Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Reporting is a practical tool issued by the International Accounting Standards Board (IASB) that describes the objective of, and the concepts for, general purpose financial reporting. The current version was issued in March 2018. ^[1]

Purpose

The primary purposes of the Framework are: ^[2]

• To assist the IASB in developing IFRS Standards that are based on consistent concepts.
• To assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction.
• To assist all parties to understand and interpret the Standards.

Qualitative characteristics

The Framework identifies the qualities that make financial information useful. These are divided into Fundamental and Enhancing characteristics. ^[3]

Useful Financial Information = Relevance + Faithful Representation

• Relevance: Information is relevant if it is capable of making a difference in the decisions made by users.
• Faithful Representation: Information must represent the economic phenomena it purports to represent.

The Elements of Financial Statements

The Framework defines the "building blocks" of the financial statements. The definitions focus on economic resources and claims. ^[4]

The Balance Sheet Equation

The relationship between assets, liabilities, and equity is the fundamental identity of accounting:

Equity = ∑ Assets − ∑ Liabilities

• Asset: A present economic resource controlled by the entity as a result of past events.
• Liability: A present obligation of the entity to transfer an economic resource as a result of past events.

The Performance Equation

The result of an entity's operations is measured by the change in net assets, excluding contributions from or distributions to equity holders:

Profit (or Loss) = ∑ Income − ∑ Expenses

• Income: Increases in assets, or decreases in liabilities, that result in increases in equity (other than contributions).
• Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity (other than distributions).

Recognition Criteria

An item is recognized in the financial statements if it meets the definition of an element and its recognition provides users with: ^[5]

1. Relevant information about the element.
2. A faithful representation of that element.

Measurement Bases

The Framework describes two primary measurement categories: ^[6]

1. Historical Cost: Measurement based on the transaction price at the date of acquisition.
2. Current Value: Including Fair Value, Value in Use, and Current Cost.

Fair Value = Exit Price (Market-based price to sell an asset or transfer a liability)

References

1. Conceptual Framework (2018).SP1.1.
2. Conceptual Framework.SP1.1.
3. Conceptual Framework.2.4.
4. Conceptual Framework.4.1–4.2.
5. Conceptual Framework.5.7.
6. Conceptual Framework.6.1.