March 2018

IFRS® Conceptual Framework

Project Summary

Conceptual Framework for Financial Reporting

Conceptual Framework at a glance

Introduction Purpose
The International Accounting Standards Board (Board) issued the revised • to assist the Board to develop IFRS Standards (Standards) based on consistent
Conceptual Framework for Financial Reporting (Conceptual Framework), a concepts, resulting in financial information that is useful to investors, lenders
comprehensive set of concepts for financial reporting, in March 2018. and other creditors
It sets out: • to assist preparers of financial reports to develop consistent accounting policies
for transactions or other events when no Standard applies or a Standard allows a
• the objective of financial reporting
choice of accounting policies
• the qualitative characteristics of useful financial information
• to assist all parties to understand and interpret Standards
• a description of the reporting entity and its boundary
• definitions of an asset, a liability, equity, income and expenses
• criteria for including assets and liabilities in financial statements Status
(recognition) and guidance on when to remove them (derecognition)
• provides concepts and guidance that underpin the decisions the Board makes
• measurement bases and guidance on when to use them when developing Standards
• concepts and guidance on presentation and disclosure • not a Standard
This Project Summary summarises: • does not override any Standard or any requirement in a Standard
• why the Board revised the Conceptual Framework
• the main changes from the previous Conceptual Framework
Effective date
• the main concepts and guidance in each chapter of the
Conceptual Framework • immediately for the Board and the IFRS Interpretations Committee
• annual periods beginning on or after 1 January 2020 for preparers who develop
an accounting policy based on the Conceptual Framework

2 | Project Summary | Conceptual Framework | March 2018

Why have we revised the Conceptual Framework?
Previous Approach
• issued in 1989 and partly revised in 2010
In revising the Conceptual Framework, the Board
Conceptual Framework • useful, but incomplete and needed improvement sought a balance between providing high-level
concepts and providing enough detail for the
Conceptual Framework to be useful to the Board
and others.
Priority The Board views the Conceptual Framework as a
identified as a priority by stakeholders in the 2011 Agenda Consultation
practical tool to help it develop Standards. Hence, the
Conceptual Framework includes concepts that help the
Board develop Standards and also discusses the factors
Filling gaps the Board needs to consider in making judgements
for example, guidance on measurement, presentation and disclosure
when application of the concepts does not lead to a
single answer.
Updating
for example, the definitions of an asset and a liability

Clarifying
for example, the role of measurement uncertainty

Revised
• a comprehensive set of concepts for financial reporting
Conceptual Framework
Project Summary | Conceptual Framework | March 2018 | 3
Main changes
The revised Conceptual Framework introduces the following main improvements:

New
Measurement concepts on measurement, including factors to be considered when selecting a measurement basis
Presentation and disclosure concepts on presentation and disclosure, including when to classify income and expenses in other comprehensive income

Derecognition guidance on when assets and liabilities are removed from financial statements

Updated
Definitions definitions of an asset and a liability
Recognition
criteria for including assets and liabilities in financial statements

Clarified
Prudence Stewardship Measurement uncertainty Substance over form

4 | Project Summary | Conceptual Framework | March 2018

Chapter 1—The objective of financial reporting
This chapter sets out the objective of general purpose financial reporting (financial reporting), what information is needed to achieve that objective
and who the primary users (users) of financial reports are.

Objective of financial reporting Summary of changes

To provide financial information that is useful to users in making decisions This chapter was issued in 2010 and went through
relating to providing resources to the entity extensive due process at that time. Therefore, in
revising the Conceptual Framework, the Board did not
Users’ decisions involve decisions about fundamentally reconsider this chapter. However, it
clarified why information used in assessing
buying, selling or holding providing or settling loans voting, or
stewardship is needed to achieve the objective of
otherwise influencing financial reporting.
equity or debt instruments and other forms of credit
management’s actions
Stewardship
To make these decisions, users assess Users of financial reports need information to help them
prospects for future management’s stewardship of the assess management’s stewardship. The Conceptual
Framework explicitly discusses this need as well as the
need for information that helps users assess the prospects
net cash inflows to the entity entity’s economic resources for future net cash inflows to the entity.

To make both these assessments, users need information about both Users of financial reports

the entity’s economic resources, claims against the entity and changes in those resources and claims Users of financial reports are an entity’s existing and
potential investors, lenders and other creditors. Those
how efficiently and effectively management has discharged its users must rely on financial reports for much of the
responsibilities to use the entity’s economic resources financial information they need.

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Chapter 2—Qualitative characteristics of useful
financial information
This chapter discusses what makes financial information useful.

For information to be useful it must both be relevant and provide a faithful representation of what it purports to represent. Relevance and faithful representation are the fundamental
qualitative characteristics of useful financial information, and the guiding concepts that apply throughout the revised Conceptual Framework.

Fundamental qualitative characteristics Summary of changes

Relevance Faithful representation This chapter was issued in 2010 and went through
extensive due process at that time. Therefore,
• information is relevant if it is capable of making a • information must faithfully represent the
in revising the Conceptual Framework the Board did not
difference to the decisions made by users substance of what it purports to represent
fundamentally reconsider this chapter. However, the
• financial information is capable of making a difference • a faithful representation is, to the maximum extent Board clarified the roles of prudence, measurement
in decisions if it has predictive value or confirmatory possible, complete, neutral and free from error uncertainty and substance over form in assessing
value • a faithful representation is affected by level of whether information is useful.
measurement uncertainty
Prudence

Enhancing qualitative characteristics Neutrality is supported by the exercise of prudence.

Prudence is the exercise of caution when making
Comparability Verifiability Timeliness Understandability judgements under conditions of uncertainty. Prudence does
• these four qualitative characteristics enhance the usefulness of information not allow for overstatement or understatement of assets,
liabilities, income or expenses.
• but they cannot make non-useful information useful
Measurement uncertainty
Cost constraint Measurement uncertainty does not prevent information
• the benefit of providing the information needs to justify the cost of providing and using the information from being useful. However, in some cases the most
relevant information may have such a high level of
measurement uncertainty that the most useful information is
information that is slightly less relevant but is subject to
6 | Project Summary | Conceptual Framework | March 2018 lower measurement uncertainty.
Chapter 3—Financial statements and the
reporting entity
This chapter describes the objective and scope of financial statements and provides a description of the reporting entity.

• an entity that is required, or chooses, to prepare financial statements Summary of changes

Reporting entity • not necessarily a legal entity—could be a portion of an entity or comprise more
This chapter is new.
than one entity
Boundary of a reporting entity
Financial statements a particular form of financial reports that provide information about the reporting
entity’s assets, liabilities, equity, income and expenses Determining the appropriate boundary of a reporting entity
can be difficult if, for example, the entity is not a legal
entity. In such cases, the boundary is determined by
Consolidated Unconsolidated Combined considering the information needs of the users of the
financial statements financial statements financial statements entity’s financial statements. Those users need information
that is relevant
provide information about assets, provide information about assets, and that faithfully represents what it purports to
provide information about assets,
liabilities, equity, income and liabilities, equity, income and liabilities, equity, income and represent. A reporting entity does not comprise an
expenses of both the parent and its expenses of the parent only expenses of two or more entities that arbitrary or incomplete collection of assets, liabilities,
subsidiaries as a single reporting are not all linked by a equity, income and expenses.
entity parent-subsidiary relationship

Project Summary | Conceptual Framework | March 2018 | 7

Chapter 4—The elements of financial statements
This chapter defines the five elements of financial statements—an asset, a liability, equity, income and expenses.

Previous definition of an asset Revised definition of an asset Summary of changes

A resource controlled by the entity as a result of past A present economic resource controlled by the entity The definitions of an asset and a liability have been
events and from which future economic benefits are as a result of past events refined and the definitions of income and expenses have
expected to flow to the entity An economic resource is a right that has the been updated only to reflect that refinement.
potential to produce economic benefits
The definition of equity as the residual interest in the
assets of the entity after deducting
• separate definition of an economic resource—to clarify that an asset is the
all its liabilities is unchanged. The Board’s research
economic resource, not the ultimate inflow of economic benefits
Main changes in project on Financial Instruments with
• deletion of ‘expected flow’—it does not need to be certain, or even likely, that Characteristics of Equity is exploring the
the definition of
economic benefits will arise distinction between liabilities and equity.
an asset
• a low probability of economic benefits might affect recognition decisions and the
measurement of the asset No practical ability to avoid
The revised Conceptual Framework discusses how the
Previous definition of a liability Revised definition of a liability ‘no practical ability to avoid’ criterion is applied in the
A present obligation of the entity arising from past A present obligation of the entity to transfer an following circumstances:
events, the settlement of which is expected to result in economic resource as a result of past events
(a) if a duty or responsibility arises from the entity’s
an outflow from the entity of resources embodying An obligation is a duty or responsibility that the customary practices, published policies or specific
economic benefits entity has no practical ability to avoid statements—the entity has an obligation if it has
no practical ability to act in a manner inconsistent
• separate definition of an economic resource—to clarify that a liability is the with those practices, policies or statements.
obligation to transfer the economic resource, not the ultimate outflow of economic
Main changes in (b) if a duty or responsibility is conditional on a
benefits
the definition of a particular future action that the entity itself may take
• deletion of ‘expected flow’—with the same implications as set out above for an asset —the entity has an obligation if it has no practical
liability
• introduction of the ‘no practical ability to avoid’ criterion to the definition of ability to avoid taking that action.
obligation
continued ...
8 | Project Summary | Conceptual Framework | March 2018
... continued
Unit of account the right(s) or obligation(s), or group of rights and obligations, to which Executory contract

recognition criteria and measurement concepts are applied An executory contract is a contract that is equally
unperformed. It establishes a single asset or liability for the
inseparable combined right and obligation to exchange
Selecting the unit of account economic resources.
Relevance Faithful representation Substance of contracts
To represent contractual rights and obligations faithfully,
• a unit of account is selected to provide relevant • a unit of account is selected to provide a faithful
financial statements must report their substance. In some
information about the asset or liability and any represention of the substance of the transaction or
cases, the substance of such rights and obligations is clear
related income and expenses other event from which the asset, liability and any
from a contract’s legal form. But, in other cases, the terms
related income or expenses have arisen
of the contract, or of a group or series of contracts, may
require analysis to identify the substance of the rights and
obligations.

Revised definition of income Revised definition of expenses Although income and expenses are defined
Increases in assets, or decreases in liabilities, Decreases in assets, or increases in liabilities,
in terms of changes in assets and liabilities,
that result in increases in equity, other than that result in decreases in equity, other than information about income and expenses
those relating to contributions from holders of those relating to distributions to holders of is just as important as information about
equity claims equity claims assets and liabilities.

Project Summary | Conceptual Framework | March 2018 | 9

Chapter 5—Recognition and derecognition
This chapter discusses criteria for including assets and liabilities in financial statements (recognition) and guidance on when to
remove them (derecognition).

The process of capturing for inclusion in the statement of financial position or Summary of changes
Recognition the statement(s) of financial performance an item that meets the definition of an asset, a
The previous recognition criteria were that an entity
liability, equity, income or expenses
should recognise an item that met the definition of
an element if it was probable that economic benefits
Recognition is appropriate if it results in both relevant information about assets, liabilities, equity, income and expenses would flow to the entity and if the item had a cost or
and a faithful representation of those items, because the aim is to provide information that is useful to investors, value that could be determined reliably.
lenders and other creditors
The revised recognition criteria refer explicitly to
the qualitative characteristics of useful information.
Recognition criteria
Relevance Faithful representation The Board’s aim was to develop a more coherent set of
• whether recognition of an item results in relevant • whether recognition of an item results in a concepts, not to increase or decrease the range of assets
information may be affected by, for example: faithful representation may be affected by, for and liabilities recognised.
example:

low probability of a flow of measurement uncertainty Why recognition is important

economic benefits Recognising assets, liabilities, equity, income and expenses
recognition inconsistency
depicts an entity’s financial position and financial
existence uncertainty (accounting mismatch)
performance in structured summaries (the statements of
presentation and disclosure financial position and financial performance). The amounts
recognised in a statement are included in the totals and, if
applicable, subtotals,
Cost constraint in the statement. The statements are linked because
Cost constrains recognition decisions, just as it constrains other financial reporting decisions income and expenses are linked to changes in assets and
liabilities.

continued ...
10 | Project Summary | Conceptual Framework | March 2018
... continued
Derecognition The removal of all or part of a recognised asset or liability from an entity’s
Summary of changes
statement of financial position
The guidance on derecognition is new.

Derecognition normally occurs Derecognition resulting from a transfer

Normally, a faithful representation of a transfer
For an asset For a liability
of an asset or liability is achieved by derecognition of the
asset or liability with appropriate presentation and
when the entity loses control of all or part of the when the entity no longer has a present obligation for all
disclosure.
recognised asset or part of the recognised liability
However, in limited cases, it may be necessary to
continue to recognise a transferred component of an asset
Derecognition aims to faithfully represent both
or liability together with a liability or asset for the
• any assets and liabilities retained after the transaction that led to the derecognition proceeds received or paid, with appropriate presentation
• the change in the entity’s assets and liabilities as a result of that transaction and disclosure.

Project Summary | Conceptual Framework | March 2018 | 11

Chapter 6—Measurement
This chapter describes various measurement bases and discusses factors to be considered when selecting a measurement basis.

Historical cost measurement bases Summary of changes

• historical cost provides information derived, at least in part, from the price of the transaction or other event that The previous version of the Conceptual Framework
gave rise to the item being measured included little guidance on measurement.
• historical cost of assets is reduced if they become impaired and historical cost of liabilities is increased if they become The revised Conceptual Framework describes what
onerous information measurement bases provide and explains
• one way to apply a historical cost measurement basis to financial assets and financial liabilities is to measure the factors to consider when selecting a measurement
them at amortised cost basis.

Current value measurement bases

• current value provides information updated to reflect conditions at the measurement date
• current value measurement bases include:
• the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between
fair value market participants at the measurement date
• reflects market participants’ current expectations about
the amount, timing and uncertainty of future cash flows
• reflects entity-specific current expectations about the
value in use (for assets)
amount, timing and uncertainty of future cash flows
fulfilment value (for liabilities)

• reflects the current amount that would be:

current cost ƒ paid to acquire an equivalent asset
ƒ received to take on an equivalent liability

continued ...
12 | Project Summary | Conceptual Framework | March 2018
... continued

The factors to be considered when selecting a measurement basis are relevance and faithful representation, because the aim is to provide information that is useful to investors,
lenders and other creditors

Factors to consider in selecting a measurement basis Selecting a measurement basis

Relevance In selecting a measurement basis, it is necessary to
consider the nature of the information in both the
Relevance of information provided by a measurement basis is affected by: statement of financial position and the statement(s) of
financial performance.

characteristics of the asset or liability contribution to future cash flows

The relative importance of each factor to be considered
• the variability of cash flows • whether cash flows are produced directly or indirectly in (see boxes) depends upon the facts and circumstances of
• sensitivity of the value to market factors or other combination with other economic resources individual cases.
risks • the nature of the entity’s business activities Consideration of the factors and the cost constraint is
• for example, amortised cost cannot provide • for example, if assets are used in combination to produce likely to result in the selection of different measurement
relevant information about a deriviative goods or services, historical cost can provide relevant bases for different assets, liabilities, income and expenses.
information about margins achieved in a period

Faithful representation

Whether a measurement basis can provide a faithful representation is affected by:

measurement inconsistency measurement uncertainty

• if financial statements contain measurement • does not necessarily prevent the use of a
inconsistencies (accounting mismatch), those measurement basis that provides relevant
financial statements may not faithfully represent information
some aspects of the entity’s financial position and • but if too high might make it necessary to consider
financial performance selecting a different measurement basis

Cost constraint
Cost constrains the selection of a measurement basis, just as it constrains other financial reporting decisions
Project Summary | Conceptual Framework | March 2018 | 13
Chapter 7—Presentation and disclosure
This chapter includes concepts on presentation and disclosure and guidance on including income and expenses in the statement of profit or loss and other
comprehensive income.

The statement of profit or loss Summary of changes

• The statement of profit or loss is the primary source of information about an entity’s financial This chapter is new.
performance for the reporting period
• Profit or loss could be a section of a single statement of financial performance or a separate statement Better Communication
• The statement(s) of financial performance include(s) a total (subtotal) for profit or loss
Information about assets, liabilities, equity, income and
• In principle, all income and expenses are classified and included in the statement of profit or loss expenses is communicated through presentation and
disclosure in the financial statements.
Other comprehensive income Effective communication of information in financial
• In exceptional circumstances, the Board may decide to exclude from the statement of profit or loss income or statements makes that information more relevant and
expenses arising from a change in current value of an asset or liability and include those income and expenses in contributes to a faithful representation of an entity’s assets,
other comprehensive income liabilities, equity, income and expenses.
• The Board may make such a decision when doing so would result in the statement of profit or loss providing The revised Conceptual Framework includes concepts
more relevant information or a more faithful representation that describe how information should be presented and
disclosed in financial statements.
Recycling The Board is also working on several projects on the theme
• In principle, income and expenses included in other comprehensive income in one period are recycled to the statement of Better Communication to make financial information
of profit or loss in a future period when doing so results in the statement of profit or loss providing more relevant more useful to investors, lenders and other creditors and to
information or a more faithful representation improve the communication of that information.
• When recycling does not result in the statement of profit or loss providing more relevant information or a more
faithful representation, the Board may decide income and expenses included in other comprehensive income are
not to be subsequently recycled

14 | Project Summary | Conceptual Framework | March 2018

Amendments to References to the Conceptual Framework
in IFRS Standards—a separate accompanying document
That document sets out amendments to Standards to update references to the Conceptual Framework.

Exemptions
• Some Standards include explicit references to previous versions of the
Objective of the Conceptual Framework • IFRS 3 Business Combinations
amendments • These amendments update those references so they refer to the revised To avoid unintended consequences, acquirers are
Conceptual Framework required to apply the definitions of an asset and a
liability and supporting concepts in the previous,
• The Board expects the amendments to references to the Conceptual Framework rather than the revised, Conceptual Framework. The
Effects in Standards will not have a significant effect on users and preparers of Board plans to assess how IFRS 3 can be updated
financial statements without unintended consequences.
• Regulatory account balances
When developing accounting policies for regulatory
• The amendments are effective for annual periods beginning on or after 1 account balances applying IAS 8 Accounting Policies,
Effective date and January 2020, with earlier application permitted Changes in Accounting Estimates and Errors, entities are
transition required to refer to the previous, rather than the revised,
• The amendments should be applied retrospectively unless retrospective
Conceptual Framework. This avoids entities revising
application would be impracticable or involve undue cost or effort
those accounting policies twice within
a short period: once for the revised Conceptual
Framework and again when a revised Standard on
rate-regulated activities is issued.

Project Summary | Conceptual Framework | March 2018 | 15

Important information
This Project Summary has been compiled by the staff of the IFRS Foundation for the convenience of interested parties. The views within this
document are those of the staff who prepared this document and do not necessarily reflect the views or the opinions of the Board. The content of
this Project Summary does not constitute any advice and is not to be considered as an authoritative document issued by the Board.

Official pronouncements of the Board are available in electronic format to eIFRS subscribers. Publications are available for ordering from the IFRS
Foundation website at www.ifrs.org.
Other relevant documents
Conceptual Framework for Financial Reporting—describes the objective of, and the concepts for, general purpose financial reporting.
Basis for Conclusions on the Conceptual Framework for Financial Reporting—summarises the Board’s considerations in developing the
Conceptual Framework.
Amendments to References to the Conceptual Framework in IFRS Standards—sets out amendments to Standards, their accompanying
documents and IFRS practice statements.
Feedback Statement—summarises the feedback on the proposals that led to the revised Conceptual Framework.

16 | Project Summary | Conceptual Framework | March 2018

Notes

Project Summary | Conceptual Framework | March 2018 | 17

Notes

18 | Project Summary | Conceptual Framework | March 2018

Notes

Project Summary | Conceptual

Framework | March 2018 | 19
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