IASB Framework for the Preparation and Presentation of Financial Statements

The International Accounting Standards Board (IASB) is the independent standard-

setting body responsible for developing International Financial Reporting Standards
(IFRSs). To ensure consistency, transparency, and comparability across jurisdictions, the
IASB developed the Conceptual Framework for Financial Reporting.
The Conceptual Framework serves as a theoretical foundation that underpins the
preparation and presentation of financial statements. It provides a set of interrelated
objectives and fundamental principles that guide the development of accounting
standards and assist preparers, auditors, and users of financial statements.
Although it is not a Standard and cannot override any IFRS, the Framework is used when
no specific IFRS applies to a transaction or event, helping management to adopt an
accounting policy that results in information that is relevant and faithfully represented.

Objectives of the IASB Framework

The IASB Conceptual Framework has several important objectives, including:

i. Assisting the IASB in developing IFRSs: The framework guides the

Board in creating accounting standards that are logically consistent and
based on sound accounting concepts.
ii. Assisting preparers of financial statements: Where no IFRS applies to
a particular transaction, the framework helps preparers select
appropriate accounting policies that produce useful information.
iii. Assisting auditors: Auditors use the framework to assess whether
financial statements comply with IFRSs and reflect economic reality.
iv. Assisting users of financial statements: Users (e.g., investors, lenders,
analysts) can understand the underlying principles of financial
reporting, aiding them in interpreting financial information.
v. Promoting harmonization and consistency: The framework enhances
global comparability by establishing common accounting principles.

1
Thus, the IASB framework ensures that all participants in financial reporting share a
common understanding of key accounting concepts and objectives.

Purpose of Financial Statements

The primary 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 about providing resources to the entity.
Accordingly, Financial statements serve as the main source of information for decision-
making by external users.
These users need to assess:
• The entity’s financial position (resources and obligations).
• Its financial performance (profitability).
• Its cash flows (liquidity and solvency).
Financial statements help users evaluate management’s stewardship of resources and
assess the entity’s future prospects for generating cash flows.
Underlying Assumptions
The IASB framework is built on two key assumptions:
i. Accrual Basis of Accounting: Transactions and events are recorded when they
occur, not when cash is received or paid. This approach ensures that income and
expenses are matched to the period to which they relate. For example, revenue is
recognized when goods are delivered, even if payment is received later.
ii. Going Concern: The financial statements are prepared with the assumption that
the entity will continue in operation for the foreseeable future. It implies that the
business has no intention or need to liquidate or curtail operations. If this

2
 assumption is invalid, assets and liabilities would need to be measured at
liquidation value rather than historical cost.

Qualitative Characteristics of Financial Information

Qualitative characteristics describe the attributes that make financial information useful
to users. The framework classifies them into fundamental and enhancing characteristics.
A. Fundamental Qualitative Characteristics
1. Relevance: Financial statement should be prepared and presented to contain
information that is relevant. Information is relevant if it can influence users’
decisions by helping them evaluate past, present, or future events or
confirm/correct past evaluations. Hence, information is relevant if it has
predictive value or confirmatory value. Relevant information should also be
material in nature. Information is material if its omission or misstatement could
influence economic decisions.
2. Faithful Representation: Financial information must faithfully represent the
economic phenomena it purports to represent. It should be:
• Complete (all necessary information included),
• Neutral (free from bias), and
• Free from error (no significant inaccuracies).
Together, relevance and faithful representation make information useful for decision-
making.

B. Enhancing Qualitative Characteristics

1. Comparability: Financial statement should be prepared in such a way that it
enables to identify and understand similarities and differences among entities and
across periods. Comparability is achieved through consistent accounting policies.
2. Verifiability: Financial statements should be prepared in a way that it enables
different knowledgeable and independent observers to reach the same conclusion
on the financial performance and position of the reporting entity. This assures

3
 users that information faithfully represents underlying transactions. Verification
may be direct (e.g., checking cash balance) or indirect (e.g., recalculating inputs).
3. Timeliness: Information must be made available in time to influence decisions.
Delay may reduce relevance.
4. Understandability: Financial statements should be prepared and presented in as
such a way that it can easily be understood by users. In other words, information
should be presented clearly and concisely. Complex matters should not be
excluded if they are relevant.
Note: These enhancing characteristics improve the usefulness of financial information but
cannot make irrelevant or unfaithfully represented information useful.
Components of financial statement
According to the IAS 1 “Presentation of financial statements”, a complete set of financial
statement should include the following:
i. Statement of financial position
ii. Statement of comprehensive income or statement of financial performance
iii. Statement of changes in equity
iv. Statement of cashflow
v. Statement of accounting policies and explanatory notes (i.e. note to the
accounts).
Elements of Financial Statements
The framework defines five elements directly related to financial position and
performance:
1. Assets: The present economic resource controlled by the entity as a result of past
events. An economic resource is a right with the potential to produce economic
benefits. Examples: cash, receivables, inventory, buildings, equipment.
2. Liabilities: The present obligation of the entity to transfer an economic resource
as a result of past events. Examples: loans payable, trade creditors, accrued
expenses.
3. Equity: The residual interest in the assets after deducting all liabilities. It
represents owners’ interest. Examples: share capital, retained earnings, reserves.

4
 4. Income: Increases in assets or decreases in liabilities that result in increases in
equity, other than contributions from owners. Includes revenue (from ordinary
activities) and gains.
5. Expenses: Decreases in assets or increases in liabilities that result in decreases in
equity, other than distributions to owners. Includes cost of sales, depreciation,
wages, losses.
Recognition of Elements
Recognition means incorporating an item into the financial statements. An item should
be recognized when:
• It meets the definition of an element (asset, liability, income, or expense).
• It is probable that future economic benefits will flow to or from the entity.
• The item has a cost or value that can be measured reliably.

Example: A receivable is recognized when goods are sold on credit (probable inflow and
measurable). A potential lawsuit is recognized as a liability only if payment is probable
and estimable.
Measurement Bases
Measurement determines the monetary amount at which elements are recognized. The
framework identifies several bases:

i. Historical Cost: this is based on the original transaction amount. Objective and
verifiable but may become outdated.
ii. Current Cost: Reflects the amount that would be paid to acquire the same asset
today.
iii. Realizable (Settlement) Value: The amount that could be obtained by selling
an asset or paid to settle a liability.
iv. Present Value: The discounted value of future net cash inflows or outflows.
This recognizes the time value of money.
v. Fair Value: The price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants.

5
In practice, IFRS uses a mixed measurement model, applying different bases to different
elements.

IFRS 15- REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 is an international accounting standard issued by the International Accounting
Standards Board (IASB) that governs how companies recognize revenue from contracts
with customers. The standard applies to all contracts with customers, except for; Lease
contracts (IFRS 16); Insurance contracts (IFRS 17); Financial instruments and other
contractual rights/obligations (IFRS 9, IAS 32, IFRS 7); Non-monetary exchanges between
entities in the same line of business (e.g., barter of advertising services.
The IASB issued IFRS 15 "Revenue from contract with customers" because the existing
criteria for revenue recognition outlined in IAS 11 "Construction contract" and 18
"Revenue" were considered to be highly subjective. As a result, this, it was difficult to
verify the accuracy of the reported figures for revenue and associated costs.
One of the fundamental qualitative characteristics of useful financial information which
is referred to in the lASB Conceptual Framework is faithful representation. Information
needs to be verifiable in order to ensure it meets this fundamental characteristic. IFRS 15
"Revenue from contract with customers" provides a clearer framework upon which the
revenue recognition decision is based, thus increasing the verifiability of the revenue
figure and hence its usefulness.
Therefore, IFRS 15 set out rules and principles for the recognition of revenue based on
the transfer of control to the customer from the entity supplying the goods or services.
Under IFRS 15 the transfer of goods and services is based upon the transfer of control,
rather than the transfer of risk and rewards as in IAS 18. Control of an asset is described
in the standard as the ability to direct the use of, and obtain substantially of the remaining
benefits from the asset. IFRS 15 applies to all contracts with customer except those
addressed by other accounting standards.

6
Definition of Key Terms
i. Contract: this is an agreement between two or more parties that create
enforceable rights and obligations.
ii. Income: these are increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of liabilities that
result in an increase in equity, other than those relating to contributions from
equity participants.
iii. Revenue: these are income arising from the principal or main activities of the
entity during the accounting period.
iv. Customer: this is the party that has contracted with an entity to obtain goods
or services that are an output of the entity's ordinary activities in exchange for
consideration.
v. Performance obligations: This is a promise in a contract with a customer to
transfer goods or services to the customer. This may be goods or services (or a
bundle of goods or services) that is distinct; or series of distinct goods or
services that are substantially the same and that have the same pattern of
transfer to customer.
vi. Contract asset: This is an entity's right to consideration in exchange for goods
or services that the entity has transferred to a customer when that right is
conditioned on something other than the passage of time (for example the
entity's future performance). That is, contract asset occurs when the reporting
entity's right to consideration is conditional on something other than the
passage of time, for instance conditional on future performance. When revenue
has been earned but not yet invoiced, the reporting entity will recognize
contract asset (and not receivable) in its statement of financial position.
vii. Receivable: This is an entity's right to consideration that is unconditional
except for the passage of time. For instance, where all the obligations have been
performed but the agreed date of settlement is yet to occur. Where revenue has
been earned and invoiced, the reporting entity will recognize receivable (and
not contract asset) in its statement of financial position.

7
 viii. Contract liability: A contract liability is recognized and presented in the
statement of financial position where a customer has paid an amount of
consideration prior to the reporting entity performing its obligation. That is, a
contract liability is recognized when a customer has paid part or all the amount
of the consideration before the reporting entity transfers control of the related
good or service to the customer.
ix. Stand-alone selling price: This is the price at which an entity would sell a
promised good or service separately to a customer.
x. Transaction price: This is the amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or services
to a customer (excluding amounts collected on behalf of third parties).

Satisfaction of Performance Obligations or Transfer of Control

IFRS 15 requires an entity to recognize revenue only when it satisfies an identified
performance obligation by transferring a promised good or service to a customer.
Goods or services are considered to be transferred when the customer obtains control
That is, when the seller or vendor transfers the control over the goods or services to
customers. IFRS 15 states that 'control of an asset refers to the ability to direct the use of
and obtain substantially all of the remaining benefits from the asset'. Control also means
the ability to prevent others from directing the use of, and receiving the benefit from, a
good or service.
Types of Performance Obligations
a. Performance obligation satisfied at a point in time
b. Performance obligation satisfied over time
IFRS 15 introduces a five-step model to recognize revenue
Whether performance obligation is satisfied at a point in time or over time Under IFS 15
"Revenue from contract with customers", revenue is recognized and measured using the
following five step models:
1. Identify the contract with customers
2. Identify the separate performance obligations

8
 3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when (or as) a performance obligation is satisfied
Step 1: Identify the Contract with Customer
The main point here is to determine whether a contract actually exist between the
reporting entity and its customers or not. According to IFRS 15, for any contract to be
valid, there following criteria must be met:
a. The parties have approved the contract and are committed to carrying it out.
b. Each party's rights regarding the goods and services to be transferred can be
identified.
c. The payment terms for the goods and services can be identified.
d. The contract has commercial substance.
e. It is probable that the entity will collect the consideration to which it will be
entitled.
f. The contract can be written, verbal or implied.
Step 2: Identify the Separate Performance Obligations
The main point here is to determine whether the different goods or services included in
the contract that can be transacted separately. A contract includes promises to provide
goods or services to a customer. Those promises are called performance obligations. A
company would account for a performance obligation separately only if the promised
good or service can be separated. Goods or services can be separated if they can be sold
separately or because it has a different function and a different profit margin.
Step 3: Determine the Transaction Price
The transaction price is the amount of consideration that the company (that is, the service
provider or the seller of the goods) is expected to receive from the customer for service
rendered or for goods transferred.
That is, the transaction price is the amount of consideration the service provider or the
seller of the goods expects to be entitled to or received from the customer in exchange
for transferring goods or services. The transaction price would reflect the company's
probability-weighted estimate of variable consideration (including reasonable estimates

9
of contingent amounts) in addition to the effects on the customer's credit risk and the time
value of money (if material).
Variable contingent amounts are only included where it is highly probable that there will
not be a reversal of revenue when any uncertainty associated with the variable
consideration is resolved. That is, when there is more than 50% chances that the revenue
will be received even if any uncertainty associated to the variable consideration
determined. Examples of where a variable consideration can arise include: discounts,
refunds, price concessions, credits and penalties.
Step 4: Allocate the Transaction Price to the Performance Obligations
Where a contract contains more than one distinct performance obligation the company
(that is, the service provider or the seller of the goods) should allocate the transaction
price to all separate performance obligations in proportion of their stand-alone selling
price of the good or service underlying each performance obligation.
That is, when a contract contains more than one distinct (or different) performance
obligation or component, the company (that is, the service provider or the seller of the
goods) should allocate the transaction price to all separate performance obligations or
components based on the ratio of the amount that each component or performance
obligation would have been separately sold (i.e. if they were not combined).
The stand-alone selling price is the price or amount that the goods should have been
separately sold or service separately rendered. That is, the selling price of each
performance obligation or component if it was sold or rendered separately.
So, if any entity sells a bundle of goods and/or services which it also supplies unbundled.
The separate performance obligations in the contract should be priced in the same
proportion as the unbundled prices. This would apply to mobile phone contracts where
the handset is supplied 'free'. The entity must look at the stand-alone price of such a
handset and some of the consideration for the contract should be allocated to the handset.
However, there are instances, where the transaction price will NOT be allocated based
on stand-alone prices but will the discount in the contract to be allocated first. Where this
is the case, the transaction price attributable to each performance obligation will now be

10
their respective stand-alone prices minus the allocated discount. This exceptional case
will be discussed later under "Allocation of discounts".
Step 5: Recognize Revenue When (Or As) A Performance Obligation is Satisfied
The entity satisfies a performance obligation by transferring control of the promised
goods to the customer or rendering the promised service to the customer.
A performance obligation can be satisfied at a point in time, such as when goods are
delivered to the customer, or over time. Performance obligations satisfied overtime are
not usually delivery of goods and are agreed service provision that cannot be provided
at a particular point in time.
According to IFRS 15, an obligation satisfied overtime will meet one of the following
criteria:
• The customer simultaneously receives and consumes the benefits as the
performance takes place.
• The entity's performance creates or enhances an asset that the customer controls
as the asset is created or enhanced.
• The entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date.
Notes:
• The amount of revenue recognized is the amount allocated to that performance
obligation in "Step 4 above".
• An entity must be able to reasonably measure the outcome of a performance
obligation before the related revenue can be recognized.
• In some circumstances, such as in the early stages of a contract, it may not be
possible to reasonably measure the outcome of a performance obligation, but the
entity expects to recover the costs incurred, in these circumstances, revenue is
recognized only to the extent of costs incurred.

11
 EXAMPLES
Example 1: Identification of separate performance obligations
Right Path Limited entered into a contract to supply computer equipment and also
provide maintenance services for a period of two years after the computer equipment has
been delivered.
Required
What are the performance obligations in the contract with the customer?

Example 2 : Identification of separate performance obligations

Nancy Limited entered into a contract with Zenith bank to supply LG 2,000 air-
conditioner and also to install the 2,000 air-conditioner in all the branches in Lagos state.
The installation services can also be provided by other entities.

Required
What are the performance obligations in the contract with Zenith bank?

Example 3: Identification of separate performance obligations

Office Solutions, a limited company, has developed a communications software package
called CommSoft. Office Solutions has entered into a contract with Logic-city to supply
the following:
a. Licence to use Commsoft
b. Installation service. This may require an upgrade to the computer operating
system, but the software package does not need to be customized.
c. Technical support for three years
d. Three years of updates for Commsoft.
Office Solutions is not the only company able to install CommSoft, and the technical
support can also be provided by other companies. The software can function without the
updates and technical support.

12
Required

i. Explain whether the goods or services provided to Logic-city are distinct in

accordance with IFRS 15 Revenue from contracts with customers.
Example 4: Determination of the transaction price
On 1 January, 20xS, ABC Limited sold a machine to a customer for a total price of $680,000
and payment was made immediately by the customer. The terms of sale included an
arrangement that ABC Limited would service and maintain the machine for a two years
period from 1 January 20x5 to 31 December 20x6. The normal selling price of the machine
without a service and maintenance arrangement was $500,000 and would have charged
$240,000 to provide this two years maintenance services.
Required:
i. Determine the transaction price from the above contract with a customer

Example 5: Determination of the transaction price

PICAS Plc. supplies computer hardware to large businesses. On 1 January 20x2, PICAS
entered into a contract with GP limited, under which PICAS Plc is to supply PH computer
hardware to GP limited $1,300 per unit. The terms of the contract includes that if GP
limited purchases more than 2,000 PH computers hardware in a year, the price per unit
is reduced retrospectively to $1,200 per unit. PICAS's year end is 31 December.
As 31 March 20x2, GP limited had purchased 100 PH computers hardware from PICAS
Plc. PICAS Plc. therefore estimates that GP limited would not likely purchase up to 2,000
PH computers hardware in the year to 31 December 20x2 and as a result will not be
entitled to the volume discount.
During the second quarter ended 30 June 20x2, GP limited improved on its purchases
significantly and purchased an additional 400 PH computers hardware from PICAS Plc.
Despite the significant increase in purchases by GP limited, PICAS Plc. still estimated that
GP limited purchases would not exceed the threshold for the volume discount in the year
to 31 December 20x2. During the third quarter ended 30 September 20x2, GP limited
expanded rapidly as a result of a substantial advertisement including online sales, and

13
purchased an additional 1,400 PH computers hardware from PICAS PIc. PICAS Plc then
estimated that GP limited purchases would certainly exceed the threshold for the volume
discount in the year to 31 December 20x2.
Required
Calculate the revenue, PICAS Plc. would recognize in:
a. Quarter ended 31 March 20x2
b. Quarter ended 30 June 20x2
c. Quarter ended 30 September 20x2
Example 6: Allocation of transaction price
On 1 January, 20x5, ABC Limited sold a machine to a customer for a total price of $680,000
and payment was made immediately by the customer. The terms of sale included an
arrangement that ABC Limited would service and maintain the machine for a two years
period from 1 January 20x5 to 31 December 20x6. The normal selling price of the machine
without a service and maintenance arrangement was $500,000 and would have charged
$240,000 to provide this two years maintenance services.
Required
i. Show how the above contract would be accounted for in the books PQR limited

14