What is the Conceptual Framework?
Form of Theoretical Basis for determining:
(1) Which events to account for
(2) How to measure them.
(3) How to communicate them in financial statements.
Advantages of the Conceptual Framework.
- Standardised approach.
- Less subject to political pressure.
- Consistent approach across standards
- Principles‑based = avoids excessive rules.
Disadvantages of the Conceptual Framework.
- Cannot satisfy all types of users.
- Standards may be created for different purposes.
- Unclear if preparing/implementing standards is easier with it.
Purpose of the IASB Conceptual Framework?
- Helps IASB create IFRS consistently.
- Helps preparers when no suitable standard exists.
- Helps all users interpret IFRS.
- Does not override any standard.
Main objectives of Financial Reporting?
To give useful information to primary users (investors, lenders, creditors) for making resource‑allocation decisions.
Information PRIMARY USERS Need
- Economic resources, claims, and changes
- Management stewardship (efficient use of resources)
QUALITATIVE CHARACTERISTICS -
(1) FUNDAMENTAL
(a) Relevance
- Predictive Value.
- Confirmatory Value (e,g, Historical Performance).
- Materiality of Considerations.
QUALITATIVE CHARACTERISTICS -
(1) FUNDAMENTAL
(b) Faithful Representation
- Reflects ECONOMIC SUBSTANCE (rather than Legal forms).
- (1) Complete ; (2) Neutral ; (3) Free From Error.
- PRUDENCE: can’t be overly optimistic / over-stated.
QUALITATIVE CHARACTERISTICS -
(2) ENHANCING
Comparability
Helps shareholders / PRIMARY USERS to decide whether they want to invest = requires consistency with FS.
QUALITATIVE CHARACTERISTICS -
(2) ENHANCING
Verifiability
Can you prove what you are actually saying / showing = Links to FAITHFUL REPRESENTATION.
QUALITATIVE CHARACTERISTICS -
(2) ENHANCING
Timeliness
- Out of date information = not useful.
- Providing information in a timely manner to help make informed decisions.
QUALITATIVE CHARACTERISTICS -
(2) ENHANCING
Understandability
Presenting information clearly and concisely.
Recognition of Elements in the FS
- Meets definition of an element.
- Provides useful, prudently stated, faithfully represented information.
Derecognition of Elements in the FS
- Asset: control lost.
- Liability: no present obligation remains.
MEASUREMENT:
(1) Historical Cost -
Definition
- Assets measured at acquisition cost.
- Liabilities at consideration received.
MEASUREMENT:
(1) Historical Cost -
Advantages
- Objective = hard to manipulate.
- Reliable and verifiable.
- Consistent.
- Easily understood
MEASUREMENT:
(1) Historical Cost -
Disadvantages
- Profit overstatement (e.g. inflation).
- Outdated asset values.
- Distorted ROCE.
- No separate measurement of holding gains/losses.
- Misleading trends
MEASUREMENT:
(2) Current Values -
Measurement Bases: (1) Fair Value
- IFRS 13.
- Market value
- No Active Market = then (1) Estimate future cashflows or (2) Time value of money.
MEASUREMENT:
(2) Current Values -
Measurement Bases: (2) Value in Use and Fulfilment Value
Value in Use:
- Future economic benefits of asset use.
Fulfilment Value:
- Cost of settling a liability.
MEASUREMENT:
(2) Current Values -
Measurement Bases: (3) Current Costs
Assets = Cost at Measurement Date + Transaction Costs Incurred.
Liabilities = Consideration Received at Measurement Date - Transaction Costs Incurred at that date.
MEASUREMENT:
(2) Current Values -
Advantages
- Helps decide whether to hold/sell assets or settle liabilities
- Relevant for assessing liquidity, stability, and future prospects
