IASB Conceptual Framework - 2018
Waqas Aslam
senior accountant at cander | certified xero/qbo advisor | MBA, CPA in Progress
IASB Conceptual Framework - 2018
The International Accounting Standards Board's (IASB) Conceptual Framework for Financial Reporting 2018 is an important resource for accounting professionals and businesses worldwide. It serves as a foundation for the development of accounting standards and guides the IASB in making financial reporting decisions.
In this blog, we'll look at the key features of the IASB Conceptual Framework and how they can help your business.
The Conceptual Framework is organized into Eight chapter
#1. The objective of general-purpose financial reporting
This chapter begins by explaining that the?objective of general-purpose financial reporting?is to help investors, lenders, and other creditors make choices about allocating resources to the reporting business.
The chapter gives (non-contentious) instances of third-party investment and loan choices based on general-purpose financial information.
To make these judgments, Chapter 1 says primary users require knowledge about the entity's economic resources and how efficiently its management employed them
The chapter?goes on to say that each primary user has different information needs and wants that may be at odds with each other. When making standards, the IASB will try to come up with the information set that meets the needs of most?primary users. But the fact that the reporting entity is focusing on common information needs doesn't mean that it can't include other information that is most useful to a subset of primary users.
General-purpose financial reports provide information about:
The?financial position?of a reporting entity shows its economic resources (assets) and the claims against it (liabilities). It allows users to:
The?financial performance?of reporting entity shows the use of assets, how efficiently entity use the assets and generate returns?
This helps the user to assess the short-term liquidity, the medium-term solvency, and the longer-term viability of the business.
#2. Qualitative characteristics of useful financial information
The International Financial Reporting Standards (IFRS) define the qualitative characteristics of useful financial information as those that make the information useful to users of financial statements in making economic decisions.?There are two fundamental qualitative?characteristics that information needs to portray in order to be decision-useful and not misleading.?These are?Relevance and faithful representation. There are also characteristics?that are referred to as?enhancing.?
Relevance: Financial information?is relevant if it has the potential to influence the economic decisions of users by helping them to evaluate past, present, or future events or conditions.
Faithful representation:?Financial information is a faithful representation if it accurately and reliably represents the transactions or events that it purports to represent.
Comparability:?Financial information is comparable if it can be meaningfully compared with other financial information, such as that of other companies or of the same company at different points in time.
Verifiability:?Financial information is verifiable if it can be independently and objectively verified by a third party.
Timeliness:?Financial information is timely if it is available to users in time for it to be used in making economic decisions.
Understandability:?presumes that users have a basic understanding of business and economic activity.
Cost Constraint:?By providing relevant and trustworthy financial data, decision-makers are able to evaluate the prospective costs and advantages of various choices and select the most appropriate course of action.
#3. Financial Statement and Reporting Entity
Financial statements?are written reports that provide information about a company's?financial position,?performance, and?cash flows. They include the?balance sheet, income statement, statement of cash flows, and statement of shareholder equity.?The content of financial statement is discussed in?Chapter 1.?The purpose of financial statements is to provide information that is useful to a wide range of users, including investors, creditors, and management, in making informed business decisions.
Consolidated financial?statements combine parent and subsidiary statements. These statements show a group's financial performance as a whole. This gives investors and other stakeholders a more accurate and relevant view of the company's overall financial status.
Unconsolidated financial?statements are the financial statements of separate entities not included in a parent company's consolidated financial statements. They present a single company's financial status and performance, not a group.
Combined financial?statements present parent business and subsidiary financial information as a single entity. In a joint venture, the parent business and the joint venture firm have separate financial statements, but they are also consolidated in a combined financial statement that represents each company's equity.
A reporting entity?is an organization that is required to prepare financial statements. The concept of a reporting entity is important because it determines the scope of the financial statements and the boundaries of the organization that is being reported on. In general, a reporting entity is any organization that has external stakeholders (such as investors or creditors) who rely on its financial statements for information. This can include companies, government agencies, and not-for-profit organizations.
The financial statements of a reporting entity should include all assets, liabilities, equity, revenues, and expenses that are under the control of the organization. Transactions and events that are outside the scope of the reporting entity should not be included in the financial statements.
Reporting period:?Financial statements are prepared for a reporting period. It's the time period the statement covers. The firm might select yearly, quarterly, or other reporting periods. By comparing the financial information in a statement to the same reporting period in the prior year, stakeholders may understand how a company's financial situation and performance has changed over time. Interim financial statements give updated financial information between reports.
#4. The elements of financial statements
The elements of financial statements are the components of financial statements that indicate a company's, person's, or other entity's resources, obligations, and equity. The five major components are assets, liabilities, equity, revenues, and expenses.
Economic resource
Assets are resources?possessed by the entity that are expected to deliver economic benefits in the future. Cash, investments, property, plants, and equipment are all examples of assets.
Claim
Liabilities?are the entity's commitments that are expected to be settled in the future, typically through the transfer of assets or the provision of services. Loans, mortgages, and accounts payable are examples of liabilities.
Equity?is the entity's leftover interest in its assets after its liabilities have been satisfied. It contains the entity's owners' capital as well as any retained earnings or profits.
Changes in economic resources and claims, reflecting financial performance
Income?are economic resource inflows coming from the selling of commodities or services.
Expenses?are outflows of economic resources incurred throughout the revenue-generating process
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Other changes in economic resources and claims
#5. Recognition and derecognition
An item In financial reporting,?recognition?refers to the process of including an item in the financial statements. is recognized in the financial statements when it meets the criteria for inclusion specified in the relevant accounting standards.
Derecognition, on the other hand, refers to the process of removing an item from the financial statements. An item is derecognized when it no longer meets the criteria for recognition or when it is transferred to another entity.
The criteria for recognition and derecognition vary depending on the type of item being considered. For example, an?asset?is typically recognized when it is probable that the entity will receive future economic benefits from the asset and the asset has a cost or value that can be measured reliably. An asset is derecognized when it is sold or otherwise disposed of, or when it is no longer expected to provide future economic benefits.
Liabilities?are recognized when the entity has a present obligation as a result of a past event, and it is probable that an outflow of economic resources will be required to settle the obligation. A liability is derecognized when it is settled or otherwise extinguished.
Relevance:
Whether recognition of an item results in relevant information may be affected by, for example: "low probability of a flow of economic benefits or existence uncertainty"
Faithful representation:
Whether recognition of an item results in a faithful representation may be affected by, for example: "measurement uncertainty, recognition inconsistency (accounting mismatch), or presentation and disclosure"
#6. Measurement
According to the IFRS conceptual framework, measurement is the process of determining the monetary amounts at which the elements of financial statements are to be recognized and presented. The objective of measurement is to determine the fair value of an element, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
The conceptual framework provides guidance on the following types of measurement
Historical cost measurement:?This is the most common form of measurement and involves recording an asset or liability at its original cost.
Fair value measurement:?This involves measuring an asset or liability at its fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Current cost measurement:?This involves measuring an asset or liability at its current cost, which is the amount of cash or cash equivalents that would have to be paid to acquire or settle the asset or liability at the measurement date.
Net realizable value measurement:?This involves measuring an asset at the amount that is expected to be received from selling the asset, less the costs of disposal.
The conceptual framework also provides guidance on the principle of prudence, which requires that assets and income be recognized when they are reasonably certain to be realized and that liabilities and expenses be recognized when they are probable.
#7. Presentation and disclosure
A reporting business conveys information about its assets, liabilities, equity, income, and costs via the presentation and disclosure of financial statements. Communication is only successful if the information is relevant, contributes to an accurate portrayal, and improves the financial statements' readability and comparability. When developing presentation and disclosure requirements in Standards, a balance must be struck between the following: allowing entities the flexibility to provide relevant information that faithfully represents the entity's assets, liabilities, equity, income, and expenses; and requiring information that is comparable from period to period for a reporting entity and in a single reporting period across entities.
The purpose of the presentation and disclosures is to offer a useful tool for communication inside the Financial Statements, specifically:
The statement of profit or loss:
The statement of profit or loss is the most important source of information on the financial performance of a company for the time period being reported on.?A profit or loss statement may be included as part of an overall financial performance report, or it may be presented as a standalone document.?The total (subtotal) for profit or loss is included in the statement (statements) of financial performance.?In general, the statement of profit or loss accounts for all revenue and costs by assigning them appropriate categories and include them in the totals.
Other comprehensive income:
If certain conditions are met, the Board of Directors may choose to include in other comprehensive income any income or expenses that arise from a change in the current value of an asset or liability rather than including those income or expenses on the statement of profit or loss. This decision can only be made in unusual situations.
When doing so will result in the statement of profit or loss giving more relevant information or a more true depiction, the Board of Directors has the authority to make such a decision.
#8. Concepts of capital and capital maintenance
Concepts of capital
The Framework discusses two concepts of capital and consequently two concepts of capital maintenance.
These are the?financial concept?of capital and the?physical concept?of capital.
Under the financial concept of capital, a profit is realised only if the financial amount of net assets at the end of the period exceeds the financial amount of net assets at the beginning of the period, after deducting dividends to and contributions from owners throughout the period.
Under the physical concept of capital, a profit is earned only if the entity's physical productive capacity (or operating capability) at the end of the period exceeds its physical productive capacity at the beginning of the period, after excluding distributions to and contributions from owners during the period.
Concept of capital maintenance
Profit indicates?the rise of nominal money capital over time under the?financial capital maintenance?concept. Increasing asset values, called holding gains, are theoretically profits. They aren't recognised as such until the assets are exchanged. Profit on inventory sale is one example.
Profit indicates?the growth in physical productive capacity under the notion of?physical capital?upkeep. All price changes impacting the entity's assets and obligations are considered as changes in the assessment of its physical productive capacity, thus they are handled as capital maintenance adjustments and not as profit.
Measurement bases?and capital maintenance define the accounting model used to prepare financial statements. Different accounting models vary in relevance and trustworthiness, and management must find a compromise.
In conclusion, the?IASB Conceptual Framework?serves as a foundation for the development of International Financial Reporting Standards (IFRS) and provides a framework for understanding and interpreting financial statements. Overall, the IASB Conceptual Framework is an essential tool for all stakeholders involved in the preparation and use of financial statements, providing a comprehensive framework for financial reporting and decision making.
If you found this article useful and you're interested in learning more on this topic, we also have other related articles available on this topic like?Developing IFRS Standards ,?
I hope that this article has been informative and provided valuable insights into these key concepts in financial reporting. Stay tuned for my next post, where I will delve deeper into IFRS 15 and its components. I will be sharing examples and discussing all the key components of IFRS 15 to help you gain a better understanding of how this standard applies to revenue recognition.
Administrative Secretary Cum Finance head |DipIFRS in progress|
5 个月Much Informative.