Conceptual Framework at a glance for transactions or other events when no

Standard applies or Standard allows a

Introduction
choice of accounting policies
The International Accounting Standards Board  to assist all parties to understand and
(IASB)(Board) issued the revised Conceptual interpret standards
Framework for Financial Reporting (Conceptual
Framework), a comprehensive set of concepts
for financial reporting, in March 2018. Status
It sets out:  provides concepts and guidance that
underpin the decisions the Board makes
 the objective of financial reporting
when developing Standards
 the qualitative characteristics of useful
 not a Standard
information
 does not override any Standard or any
 a description of the reporting entity and
requirement in a Standard
its boundary
 definitions of an asset, a liability, equity,
income and expenses
Effective date
 criteria for including assets and liabilities
in financial statements (recognition) and  immediately for the Board and the IFRS
guidance on when to remove them Interpretation Committee
(derecognition)w  annual periods beginning on or after 1
 measurement bases and guidance on January 2020 for preparers who develop
presentation on when to use them an accounting policy based on the
 concepts and guidance on presentation Conceptual Framework
and disclosures

WHY HAVE WE REVISED THE

This Project Summary summaries: CONCEPTUAL FRAMEWORK?
 why the Board revised the Conceptual - Previous Conceptual Framework
Framework o Issued in 1989 and partly revised
 the main changes from the previous in 2010
Conceptual Framework o Useful, but incomplete and
 the main concepts and guidance in each needed improvement
chapter of the Conceptual Framework  Priority – identified as a priority by
stakeholders in the 2011 Agenda
Consultation
Purpose  Filling gaps – for example, guidance on
measurement, presentation and
 to assist the Board to develop IFRS
disclosure
Standards (Standards) based on
 Updating – for example, the definitions
consistent concepts, resulting in
of an asset and a liability
financial information that is useful to
 Clarifying – for example, the role of
investors, lenders and other creditors
 to assist preparers of financial reports to measurement uncertainty
develop consistent accounting policies
 - Revised Conceptual Framework – a Recognition : criteria for including assets and
comprehensive set of concepts for liabilities in financial statements
financial reporting
CLARIFIED
- Prudence
Approach - Stewardship
- Measurement uncertainty
In revising the Conceptual Framework, the
- Substance over form
Board sought a balance between providing
high-level concepts and providing enough
details for the Conceptual Framework to be
CHAPTER 1: THE OBJECTIVE OF
useful to the Board and others.
FINANCIAL REPORTING
The Board views the Conceptual Framework
This chapter sets out the objective of general
as a practical tool to help it develop Standards.
purpose financial reporting (financial reporting),
Hence, the Conceptual Framework includes
what information is needed to achieve that
concepts that help the Board develop
objective and who the primary users (users) of
Standards and also discusses the factors the
financial reports are.
Board needs to consider in making judgements
when application of the concepts doesn’t lead Objective of financial reporting
to a single answer.
To provide financial info that’s useful to
users in making decisions relating to providing
resources to the entity
MAIN CHANGES
Users’ decisions involve decisions abt
The revised Conceptual Framework introduces
the following main improvements:  Buying, selling, or holding equity or debt
instruments
NEW:
 Providing or settling loans and other
Measurement : concepts on measurement, forms of credit
including factors to be considered when  Voting, or otherwise influencing
selecting a measurement basis management’s actions
Presentation and disclosure : concepts on To make these decisions, users assess
presentation and disclosure, including when to
 Prospects for future net cash inflows to
classify income and expenses in other
the entity
comprehensive income
 Management’s stewardship of the
Derecognition : guidance on when assets and entity’s economic resources
liabilities are removed from financial
To make both these assessments, users need
statements
info about both
 The entity’s economic resources, claims
UPDATED: against the entity and changes in those
resources and claims
Definitions : definitions of an asset and a
 How efficiently and effectively
liability
management has discharged its
 responsibilities to use the entity’s RELEVANCE
economic resources
- Info is relevant if its capable of making a
Summary of changes difference to the decisions made by
users
This chapter was issued in 2010 and went
- Financial info is capable of making a
through extensive due process at that time.
difference in decisions if it has predictive
Therefore, in revising the Conceptual
value or confirmatory value
Framework, the Board didn’t fundamentally
reconsider this chapter. However, it clarified FAITHFUL REPRESENTATION
why info used in assessing stewardship is
- Info must faithfully represent the
needed to achieve the objective of financial
substance of what it purports to
reporting.
represent
Stewardship - A faithful representation is, to the
maximum extent possible, complete,
Users of financial reports need info to help
neutral, and free from error
them assess management’s stewardship. The
- A faithful representation is affected by
Conceptual Framework explicitly discusses this
level of measurement uncertainty
need as well as the need for info that helps
users assess the prospects for future net cash
inflows to the entity
Enhancing qualitative characteristics
Users of financial reports
VERIFIABILITY
Users of financial reports are an entity’s
COMPARABILITY
existing and potential investors, lenders and
other creditors. Those users must rely on UNDERSTANDABILITY
financial reports for much of the financial info
TIMELINESS
they need.
- These 4 qualitative characteristics
enhance the usefulness of info
CHAPTER 2 – QUALITATIVE - But they cant make non-useful info
CHARACTERISTICS OF USEFUL FINANCIAL useful
INFO
Cost Constraint – the benefit of providing the
This chapter discusses what makes financial info needs to justify the cost of providing and
info useful using the info
For information to be useful it must be Prudence
RELEVANT and provide a FAITHFUL
Neutrality is supported by the exercise of
REPRESENTATION of what it purports to
prudence. Prudence is the exercise of caution
represent. RELEVANCE and FAITHFUL
when making judgements under conditions of
REPRESENTATION are the fundamental
uncertainty. Prudence doesn’t allow for
qualitative characteristic of useful financial
overstatement or understatement of assets,
information, and the guiding concepts that
liabilities, income or expenses.
apply throughout the revised Conceptual
Framework. Measurement uncertainty – doesn’t prevent
info from being useful. However, in some cases
Fundamental qualitative characteristics
the most relevant info may have such a high statements. Those users need info that’s
level of measurement uncertainty that the most RELEVANT and that FAITHFULLY
useful info is info that is slightly less relevant REPRESENTS what it purports to represent. A
but is subject to lower measurement reporting entity doesn’t comprise an arbitrary or
uncertainty. incomplete collection of assets, liabilities,
equity, income and expenses.

CHAPTER 3 – FINANCIAL STATEMENTS

AND THE REPORTING ENTITY CHAPTER 4 – THE ELEMENTS OF
FINANCIAL STATEMENTS
This chapter describes the objective and scope
of financial statements and provides a This chapter defines the 5 elements of financial
description of the reporting entity. statements - an asset, liability, equity, income
and expenses.
Reporting entity
ASSET
- an entity that is required, or chooses, to
prepare financial statements Prev – a resource controlled by the entity as a
- Not necessarily a legal entity – could be result of past events and from which future
a portion of an entity or comprise more economic benefits are expected to flow to the
than one entity entity.
Financial statement – a particular form of Revised – a present economic resource
financial reports that provide info abt the controlled by the entity as a result of past
reporting entity’s assets, liabilities, equity, events; an economic resource is a right that
income and expenses has the potential produce economic benefits.
Consolidated financial statements – provide Main changes in the definition of an ASSET:
info abt assets, liabilities, equity, income and
- Separate definition of an economic
expenses of both the parent and its
resource – to clarify that an asset is the
subsidiaries as a single reporting entity
economic resource, not the ultimate
Unconsolidated financial statements – provide inflow of economic benefits
info abt assets, liabilities, equity, income and - Deletion of ‘expected flow’ – it doesn’t
expenses of the parent only need to be certain, or even likely, that
economic benefits will arise/
Combined financial statements – provide info
- A low probability of economic benefits
abt the assets, liabilities, equity, income and
might affect recognition decisions and
expenses of two or more entities that are not all
the measurement of the asset.
linked by a parent-subsidiary relationship.
Summary of changes : this chapter is new
LIABILITY
Boundary of a reporting entity
Prev – a present obligation of the entity arising
Determining the appropriate boundary of a
from past events, the settlement of which is
reporting entity can be difficult if, for ex, the
expected to result in an outflow from the entity
entity is not a legal entity. In such cases, the
of resources embodying economic benefits
boundary is determined by considering the info
needs of the users of the entity’s financial
Revised – a present obligation of the entity to b) If a duty or responsibility is conditional
transfer an economic resource as a result of on a particular future action that the
past events; an obligation is a duty or entity itself may take – the entity has an
responsibility that the entity has no practical obligation if it has no practical ability to
ability to avoid. avoid taking the action.
Main changes in the definition of a LIABILITY
- Separate definition of an economic Unit of account – the right(s) or obligation(s), or
resource – to clarify that a liability is the group of rights and obligations, to which
- obligation to transfer the economic recognition criteria and measurement concepts
resource, not the ultimate outflow of are applied.
economic benefits
Selecting the unit of account
- Deletion of ‘expected flow’ - w the same
implications as set out above for an Relevance – a unit of acct is selected to
asset provide relevant info abt the asset or liability
- Introduction of the ‘no practical ability to and any related income and expenses
avoid’ criterion to the definition of
Faithful representation – a unit of acct is
obligation
selected to provide a faithful representation of
the substance of the transaction or other event
from which the asset, liability and any related
Summary of changes
income or expenses have arisen.
The definitions of an asset and a liability have
been refined and the definitions of income and
expenses have been updated only to reflect INCOME
that refinement.
Revised – increases in assets, or decreases in
The definition of equity as the residual interest liabilities, that result in increases in equity,
in the assets of the entity after deducting all its other than those relating to contributions from
liabilities is unchanged. The Board’s research holders of equity claims
project on Financial Instruments with
Characteristics of Equity is exploring the
distinction between liabilities and equity. EXPENSES
No practical ability to avoid Revised – decreases in assets, or increases in
liabilities, that result in decreases in equity,
The revised Conceptual Framework discusses
other than those relating to distribution to
how the ‘no practical ability to avoid’ criterion is
holders of equity claims
applied in the ff circumstances:\
a) If a duty or responsibility arises from the
entity’s customary practices, published Executory contract – a contract that’s equally
policies or specific statements – the unperformed. It establishes a single asset or
entity has an obligation if it has no liability for the inseparable combined right and
practical ability to act in manner obligation to exchanged economic resources.
inconsistent w those practices, policies
Substance of contracts – to represent
or statements.
contractual rights and obligations faithfully,
financial statements must report their Cost constraint – recognition decisions, just as
substance. In some cases, the substance of it constraints other financial reporting decisions
such rights and obligations is clear form the
Summary of changes
contract’s legal form. But, in other cases, the
terms of the contract, or of a group or serries of The previous recognition criteria were that on
contracts, may require analysis to identify the entity should recognize an item that met the
substance of the rights and obligations. definition of an element if it was probable that
economic benefits would flow to the entity and
Although income and expenses are defined in
if the item had a cost or value that could be
terms of changes in assets and liabilities, info
determined reliably.
abt income and expenses is just as important
as info abt assets and liabilities The revised recognition criteria refer explicitly
to the qualitative characteristics of useful info.
The Board’s aim was to develop a more
CHAPTER 5 – RECOGNITION AND
coherent set of concepts, not to increase or
DERECOGNITION
decrease the range of assets and liabilities
This chapters discusses for including assets recognized.
and liabilities in financial statements
(recognition) and guidance on when to remove
them (derecognition) Why recognition is important?
Recognition – the process of capturing for Recognizing assets, liabilities, equity, income
inclusion in the statement of financial position and expenses depicts an entity’s financial
or the statement(s) of financial performance an position and financial performance in structured
item that meets the definition of an asset, summaries (the statements of financial position
liability, equity, income or expense. and financial performance). The amounts
recognized in a statement are included in the
Recognition is appropriate if it results in both
totals and, if applicable, subtotals, in the
RELEVANT info abt assets, liabilities, equity,
statements. The statements are linked because
income and expenses and a FAITHFUL
income and expenses are linked to changes in
REPRESENTATION of those items, because
assets and liabilities.
the aim is to provide info that is useful to
investors, lenders and other creditors.
Recognition criteria Derecognition – the removal of all or part of a
recognized asset or liability from an entity’s
Relevance – whether recognition of an item
statement of financial position.
results in relevant info may be affect by, for ex,:
- low probability of a flow of economic benefits; Derecognition normally occurs
- existence uncertainty
- For an asset – when the entity loses
Faithful representation – whether recognition of control of all or part of the recognized
an item results in a faithful representation may asset
be affected by, for ex: - measurement - For a liability – when the entity no longer
uncertainty; - recognition inconsistency has a present obligation for all or part of
(accounting mismatch); - presentation and the recognized liability
disclosure.
Derecognition aims to faithfully represent both
 - Any assets and liabilities retained after - Current value provides info updated to
the transactions that led to the reflect conditions at the measurement
derecognition date
- The change in the entity’s assets and - Current value measurement bases
liabilities as a result of that transaction include:
o Fair value – the price that would
Summary of changes
be received to sell an asset, or
The guidance on derecognition is new paid to transfer a liability, in an
orderly transaction between
Derecognition resulting from a transfer
market participants at the
Normally, a faithful representation of a transfer measurement date; reflects
of an asset or liability is achieved by market participant’s current
derecognition of the asset or liability w expectations abt the amount,
appropriate presentation and disclosure. timing and uncertainty of future
cash flows.
However, in limited cases, it may be necessary
o Value in use (for assets);
to continue to recognize a transferred
fulfillment value (for liabilities) –
component of an asset or liability together with
reflects entity-specific current
a liability or asset for the proceed received or
expectations abt the amount,
paid, w appropriate presentation and
timing and uncertainty of future
disclosure.
cash flows.
o Current cost – reflects the current
CHAPTER 6 – MEASUREMENT amount that would be:
 Paid in acquire an
This chapter describes various measurements equivalent asset
bases and discusses factors to be considered  Received to take on an
when selecting a measurement basis. equivalent liability
Historical cost measurement bases
- Historical cost provides info derived, at Summary of changes
least in part, from the price of the
transaction or other event that gave rise The previous version of the conceptual
to the item being measured framework included little guidance on
- Historical cost of assets is reduced if measurement. The revised conceptual
they become impaired and historical framework describes what info measurement
cost of liabilities is increased if they bases provide and explains the factors to
become onerous consider when selecting a measurement basis.
- One way to apply a historical cost The factors to be considered when selecting a
measurement basis to a financial assets measurement basis are RELEVANCE and
and financial liabilities is to measure FAITHFUL REPRESENTATION because the
them at amortized cost aim is to provide info that’s useful to investors,
lenders, and other creditors.

Current value measurement bases Factors to consider in selecting a measurement

basis
RELEVANCE – of info provided by a In selecting a measurement basis, its
measurement basis is affected by: necessary to consider the nature of the info in
both the statement of financial position and the
- Characteristics of the asset or liability
statement(s) of financial performance.
o The variability of cash flows
o Sensitivity of the value to market The relative importance of each factor to be
factors or other risks considered (see boxes) depends upon the
o For ex, amortized cost cant facts and circumstances of individual cases.
provide relevant info abt a Consideration of the factors and the cost
derivative constraint is likely to result in the selection of
- Contribution to future cash flows different measurement bases for different
o Whether cash flows are produced assets, liabilities, income and expenses.
directly or indirectly in
combination w other economic
resources. CHAPTER 7 – PRESENTATION AND
o The nature of the entity’s DISCLOSURE
business activities
o For ex, if assets are used in This chapter includes concepts on presentation
and disclosure and guidance on including
combination to produce
income and expenses in the statement of profit
goods/service, historical cost can
or loss and other comprehensive income.
provide relevant info abt margins
achieved in a period The statement of profit or loss
FAITHFUL REPRESENTATION - The statement of profit or loss is the
primary source of info abt an entity’s
Whether a measure basis can provide a faithful
financial performance for the reporting
representation is affected by:
period.
- Measurement inconsistency - Profit or loss could be a section of a
o If financial statements contain single statement of financial
measurement inconsistencies performance or a separate statement
(accounting mismatch), those - The statement(s) of financial
financial statements may not performance include(s) a total (subtotal)
faithfully represent some aspects for profit or loss
of the entity’s financial position - In principle, all income and expenses
and financial performance. are classified and included in the
- Measurement uncertainty statement of profit or loss.
o Doesn’t necessarily prevent the
use of a measurement basis that
provides relevant info Other comprehensive income
o But if too high might make if
- In exceptional circumstances, the Board
necessary to consider selecting a
may decide from the statement of profit
different measurement basis.
or loss, income or expenses arising from
Selecting a measurement basis a change in current value of an asset or
liability and include those income and
 expenses in other comprehensive lenders, and other creditors and to improve the
income. communication of that info.
- The Board may make such a decision
when doing so would result in the
statement of profit or loss providing AMENDMENTS TO REFERENCES TO THE
more relevant information or more CONCEPTUAL FRAMEWORK IN IFRS
faithful representation STANDARDS – a separate accompanying
document
Recycling
Objective of the amendments
- In principle, income and expenses
included in other comprehensive income - Some standards include explicit
in one period are recycled to the references to previous versions of the
statement of profit or loss in a future conceptual framework
period when doing so results in the - These amendments update those
statement of profit or loss providing references so they refer to the revised
more relevant info or more a faithful conceptual framework
representation
Effects – the Board expects the amendments
- When recycling doesn’t result in the
to references to the conceptual framework in
statement of profit or loss providing
standards will not have a significant effect on
more relevant info or more a faithful
users and preparers of financial statements
representation, the Board may decide
income and expenses included in other Effective date and transition
comprehensive income are not be
- The amendments are effective for
subsequently recycled.
annual periods beginning on or after 1
Summary of changes: this chapter is new January 2020, w earlier application
permitted.
Better communication
- The amendments should be applied
Info abt assets, liabilities, equity, income and retrospectively unless retrospective
expenses is communication through application would be impracticable or
presentation and disclosure in the financial involve undue cost or effort
statements.
Exemptions
Effective communication of information in
- IFRS 3 BUSINESS COMBINATIONS
financial statements makes that info more
relevant and contributes to a faithful To avoid unintended consequences, acquirers
representation of an entity’s assets, liabilities, are required to apply the definitions of an asset
equity, income and expenses. and a liability and supporting concepts in the
previous rather than the revised conceptual
The revised conceptual framework included
framework. The Board plans to asses how
concepts that describe how info should be
IFRS 3 can be updated without unintended
represented and disclosed in financial
consequences.
statements.
- Regulatory account balances
The Board is also working on several projects
on the them of Better Communication to make When developing accounting policies for
financial information more useful to investors, regulatory account balances applying IAS 8
Accounting Policies, Changes in Accounting
Estimates and Errors, entities are required to
refer to the previous, rather than the revised,
conceptual framework. This avoids entities
revising 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.