IASB Conceptual Framework 2018 -An Overview

IASB Conceptual Framework 2018 – An Overview
Status and purpose of the Conceptual Framework.
The Conceptual Framework for Financial Reporting’s general purpose is:
a) To assist the IASB in developing and revising IFRSs that are based on consistent
concepts,
b) To help preparers to develop consistent accounting policies for areas that are not
covered by a standard or where there is choice of accounting policy, and
c) To assist all parties to understand and interpret IFRS.
It maintains that the framework does not override any specific IFRS. Rather the IASB should
decide to issue a new or revised pronouncement that conflicts with the framework. The IASB
will highlight the fact and explain the reasons for the departure in the basis for conclusions.
Conceptual Framework for Financial Reporting was issued by the International Accounting
Standards Board in September 2010. It was revised in March 2018. The 2018 Conceptual
Framework is structured into an introductory explanation on the status and purpose of the
Conceptual Framework, eight chapters,
Chapter
Topic
Status and purpose of the Conceptual Framework
1. The objectives of general-purpose financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

Chapter 1 - The Objective 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 relating to providing resources to the entity.
This is identified as information about the entity’s economic resources and the claims against
the reporting entity as well as information about the effects of transactions and other events
that change a reporting entity’s economic resources and claims. This chapter newly stresses
that information can also help users to assess management’s stewardship of the entity’s
economic resources.
Chapter 2 - Qualitative Characteristics of Useful Financial 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.
The Fundamental Qualitative Characteristics:
The fundamental qualitative characteristics are:
a) Relevance and
b) Faithful Representation
Relevance:
Relevant financial information can make 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.
Financial information can make a difference in decisions if it has predictive value, confirmatory
value, or both. 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. Financial information has confirmatory
value if it provides feedback about (confirms or changes) previous evaluations. The predictive
value and confirmatory value of financial information are interrelated. Information that has
predictive value often also has confirmatory value.
Faithful representation:
Faithful representation means representation of the substance of an economic phenomenon
instead of representation of its legal form only. To be a faithful representation, a depiction
would have three characteristics. It would be complete, neutral and free from error.
A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
A neutral depiction is without bias in the choice or presentation of financial information. A
neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise
manipulated to increase the probability that 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.
Faithful representation does not mean correct in all respects. Free from error means there are
no errors or omissions in the description of the phenomenon, and the process used 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 correct in all respects.
The Enhancing Qualitative Characteristics:
The enhancing qualitative characteristics are:
1. comparability,
2. verifiability,
3. timeliness
4. understandability of useful financial information and notes the cost constraint.
Comparability: Comparability is the qualitative characteristic that enables users to find 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.
Consistency: 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 achieve that goal.
Verifiability: 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 depiction is a faithful representation. Quantified information need not be a
single point estimate to be verifiable. A range of possible amounts and the related probabilities
can also be verified. Verification can be direct or indirect. Direct verification means verifying
an amount or other representation through direct observation, for example, by counting cash.
Indirect verification means checking the inputs to a model, formula or other technique and
recalculating the outputs using the same method.
Timeliness: Timeliness means having information available to decision-makers in time to
be capable of influencing their decisions. The older the information is the less useful it is.
However, some information may continue to be prompt long after the end of a reporting period
because, for example, some users may need to find and assess trends.
Understandability: Classifying, characterising and presenting information clearly and
concisely makes it understandable. 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 possibly misleading. 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.
Materiality: 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.

Neutrality is supported by the exercise of prudence. Prudence is defined as the exercise of
caution when making judgements under conditions of uncertainty. The exercise of prudence
means that assets and income are not overstated, and liabilities and expenses are not
understated. Equally, the exercise of prudence does not allow for the understatement of assets
or income or the overstatement of liabilities or expenses. Such misstatements can lead to the
overstatement or understatement of income or expenses in future periods. The exercise of
prudence does not imply a need for asymmetry, for example, a systematic need for more
persuasive evidence to support the recognition of assets or income than the recognition of
liabilities or expenses. Such asymmetry is not a qualitative characteristic of useful financial
information. Nevertheless, Standards may contain asymmetric requirements if this is a
consequence of decisions intended to select the most relevant information that faithfully
represents what it purports to represent.
Chapter 3 - Financial Statements and The Reporting Entity.
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. Also sets out the going concern assumption.
It only mentions 3 statements explicitly:
a) in the statement of financial position, by recognising assets, liabilities, and equity
b) in the statement(s) of financial performance, by recognising income and expenses; and
c) in other statements and notes, by presenting and disclosing information
The financial statements are prepared for a specified period and provide comparative
information and under certain circumstances forward-looking information.
New to the framework is the definition of a reporting entity and the boundary of a it. The
chapter also states the IASB's conviction that, generally, consolidated financial statements are
more likely to provide useful information to users of financial statements than unconsolidated
financial statements.
Consolidated financial statements provide information about the assets, liabilities, equity,
income, and expenses of both the parent and its subsidiaries as a single reporting entity.
Consolidated financial statements are not designed to provide separate information about the

assets, liabilities, equity, income, and expenses of any subsidiary. A subsidiary’s own financial
statements are designed to provide that information.
Unconsolidated financial statements are designed to provide information about the parent’s
assets, liabilities, equity, income, and expenses, and not about those of its subsidiaries.
Chapter 4 - The Elements of Financial Statements.
The elements of financial statements defined in the Conceptual Framework are
• assets, liabilities, and equity (which relate to a reporting entity’s financial position) as
well as
• income and expenses (which relate to a reporting entity’s financial performance)
The definitions are quoted below:
Asset: A present economic resource controlled by the entity because of past events. An
economic resource is a right that has the potential to produce economic benefits.
Liability: A present obligation of the entity to transfer an economic resource because 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.
New is the introduction of a separate definition of an economic resource to move the references
to future flows of economic benefits out of the definitions of an asset and a liability. The
expression "economic resource" instead of simply "resource" stresses that the IASB no longer
thinks of assets as physical objects but as sets of rights.
It means the definitions of assets and liabilities no longer refer to "expected" inflows or
outflows. Instead, the definition of an economic resource refers to the potential of an
asset/liability to produce/to require a transfer of economic benefits.

Distinguishing between liabilities and equity is not part of the new framework but has been
transferred to the IASB's research project on financial instruments with the characteristics of
equity.
Chapter 5 - Recognition and Derecognition.
The Conceptual Framework states that only items that meet the definition of an asset, a liability
or equity are recognised in the statement of financial position and only items that meet the
definition of income or expenses are to be recognised in the statement(s) of financial
performance.
However, their recognition depends on two criteria: their recognition provides users of
financial statements with
1. relevant information about the asset or the liability and about any income, expenses, or
changes in equity and
2. a faithful representation of the asset or the liability and of any income, expenses, or
changes in equity.
Relevance: Information about assets, liabilities, equity, income, and expenses is relevant to
users of financial statements. However, recognition of a particular asset or liability and any
resulting income, expenses or changes in equity may not always provide relevant information.
Faithful representation: Recognition of a particular asset or liability is appropriate if it
provides not only relevant information, but also a faithful representation of that asset or liability
and of any resulting income, expenses, or changes in equity. Whether a faithful representation
can be provided may be affected by the level of measurement uncertainty associated with the
asset or liability or by other factors.
The framework also notes a cost constraint. New to the framework is the discussion of
derecognition. The requirements as presented in the framework are driven by two aims:
• for an asset, derecognition normally occurs when the entity loses control of all or part
of the recognised asset; and
• for a liability, derecognition normally occurs when the entity no longer has a present
obligation for all or part of the recognised liability
The framework also describes alternatives when it is not possible to achieve both aims.

Chapter 6 - Measurement.
Elements recognised in financial statements are quantified in monetary terms. This requires the
selection of a measurement basis. A measurement basis is an identified feature—for example,
historical cost, fair value, or fulfilment value—of an item being measured. Applying a
measurement basis to an asset or liability creates a measure for that asset or liability and for
related income and expenses.
The framework also sets out factors to consider when
• selecting a measurement basis – relevance, faithful representation, enhancing
qualitative characteristics and the cost constraint, factors specific to initial
measurement, as well as more than one measurement basis, and
• points out that consideration of the objective of financial reporting, the qualitative
characteristics of useful financial information and the cost constraint are likely to result
in the selection of different measurement bases for different assets, liabilities and items
of income and expense.
The framework does not provide detailed guidance on when a measurement basis would be
suitable because the suitability of measurement bases will vary depending on facts and
circumstances.
On equity, the framework offers some limited discussion, although total equity is not measured
directly. Still, the framework maintains, it may be appropriate to measure directly individual
classes of equity or components of equity to provide useful information.
Chapter 7 - Presentation and Disclosure.
In this chapter, the framework discusses concepts that determine what information is included
in the financial statements and how that information should be presented and disclosed.
The statement of statement of comprehensive income is newly described as "Statement of
Financial Performance".
However, the framework does not specify whether this statement should consist of a single
statement or two statements, it only requires that a total or subtotal for profit or loss must be
provided.

It also notes that the statement of profit or loss is the primary source of information about an
entity’s financial performance for the reporting period and that only in "exceptional
circumstances" the Board may decide that income or expenses are to be included in other
comprehensive income. Notably, the framework does not define profit or loss, thus the question
of what goes into profit or loss or into other comprehensive income is still unanswered.
Offsetting
Offsetting occurs when an entity recognises and measures both an asset and liability as separate
units of account, but groups them into a single net amount in the statement of financial position.
Offsetting classifies dissimilar items together and therefore is not appropriate.
Offsetting assets and liabilities differs from treating a set of rights and obligations as a single
unit of account
Chapter 8 - Concepts of capital and capital maintenance.
The content in this chapter was taken over from the existing Conceptual Framework and
discusses concepts of capital (financial and physical), concepts of capital maintenance (again
financial and physical) and the determination of profit as well as capital maintenance
adjustments.
The concepts of capital in give rise to the following concepts of capital maintenance:
a) Financial capital maintenance:
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. Financial capital 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.

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 required to maintain the capital at
the beginning of the period is profit.
The IASB decided that updating the discussion of capital and capital maintenance could have
delayed the completion of the framework significantly. The Board might consider revising the
description and discussion of capital maintenance in the future if it considers such a revision
necessary.

IASB Conceptual Framework 2018 -An Overview

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