made of them, claims against the entity, and changes in resources
and claims ................................................................................................................. 47
4.2.1
Economic resources and claims .......................................................... 48
4.2.2 Changes
in
economic resources and claims ...................................... 48
4.2.3
Information about the use of economic resources
(stewardship) ............................................................................................ 49
5 CHAPTER 2: QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION ............................................................................. 49
5.1
Fundamental qualitative characteristics ............................................................ 51
5.1.1
Relevance (including materiality) ........................................................ 51
36 Chapter
2
5.1.2 Faithful
representation
..........................................................................
51
5.1.3
Applying the fundamental qualitative characteristics ..................... 53
5.2
Enhancing qualitative characteristics ................................................................. 54
5.2.1
Comparability .......................................................................................... 54
5.2.2 Verifiability
..............................................................................................
54
5.2.3 Timeliness
................................................................................................
55
5.2.4 Understandability
...................................................................................
55
5.2.5
Applying the enhancing qualitative characteristics ......................... 55
5.3
The cost constraint ................................................................................................. 55
6 CHAPTER 3: FINANCIAL STATEMENTS AND THE REPORTING
ENTITY ............................................................................................................ 56
6.1
Financial statements ............................................................................................... 56
6.1.1
Objective and scope of financial statements ..................................... 56
6.1.2
Reporting period and comparative information .............................. 57
6.1.3
Perspective adopted in financial statements ..................................... 58
6.1.4
Going concern assumption ................................................................... 58
6.2
The reporting entity ............................................................................................... 58
6.2.1
Consolidated and unconsolidated financial statements ................. 59
7 CHAPTER 4: THE ELEMENTS OF FINANCIAL STATEMENTS ......................... 60
7.1
Matters concerning both assets and liabilities .................................................. 61
7.1.1
Unit of account ........................................................................................ 61
7.1.2 Executory
contracts
...............................................................................
62
7.1.3
Substance of contractual rights and contractual
obligations ................................................................................................ 63
7.2
Definition of assets ................................................................................................. 63
7.2.1
Rights ......................................................................................................... 64
7.2.2
Potential to produce economic benefits ............................................ 65
7.2.3 Control
......................................................................................................66
7.3
Definition of liabilities ........................................................................................... 67
7.3.1
Obligation ................................................................................................. 67
7.3.2
Transfer an economic resource .......................................................... 68
7.3.3 Present
obligation
existing
as a result of past events ......................69
7.4
Definition of equity ................................................................................................ 70
7.5 Definition
of
income and expenses .................................................................... 70
8 CHAPTER 5: RECOGNITION AND DERECOGNITION ..................................... 71
8.1
The recognition process ......................................................................................... 71
8.2 Recognition
criteria
................................................................................................
73
8.2.1
Relevance ................................................................................................. 74
8.2.1.A
Existence uncertainty ....................................................... 74
The IASB’s Conceptual Framework
37
8.2.1.B
Low probability of an inflow or outflow of
economic benefits .............................................................. 74
8.2.2
Faithful representation .......................................................................... 75
8.2.2.A
Measurement uncertainty ................................................ 75
8.2.2.B Other
factors ....................................................................... 76
8.3
Derecognition .......................................................................................................... 77
9 CHAPTER 6: MEASUREMENT ......................................................................... 79
9.1
Measurement bases ............................................................................................... 80
9.1.1
Historical cost ......................................................................................... 80
9.1.2 Current
value
...........................................................................................
81
9.1.2.A
Fair value ............................................................................. 82
9.1.2.B
Value in use and fulfilment value .................................... 83
9.1.2.C Current
cost
........................................................................
83
9.2
Information provided by different measurement bases ................................. 84
9.2.1
Historical cost ......................................................................................... 88
9.2.2 Current
value
..........................................................................................
89
9.2.2.A
Fair value ............................................................................ 89
9.2.2.B
Value in use and fulfilment value ................................... 89
9.2.2.C
Current cost ....................................................................... 90
9.3
Factors to consider in selecting measurement bases ..................................... 90
9.3.1
Relevance ................................................................................................. 91
9.3.1.A
Characteristics of the asset or liability ........................... 91
9.3.1.B
Contribution to future cash flows................................... 92
9.3.2
Faithful representation .......................................................................... 92
9.3.3 Enhancing
characteristics
and the cost constraint .......................... 93
9.3.3.A
Historical cost ..................................................................... 94
9.3.3.B Current
value
......................................................................
94
9.3.4
Factors specific to initial measurement ............................................. 95
9.3.5
More than one measurement basis .....................................................96
9.4
Measurement of equity.......................................................................................... 97
9.5 Cash-flow-based
measurement techniques ..................................................... 98
10 CHAPTER 7: PRESENTATION AND DISCLOSURE .......................................... 99
10.1 Presentation and disclosure objectives and principles .................................100
10.2 Classification
..........................................................................................................100
10.2.1
Classification of assets and liabilities ................................................100
10.2.1.A
Offsetting ...........................................................................100
10.2.2 Classification of equity ........................................................................ 101
10.2.3 Classification
of
income and expenses ............................................ 101
10.2.3.A
Profit or loss and other comprehensive
income ................................................................................ 101
38 Chapter
2
10.3 Aggregation ............................................................................................................ 102
11 CHAPTER 8: CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE ........103
11.1
Financial capital maintenance ............................................................................ 103
11.2 Physical
capital maintenance ............................................................................. 104
12 MANAGEMENT COMMENTARY ................................................................... 104
39
Chapter 2
The IASB’s Conceptual
Framework
1 INTRODUCTION
There have been numerous attempts over many decades to define the purpose and nature
of accounting. Perhaps not surprisingly, most of the earlier studies were carried out by
individual academics and academic committees in the US; for example, the writings
in 1940 of Paton and Littleton1 were intended to present a framework of accounting
theory that would be regarded as a coherent and consistent foundation for the
development of accounting standards, whilst the studies carried out over the years by
various committees of the American Accounting Association have made a significant
contribution to accounting theory.2 In addition to the research carried out by individuals
and academic committees, professional accounting bodies around the world have also,
from time to time, issued statements that deal with various aspects of accounting theory.
These can be seen as the first attempts at developing some form of conceptual framework.
With the globalisation of business and the increased access to the world’s capital
markets that goes with it, there are essentially only two truly global systems of financial
reporting – IFRS and US GAAP.
In 2004 the IASB and FASB began a joint project to develop a single conceptual
framework, the first phase of which was completed in September 2010. This version of
the IASB’s conceptual framework (the 2010 Framework) comprised two sections
finalised in this first phase of the joint project with the FASB, together with other
material carried forward from the conceptual framework issued by the former IASC
in 1989 (‘the 1989 Framework’), which was originally intended to be replaced in a second
phase of the joint framework project. The 1989 Framework, although not jointly
developed with the FASB, nevertheless drew heavily on the FASB’s then current
conceptual framework. This close direct and indirect relationship between the IASB’s
and FASB’s frameworks may go some way to explain the progress that the two Boards
made towards convergence at the individual standard level.
In July 2013 the IASB published a discussion paper3 which was followed by an exposure
draft of an updated framework in May 2015.4
40 Chapter
2
In March 2018 the IASB published Conceptual Framework for Financial Reporting
(the Framework).
This chapter discusses the Framework as published in 2018. Readers interested in
predecessor versions should refer to earlier editions of International GAAP. The
effective date for the revised Framework for preparers of financial statements is,
broadly speaking, January 2020 although there are some exceptions to this. This is
discussed at 2 below.
The Framework itself has no explicit effective date. However:
• The Board and Interpretations Committee will start using the Framework
immediately. If, when developing a draft Interpretation, the Interpretation
Committee is faced with an inconsistency between a standard (including any
standard developed on the basis of the 1989 Framework or the 2010 Framework)
and the concepts in the 2018 Framework, it will refer the issue to the Board, as
required by the IFRS Foundation Due Process Handbook. [CF. BC0.27].
• Preparers of financial statements could be affected by the changes to the
Framework if they need to use it to develop an accounting policy when no
standard applies to a particular transaction or other event or when a standard
allows a choice of accounting policy (see Chapter 3 at 4.3). To achieve
transition to the Framework for such entities, the Board issued Amendments to
References to the Conceptual Framework in IFRS Standards in March 2018
(CF References). Where appropriate, that document updates r
eferences in
standards to refer to the new Framework and updates related quotations.
[CF. BC0.28]. These changes are effective for periods beginning on or after
1 January 2020. [CF References: Introduction and other sections].
Relevant chapters in this book will discuss, as appropriate, references to the Framework
in the standards with which they deal. At a more general level, it should be noted that
not all such references have been changed to refer to the new Framework; some
continue to refer to previous versions as discussed below.
The following Interpretations continue to refer to the version of the framework in effect
when they were developed:
• IFRIC 12 – Service Concession Arrangements – and IFRIC 19 – Extinguishing
Financial Liabilities with Equity Instruments – continue to refer to the 1989
Framework; and
• IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine – and
IFRIC 22 – Foreign Currency Transactions and Advance Consideration –
continue to refer to the 2010 Framework.
• IFRS 3 – Business Combinations – and IFRS 14 – Regulatory Deferral Accounts –
continue to refer to the 2010 Framework.
1.1
What is a conceptual framework?
In general terms, a conceptual framework is a statement of generally accepted
theoretical principles which form the frame of reference for a particular field of enquiry.
In terms of financial reporting, these theoretical principles provide the basis for both
The IASB’s Conceptual Framework
41
the development of new reporting practices and the evaluation of existing ones. Since
the financial reporting process is concerned with the provision of information that is
useful in making business and economic decisions, a conceptual framework will form
the theoretical basis for determining which events should be accounted for, how they
should be measured and how they should be communicated. Therefore, although it is
theoretical in nature, a conceptual framework for financial reporting has a highly
practical end in view.
1.2
Why is a conceptual framework necessary?
A conceptual framework for financial reporting should be a theory of accounting against
which practical problems can be tested objectively, and the utility of which is decided
by the adequacy of the practical solutions it provides. However, the various standard-
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 10