The Conceptual Framework for Financial Reporting

Introduction

The conceptual framework for financial reporting establishes the concepts and principles for preparation and presentation of financial statements.

The Objective of General-Purpose Financial Reporting

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 about providing resources to the entity. These users need information about:

• The economic resources of the entity.

• The claims against the entity.

• Changes in the entity’s economic resources and claims.

Qualitative Characteristics of Useful Financial Information

Relevance

Relevant information is capable of making a difference in the decisions made by users. It is capable of making a difference in decisions if it has predictive value, confirmatory value, or both.

Faithful Representation

To be faithful representation information must be complete, neutral, and free of error.

Completeness means that all the information, descriptions, and explanations that are necessary for faithful representation are provided.

Neutrality means that information must not be manipulated in any way in order to influence the decisions of users.

Free of error means that there are no errors made in the process of producing the financial information, however estimates have to be made.

Enhancing Qualitative Characteristics

Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or date.

Consistency is applying the same accounting treatment to similar events from period to period.

Verifiability occurs when independent measurers using the same methods obtain similar results.

Timeliness means having information available to decision-makers before it loses its capacity to influence decisions.

Understandability is classifying, characterizing and presenting information clearly and concisely makes it understandable.

The Elements of Financial Statements

The Statement of Financial Position:

• Asset. A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

• Liability. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

• Equity. The residual interest in the assets of the entity after deducting all its liabilities.

The Statement of Profit or Loss and Other Comprehensive Income:

• Income. Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

• Expenses. Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Recognition of the Elements of Financial Statements

Recognition is the process of incorporating in the statement of financial position or statement of profit or loss and other comprehensive income an item that meets the definition of an element and satisfies the following criteria for recognition:

• It is probable that any future economic benefit associated with the item will flow to or from the entity.

• The item has a cost or value that can be measured with reliability.

Recognition of the Elements of Financial Statements

While recognition means when (or whether) to recognize, measurement means in what amount to recognize asset, liability, piece of equity, income or expense.

There are several ways used to measure the items in the financial statements, such as historical cost, current cost, net realizable value or present value of future cash flows. The most common one is historical cost, but also other bases are used in combination.

Fair Presentation and Compliance with IFRS

Financial statements should present fairly the financial position, financial performance and cash flows of an entity. Compliance with IFRS is presumed to result in financial statements that achieve a fair presentation.