraph 4.4 as a residual, it may be sub-classified
in the balance sheet. For example, in a corporate entity, funds contributed by
shareholders, retained earnings, reservesrepresenting appropriations of retained
earnings and reserves representing capital maintenance adjustments may be
shown separately. Such classifications can be relevant to the decision-making
needs of the users of financial statements when they indicate legal or other
restrictions on the abilityof the entity to distribute or otherwise apply its equity.
They may also reflect the fact that parties with ownership interests in an entity
have differing rights in relation to the receipt of dividends or the repayment of
contributed equity.

4.21 The creation of reserves is sometimes required by statute or other law in order to
give the entity and its creditors an added measure of protection from the effects
of losses. Other reservesmay be established if national tax law grants exemptions
from, or reductions in, taxation liabilities when transfers to such reservesare
made. The existence and size of these legal, statutory and tax reserves is
informationthat can be relevant to the decision-making needs of users. Transfers
to such reserves are appropriations of retained earningsrather than expenses.
4.22 The amount at which equity is shown in the balance sheet is dependent on the
measurement of assets and liabilities. Normally, the aggregate amount of equity
only by coincidencecorresponds with the aggregate market value of the shares of
the entity or the sum that could be raised by disposing of either the net assets on
a piecemeal basis or the entity as a whole on a going concern basis.
4.23 Commercial, industrial and business activities are often undertaken by means of
entities such as sole proprietorships,partnerships and trusts and various types of
government business undertakings. The legal and regulatory framework for such
entities is often different from that applyingto corporate entities. For example,
there may be few, if any, restrictions on the distribution to owners or other
beneficiaries of amounts included in equity. Nevertheless, the definition of
equity and the other aspectsof this Conceptual Framework that deal with equityare
appropriate for such entities.
Performance
4.24 Profit is frequently used as a measure of performance or as the basis for other
measures, such as return on investment or earnings per share. The elements
directly related to the measurement of profit are income and expenses.
The recognition and measurement of income and expenses, and hence profit,
depends in part on the conceptsof capital and capital maintenance used by the
entity in preparing its financial statements. These concepts are discussed in
paragraphs 4.57–4.65.
4.25 The elements of income and expenses are defined as follows:
(a) Income is increases in economic benefits during the accounting period in
the form of inf lows or enhancements of assets or decreases of liabilities
that resultin increases in equity,other than those relating to contributions
from equity participants.
(b) Expenses are decreases in economic benefits during the accounting period
in the form of outf lows or depletions of assets or incurrences of liabilities
that resultin decreases in equity,other than those relating to distributions
to equity participants.
The definitions of income and expenses identify their essential features but do
not attempt to specify the criteria that would need to be met before they are
recognised in the income statement. Criteria for the recognition of income and
expenses are discussed in paragraphs 4.37–4.53.
4.26
4.27 Income and expenses may be presented in the incomestatement in different ways
so as to provide information that is relevant for economic decision-making.
For example, it is common practice to distinguish between those items of income
and expensesthat arise in the course of the ordinary activities of the entity and

thosethat do not. This distinction is made on the basis that the source of an item
is relevant in evaluating the ability of the entity to generate cash and cash
equivalents in the future; for example, incidental activities such as the disposal
of a long-term investment are unlikely to recur on a regular basis. When
distinguishing between items in this way consideration needs to be given to the
nature of the entity and its operations. Items that arise from the ordinary
activities of one entity may be unusual in respect of another.
4.28 Distinguishing between items of income and expense and combining them in
different ways also permits several measures of entity performance to be
displayed. These have differing degrees of inclusiveness. For example,the income
statement could display gross margin, profit or loss from ordinary activities
before taxation, profit or loss from ordinary activities after taxation, and profit
or loss.
Income
The definition of income encompassesboth revenue and gains. Revenue arises in
the course of the ordinary activitiesof an entity and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent.
4.29
4.30 Gains represent other items that meet the definition of income and may, or may
not, arise in the course of the ordinary activities of an entity. Gains represent
increases in economic benefits and as such are no different in nature from
revenue. Hence, they are not regarded as constituting a separate element in this
Conceptual Framework.
4.31 Gains include, for example, those arising on the disposalof non-current assets.
The definition of income also includes unrealised gains; for example, those
arising on the revaluation of marketable securities and those resulting from
increases in the carryingamount of long-term assets. When gains are recognised
in the income statement, they are usually displayed separately because
knowledge of them is useful for the purpose of making economic decisions.
Gains are often reported net of related expenses.
4.32 Various kinds of assets may be received or enhanced by income; examples include
cash, receivables and goods and services received in exchange for goods and
services supplied. Income may also result from the settlement of liabilities.
For example, an entity may provide goods and services to a lender in settlement
of an obligation to repay an outstanding loan.
Expenses
4.33 The definition of expenses encompasses losses as well as those expensesthat arise
in the course of the ordinary activities of the entity. Expensesthat arise in the
course of the ordinary activitiesof the entity include, for example, cost of sales,
wages and depreciation. They usually take the form of an outflow or depletion of
assets such as cash and cash equivalents, inventory, property, plant and
equipment.

4.34 Losses representother itemsthat meet the definitionof expenses and may, or may
not, arise in the course of the ordinary activities of the entity. Losses represent
decreases in economic benefits and as such they are no different in nature from
other expenses. Hence, they are not regarded as a separate element in this
4.35 Losses include, for example, those resulting from disasters such as fire and flood,
as well as those arising on the disposalof non-current assets. The definition of
expenses also includes unrealised losses, for example, those arising from the
effects of increases in the rate of exchange for a foreign currency in respect of the
borrowings of an entity in that currency. When losses are recognised in the
income statement, they are usually displayed separately because knowledge of
them is useful for the purpose of making economic decisions. Losses are often
reported net of related income.
Capital maintenance adjustments
4.36 The revaluation or restatement of assets and liabilities gives rise to increasesor
decreases in equity. While these increases or decreases meet the definition of
income and expenses, they are not included in the income statement under
certain concepts of capital maintenance. Instead these items are included in
equity as capital maintenance adjustments or revaluation reserves. These
concepts of capital maintenance are discussed in paragraphs 4.57–4.65 of this
Recognition of the elements of financial statements
4.37 Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the
criteria for recognition set out in paragraph 4.38. It involves the depiction of the
item in words and by a monetary amount and the inclusion of that amount in the
balance sheet or income statement totals. Items that satisfy the recognition
criteria should be recognised in the balance sheet or income statement.
The failure to recognise such items is not rectified by disclosure of the
accounting policies used nor by notes or explanatory material.
4.38 An item that meetsthe definition of an element should be recognised if:
(a) it is probablethat any future economic benefit associated with the item
will flow to or from the entity; and
(b) the item has a cost or value that can be measured with reliability.*
In assessing whether an item meets these criteria and therefore qualifies for
recognition in the financial statements, regard needs to be given to the materiality
considerations discussed in Chapter 3 Qualitative characteristics of useful financial
information. The interrelationship between the elements means that an item that
meets the definition and recognition criteria for a particular element, for
example, an asset, automatically requires the recognition of another element,
for example, income or a liability.
4.39
* Information is reliable when it is complete,neutral and free from error.

The probability of future economic benefit
The concept of probability is used in the recognition criteria to refer to the degree
of uncertainty that the future economic benefits associatedwith the item will
flow to or from the entity. The concept is in keeping with the uncertainty that
characterisesthe environment in which an entity operates. Assessmentsof the
degree of uncertainty attaching to the flow of future economicbenefits are made
on the basis of the evidence availablewhen the financial statements are prepared.
For example, when it is probablethat a receivable owed to an entity will be paid,
it is then justifiable,in the absenceof any evidence to the contrary,to recognise
the receivable as an asset. For a large population of receivables, however, some
degree of non-payment is normally considered probable; hence an expense
representing the expected reduction in economic benefits is recognised.
4.40
Reliability of measurement
The second criterion for the recognition of an item is that it possessesa cost or
value that can be measured with reliability. In many cases, cost or value must be
estimated; the use of reasonable estimates is an essentialpart of the preparation
of financialstatements and does not undermine their reliability. When,however,
a reasonable estimate cannot be made the item is not recognised in the balance
sheet or income statement. For example, the expected proceeds from a lawsuit
may meet the definitions of both an asset and income as well as the probability
criterion for recognition; however, if it is not possible for the claim to be
measured reliably, it should not be recognised as an asset or as income; the
existence of the claim, however, would be disclosed in the notes, explanatory
material or supplementary schedules.
An item that, at a particular point in time, fails to meet the recognition criteria
in paragraph 4.38 may qualify for recognition at a later date as a result of
subsequent circumstances or events.
An item that possessesthe essential characteristics of an element but fails to meet
the criteria for recognition may nonetheless warrant disclosure in the notes,
explanatory material or in supplementary schedules. This is appropriate when
knowledge of the item is considered to be relevant to the evaluation of the
financial position, performance and changes in financial position of an entity by
the users of financial statements.
4.41
4.42
4.43
Recognition of assets
An asset is recognised in the balance sheet when it is probablethat the future
economic benefits will flow to the entity and the asset has a cost or value that can
be measured reliably.
An asset is not recognised in the balance sheet when expenditure has been
incurred for whichit is considered improbable that economic benefits will flow
to the entity beyond the current accounting period. Instead such a transaction
results in the recognition of an expense in the incomestatement. This treatment
does not imply eitherthat the intentionof management in incurring expenditure
was other than to generate future economic benefits for the entity or that
management was misguided. The only implication is that the degreeof certainty
that economic benefits will flow to the entity beyond the current accounting
period is insufficient to warrant the recognition of an asset.
4.44
4.45

Recognition of liabilities
A liability is recognised in the balancesheet when it is probablethat an outflow
of resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can be
measured reliably. In practice, obligations under contracts that are equally
proportionately unperformed (for example, liabilities for inventory ordered but
not yet received) are generally not recognised as liabilities in the financial
statements. However, such obligations may meet the definition of liabilities and,
providedthe recognition criteria are met in the particular circumstances,may
qualify for recognition. In such circumstances, recognition of liabilities entails
recognition of related assets or expenses.
4.46
Recognition of income
Income is recognised in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liabilityhas
arisen that can be measured reliably. This means, in effect, that recognition of
income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of
goods or services or the decreasein liabilities arising from the waiver of a debt
payable).
4.47
4.48 The procedures normally adopted in practice for recognising income, for
example, the requirement that revenue should be earned, are applications of the
recognition criteria in this Conceptual Framework. Such procedures are generally
directed at restricting the recognition as income to those items that can be
measured reliably and have a sufficient degree of certainty.
Recognition of expenses
Expenses are recognised in the income statement when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability has
arisen that can be measured reliably. This means, in effect, that recognition of
expenses occurs simultaneouslywith the recognition of an increase in liabilities
or a decrease in assets (for example, the accrual of employee entitlements or the
depreciation of equipment).
4.49
4.50 Expenses are recognised in the income statement on the basis of a direct
association between the costs incurred and the earning of specific items of
income. This process, commonly referred to as the matching of costs with
revenues, involves the simultaneous or combined recognition of revenues and
expenses that result directly and jointly from the same transactions or other
events; for example, the various components of expense making up the cost of
goods sold are recognised at the same time as the income derived from the sale of
the goods. However, the application of the matching concept under this
Conceptual Framework does not allow the recognition of items in the balancesheet
which do not meet the definition of assets or liabilities.
4.51 When economic benefits are expected to arise over several accounting periods
and the associationwith income can only be broadly or indirectly determined,
expenses are recognised in the income statement on the basis of systematic and
rational allocation procedures. This is often necessary in recognising the

expenses associated with the using up of assets such as property, plant,
equipment, goodwill, patents and trademarks; in such cases the expense is
referred to as depreciation or amortisation. These allocation procedures are
intended to recognise expenses in the accounting periods in whichthe economic
benefits associatedwith these items are consumed or expire.
4.52 An expense is recognised immediately in the income statement when an
expenditure produces no future economic benefits or when, and to the extent
that, future economic benefits do not qualify, or cease to qualify, for recognition
in the balance sheet as an asset.
4.53 An expense is also recognised in the income statement in those cases when a
liability is incurred without the recognition of an asset, as when a liability under
a product warranty arises.
Measurement of the elements of financial statements
4.54 Measurement is the process of determining the monetary amounts at which the
elements of the financial statements are to be recognised and carried in the
balancesheet and income statement. This involves the selectionof the particular
basis of measurement.
4.55 A number of different measurement bases are employed to different degrees and
in varying combinations in financial statements. They includethe following:
(a) Historical cost. Assets are recorded at the amount of cash or cash equivalents
paid or the fair value of the considerationgiven to acquirethem at the time
of their acquisition. Liabilities are recorded at the amount of proceeds
received in exchange for the obligation, or in some circumstances (for
example, income taxes), at the amounts of cash or cash equivalents
expected to be paid to satisfy the liabilityin the normal courseof business.
(b) Current cost. Assets are carried at the amount of cash or cash equivalents
that wouldhave to be paid if the same or an equivalent asset was acquired
currently. Liabilities are carried at the undiscounted amount of cash or
cash equivalentsthat wouldbe required to settle the obligationcurrently.
(c) Realisable (settlement) value. Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the asset in an
orderly disposal. Liabilities are carried at their settlement values; that is,
the undiscounted amounts of cash or cash equivalents expected to be paid
to satisfy the liabilitiesin the normal courseof business.
(d) Present value. Assets are carried at the present discountedvalue of the future
net cash inf lows that the item is expectedto generate in the normal course
of business. Liabilities are carried at the present discounted value of the
future net cash outflows that are expected to be required to settle the
liabilities in the normal courseof business.
4.56 The measurement basis most commonly adopted by entities in preparing their
financial statements is historical cost. This is usually combined with other
measurement bases. For example, inventories are usuallycarried at the lower of
cost and net realisable value, marketable securities may be carried at market

value and pension liabilities are carried at their present value. Furthermore,
some entities use the current cost basis as a response to the inability of the
historical cost accounting model to deal with the effects of changing prices of
non-monetary assets.
Concepts of capital and capital maintenance
Concepts of capital
4.57 A financial concept of capital is adopted by most entities in preparing their
financial statements. Under a financial concept of capital, such as invested
money or invested purchasing power, capital is synonymous with the net assets
or equity of the entity. Under a physical concept of capital, such as operating
capability,capital is regarded as the productive capacityof the entitybased on, for
example, units of output per day.
4.58 The selection of the appropriate concept of capital by an entity should be based
on the needs of the users of its financial statements. Thus, a financial concept of
capital should be adopted if the users of financial statements are primarily
concerned with the maintenance of nominal invested capital or the purchasing
power of invested capital. If, however, the main concern of users is with the
operating capability of the entity, a physical concept of capital should be used.
The concept chosen indicates the goal to be attained in determining profit, even
though there may be some measurement difficulties in making the concept
operational.
Concepts of capital maintenance and the determination of
profit
4.59 The concepts of capital in paragraph 4.57 give rise to the following concepts of
capitalmaintenance:
(a) Financial capitalmaintenance. Under this concept a profit is earned only if the
financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of
the period, after excluding any distributions to, and contributions from,
owners during the period. Financialcapital maintenance can be measured
in either nominal monetary units or units of constant purchasing power.
(b) Physical capital maintenance. Under this concept a profit is earned only if the
physical productive capacity (or operating capability) of the entity (or the
resources or funds needed to achieve that capacity) at the end of the period
exceeds the physical productive capacity at the beginning of the period,
after excluding any distributions to, and contributions from, owners
during the period.
4.60 The concept of capital maintenance is concerned with how an entity defines the
capitalthat it seeks to maintain. It provides the linkage between the concepts of
capital and the concepts of profit because it provides the point of reference by
whichprofit is measured; it is a prerequisite for distinguishing between an entity’s
return on capital and its return of capital; only inflows of assets in excess of

amounts needed to maintain capitalmay be regarded as profit and therefore as a
return on capital. Hence, profit is the residualamount that remainsafterexpenses
(including capital maintenance adjustments, where appropriate) have been
deducted from income. If expenses exceed income the residualamount is a loss.
4.61 The physical capital maintenance concept requires the adoption of the current
cost basis of measurement. The financial capital maintenance concept,however,
does not require the use of a particular basis of measurement. Selection of the
basis under this concept is dependent on the type of financial capital that the
entity is seeking to maintain.
4.62 The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the
entity. In general terms, an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the period.
Any amount over and above that requiredto maintain the capitalat the beginning
of the period is profit.
4.63 Under the concept of financial capital maintenance where capital is defined in
terms of nominal monetary units, profit represents the increase in nominal
money capital over the period. Thus, increases in theprices of assets held over the
period, conventionally referred to as holding gains, are, conceptually, profits.
They may not be recognised as such, however, until the assets are disposed of in
an exchange transaction. When the concept of financial capital maintenance is
defined in terms of constant purchasing power units, profit represents the
increase in invested purchasing power over the period. Thus, only that partof the
increase in the prices of assets that exceeds the increase in the general level of
prices is regarded as profit. The rest of the increase is treated as a capital
maintenance adjustment and, hence, as part of equity.
4.64 Under the concept of physical capital maintenance when capital is defined in
terms of the physical productive capacity, profit represents the increase in that
capitalover the period. All price changes affecting the assets and liabilities of the
entity are viewed as changes in the measurement of the physical productive
capacityof the entity; hence, they are treated as capitalmaintenance adjustments
that are part of equity and not as profit.
4.65 The selection of the measurement bases and concept of capital maintenance will
determine the accounting model used in the preparation of the financial
statements. Different accounting models exhibit different degrees of relevance
and reliability and, as in other areas, management must seek a balance between
relevance and reliability. This Conceptual Frameworkis applicable to a range of
accounting models and provides guidance on preparing and presenting the
financialstatements constructed under the chosenmodel. At the present time, it
is not the intention of the Board to prescribe a particular model other than in
exceptional circumstances, such as for those entities reporting in the currencyof
a hyperinflationary economy. This intention will, however, be reviewed in the
light of world developments.

Conceptual Framework

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Conceptual Framework