CONCEPTUAL FRAMEWORK PROGRAMME

A conceptual framework is a statement of generally accepted principles which

form the frame of reference for financial reporting. These theoretical principles
provide the basis for development of the new accounting standards and the
evaluation of those already in existence. In the absence of a conceptual
framework, accounting standards are more difficult to develop since each
standard must begin from scratch. It is also more likely that there will be
inconsistencies and contradictions between one standard and another.
Advantages of a conceptual framework
(a) The situation is avoided whereby standards are developed on a patchwork
basis, where a particular accounting problem is recognised as having emerged,
and resources were then channelled into standardising accounting practice in
that area, without regard to whether that particular issue was necessarily the
most important issue remaining at that time without standardisation.
(b) As stated above, the development of certain standards (particularly national
standards) have been subject to considerable political interference from
interested parties. Where there is a conflict of interest between user groups on
which policies to choose, policies deriving from a conceptual framework will be
less open to criticism that the standard-setter buckled to external pressure.
(c) Some standards may concentrate on the income statement whereas some
may concentrate on the valuation of net assets (statement of financial position).
Arguments against a conceptual framework
(a) Financial statements are intended for a variety of users, and it is not certain
that a single conceptual framework can be devised which will suit all users.
(b) Given the diversity of user requirements, there may be a need for a variety of
accounting standards, each produced for a different purpose (and with different
concepts as a basis).
(c) It is not clear that a conceptual framework makes the task of preparing and
then implementing standards any easier than without a framework.
The IASB’s Conceptual Framework
In 1989 the IASB (then IASC) produced a document, Framework for preparation
and presentation of financial statements (‘Framework’). This was superseded in
2010 by the Conceptual framework for Financial Reporting, though this revised
document was only partially complete. It has now been replaced by the March
2018 version which has been issued in order to fill the gaps, update the content
and clarify certain areas.
The 2018 Conceptual Framework

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The 2018 Conceptual Framework is structured into an introductory explanation
on the status and purpose of the Conceptual Framework and eight chapters:
Chapter Topic
Status and purpose of the Conceptual Framework
1 The objective 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 de-recognition
6 Measurement
7 Presentation and disclosure
8 Concepts of capital and capital maintenance

The following sections consider the content of the Conceptual Framework in

more detail
Status and purpose of the Conceptual Framework
The Conceptual Framework is not an IFRS and so does not overrule any
individual IFRS. The Conceptual Framework will be revised from time to time on
the basis of the Board’s experience of working with it.
The purpose of the Conceptual Framework is to:
(a) Assist the International Accounting Standards Board (Board) to develop IFRS
Standards (Standards) that are based on consistent concepts;
(b) Assist preparers to develop consistent accounting policies when no Standard
applies to a particular transaction or other event, or when a Standard allows a
choice of accounting policy; and
(c) Assist all parties to understand and interpret the Standards.
Chapter 1: The objective of general purpose financial reporting
The conceptual Framework states that:
‘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.’
These users information about:
mic resources of the entity,

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Information about the entity’s economic resources and claims against it helps
users to assess the reporting entity’s liquidity and solvency, and its likely needs
for additional financing.
Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources.
The conceptual Framework makes it clear that this information should be
prepared on an accrual basis. Information about a reporting entity’s cash flows
during a period also helps users to assess the entity’s ability to generate future
net cash inflows
Chapter 2: Qualitative characteristics of useful financial information
The Framework identifies types of information that are useful to the users of
financial statements.
The Framework splits qualitative characteristics into categories
i) Fundamental qualitative characteristics
ii) Enhancing qualitative characteristics
Fundamental qualitative characteristics
The fundamental qualitative characteristics are relevance and faithful
representation.
Relevance
Information must be relevant to the decision-making needs of users.
Information is relevant if it can be used for predictive and/or confirmatory
purposes.
– It has predictive value if it helps users to predict what might happen in the
future.
– It has confirmatory value if it helps users to confirm the assessments and
predictions they have made in the past. The relevance of information is affected
by its materiality. Information is material if omitting it or misstating it could
reasonably be expected to influence decisions of the users based on the financial
statements.
– 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.
– Therefore, it is not possible for the IASB to specify a uniform quantitative
threshold for materiality or predetermine what could be material in a particular
situation.

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Faithfully representation
faithfully represent the substance of what it purports to
represent

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 selection or presentation of financial
information.
– 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.

Enhancing qualitative characteristics

There are four enhancing qualitative characteristics
Comparability
omparability is the qualitative characteristic that enables users to identify
and understand similarities in, and differences among, items.

similar information about other entities and with similar information about the
same entity for another period or another date.

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. Consistency helps
to achieve the goal of comparability.
Verifiability

economic phenomena it purports to represent.

could reach consensus, although not necessarily complete agreement, that a

particular depiction is a faithful representation.
Timeliness
ng information available to decision makers in time to
be capable of influencing their decisions. Generally, the older the information is
the less useful it 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.

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Understandability

makes it understandable.
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.
The cost constraint
It is important that the costs incurred in reporting financial information are
justified by the benefits that the information brings to its users.
Chapter 3: Financial statements and the reporting entity
The conceptual framework states that:
‘The objective of financial statements is to provide financial information about
the reporting entity’s assets, liabilities, equity, income and expenses8 that is
useful to users of financial statements in assessing the prospects for future net
cash inflows to the reporting entity and in assessing management’s stewardship
of the entity’s economic resources ‘ A complete set of financial statements
includes:
(a) A statement of financial position,
(b) A statement of profit or loss and other comprehensive income
(c) A statement of changes in financial position
(d) Notes, other statements and explanatory material
A reporting entity is an entity that is required, or chooses, to prepare financial
statements. A reporting entity can be a single entity or a portion of an entity
or can comprise more than one entity. A reporting entity is not necessarily a
legal entity.
Going concern assumption
Financial statements are normally prepared on the assumption that the
reporting 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 enter liquidation or to cease trading. If such an
intention or need exists, the financial statements may have to be prepared on
a different basis. If so, the financial statements describe the basis used.

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 Chapter 4: The elements of financial statements
The elements of the financial statements as identified in the conceptual
framework are summarized in the following table
Asset
events.

benefits

Liability entity to transfer an economic resource as a result

of past events

Equity
liabilities.

Income in
equity, other than those relating to contributions from holders of equity claims.

Expenses
equity, other than those relating to distributions to holders of equity claims.

Chapter 5: Recognition and de-recognition

Recognition
Per the conceptual Framework, recognition is the process of capturing for
inclusion in the statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the elements of
financial statements—an asset, a liability, equity, income or expenses.
Only items that meet the definition of an asset, a liability or equity are
recognised in the statement of financial position. Similarly, only items that
meet the definition of income or expenses are recognised in the statement(s)
of financial performance. However, not all items that meet the definition of
one of those elements are recognised.
An asset or liability is recognised only if recognition of that asset or liability
and of any resulting income, expenses or changes in equity provides users of
financial statements with information that is useful, ie with:
(a) Relevant information about the asset or liability and about any resulting
income, expenses or changes in equity; and
(b) Faithful representation of the asset or liability and of any resulting income,
expenses or changes in equity
Derecognition
Derecognition is the removal of all or part of a recognised asset or liability
from an entity’s statement of financial position. Derecognition normally
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 occurs when that item no longer meets the definition of an asset or of a
liability:
(a) for an asset, derecognition normally occurs when the entity loses control
of all or part of the recognised asset; and
(b) for a liability, derecognition normally occurs when the entity no longer has
a present obligation for all or part of the recognised liability.
Chapter 6: Measurement
The conceptual framework refers to a number of measurement bases, which
can be used to different degrees and in varying combinations in the financial
statements.
Historical or created is the value
cost of the costs incurred in acquiring or creating the asset, comprising the
consideration paid to acquire or create the asset plus transaction costs.

value of the consideration received to incur or take on the liability minus

transaction costs.

Fair value
transfer a liability, in an orderly transaction between market participants
at the measurement date.

Value in use
and benefits that an entity expects to derive from the use of an asset and from
fulfilment its ultimate disposal.
value
ilment value is the present value of the cash, or other economic
resources, that an entity expects to be obliged to transfer as it fulfils a
liability.

Current cost
measurement date, comprising the consideration that would be paid at the
measurement date plus the transaction costs that would be incurred at
that date.

bility is the consideration that would be received

for an equivalent liability at the measurement date minus the transaction
costs that would be incurred at that date.

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.

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 Chapter 7: Presentation and disclosure
The statement of profit or loss is the primary source of information about an
entity’s financial performance for the reporting period. Profit or loss could be
a section of a single statement of financial performance or a separate
statement. The statement(s) of financial performance include(s) a total
(subtotal) for profit or loss
In principle, all income and expenses are classified and included in the
statement of profit or loss In exceptional circumstances, the Board may
decide to exclude from the statement of profit or loss income or expenses
arising from a change in current value of an asset or liability and include
those income and expenses in other comprehensive income .The Board may
make such a decision when doing so would result in the statement of profit
or loss providing more relevant information or a more faithful representation.
In principle, income and expenses included in other comprehensive income
in one period are recycled to the statement of profit or loss in a future period
when doing so results in the statement of profit or loss providing more
relevant information or a more faithful representation.
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.
Chapter 8—Concepts of capital and capital maintenance
Capital maintenance refers to the concept that profits can only be made when
the capital of an organisation is restored to, or maintained at the level that it
was at the start of an accounting period.
The concept is commonly separated into two types:
(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.

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