The Conceptual Framework
Purposes
The key purpose of the Conceptual Framework is an important topic in SBR. You should expect
it to feature in every exam.
The board when developing new IFRS standards.
Preparers of financial statements when no IFRS standards applies to transaction, or when
an IFRS standard offers a choice of accounting policy.
All parties when understanding and interpreting IFRS standards.
The purposes of financial reporting
The purpose of financial reporting is to provide information to current and potential investors,
lenders and other creditors that will enable them to make decisions about providing economic
resources to an entity.
User groups need information to assess:
An entity’s potential future cash flows, and
Management’s stewardship of the entity’s economic resources.
This information is provided in financial statements.
Qualitative characteristics
Financial information is only useful if it embodies the fundamental characteristics.
The enhancing characteristics make financial information more useful.
Qualitative characteristics of useful financial
information
Fundamental Enhancing characteristics
characteristics:
Comparability
Relevance
Understandability
Faithful
Verifiability
Representation
Timeliness
(CUVT mnemonics)
The elements
The elements are the building blocks of financial statements.
An economic resource is a “right that has the potential to produce economic benefits”
(para 4.4)
Asset ‘A present economic resource controlled by an
entity as a result of past events’ (para 4.3)
Liability ‘A present obligation of the entity to transfer an
economic resource as a result of past event’
(para 4.26)
Equity The residual interest in the net assets of an
entity
Income Increase in assets or decrease in liabilities that
result in an increase to equity (excluding
contribution from equity holders)
Expenses Decrease in assets or increase in liabilities that
result in decreases to equity (excluding
distributions to equity holders)
Recognition
Items are recognised in financial statements if:
They meet the definition of an element, and
Recognition provides relevant information, and
Recognition faithfully represents the entity’s financial performance and position.
Derecognition
Derecognition from financial statements normally occurs when the entity:
Losses control of the asset, or
Has no present obligation for the liability
Accounting for derecognition should faithfully represents the changes in an entity’s net assets,
as well as any assets or liabilities retained. This involves:
Derecognising any transferred, expired or consumed component, and
Recognizing a gain or loss on the above, and
Recognizing any retained component
Measurement
If recognised in the financial statements, an element must be quantified.
The conceptual framework outlines two measurement bases:
Historical cost
Current value (this includes fair value, value-in-use, and current cost)
When selecting a measurement basis, relevance is maximized if the following are considered
The characteristics of the asset or liability
How the asset or liability contributes to future cash flows
Presentation and disclosure
The statement of profit or loss is the primary source of information about the entity’s
financial performance. Income and expenses should normally be recognised in the statement.
The board might require an income or expense to be presented in other comprehensive income
if it results from remeasuring an item to current value and if this means that:
Profit or loss provides more relevant information, or
A more faithful representation is provided of an entity’s performance.
Income and expenditure included in other comprehensive income should be reclassified to
profit or loss when doing so results in profit or loss providing more relevant information.
