A complete depiction includes all information, including all necessary descriptions and
explanations, necessary for a user to understand the phenomenon being depicted. For
example, a complete depiction of a group of assets would include, at a minimum:
• a description of the nature of the assets;
• a numerical depiction of the assets; and
• a description of what the numerical depiction represents (for example, historical
cost or fair value).
For some items, a complete depiction may also entail explanations of significant facts
about the quality and nature of those items, factors and circumstances that might affect
their quality and nature, and the process used to determine the numerical depiction.
[CF 2.14].
A neutral depiction is one without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised
or otherwise manipulated to increase the probability that financial information will be
received favourably or unfavourably by users. That is not to imply that neutral
information has no purpose or no influence on behaviour. On the contrary, relevant
financial information is, by definition, capable of making a difference in users’ decisions.
[CF 2.15].
The Framework has a discussion of the word ‘prudence’, the exercise of which is
considered by the Board to support neutrality. The IASB considers prudence to be the
exercise of caution when making judgements under conditions of uncertainty. This is
said to mean that:
• assets and income are not overstated and liabilities and expenses are not
understated; but also that
• the exercise of prudence does not allow for the understatement of assets or income
or the overstatement of liabilities or expenses.
Such misstatements can lead to the overstatement or understatement of income or
expenses in future periods. [CF 2.16].
This is not, perhaps, a universally accepted view of the meaning of the word prudence
– which to many may mean a more cautious approach to recognising gains and assets
and a less cautious approach to recognising losses and liabilities.
The IASB addresses this by stating that the exercise of prudence does not imply a need
for asymmetry, for example, a systematic need for more persuasive evidence to support
the recognition of assets or income than the recognition of liabilities or expenses. Such
asymmetry is not considered by the Board to be a qualitative characteristic of useful
financial information. Nevertheless, particular standards may contain asymmetric
requirements if this is a consequence of decisions intended to select the most relevant
information that faithfully represents what it purports to represent. [CF 2.17].
The Framework stresses that the term ‘free from error’ does not necessarily imply that
information is accurate in all respects. Rather, information is ‘free from error’ if there
The IASB’s Conceptual Framework
53
are no errors or omissions either in the description of the economic phenomenon being
depicted or in the selection or application of the process used to produce the reported
information. For example, an estimate of an unobservable price or value cannot be
determined to be accurate or inaccurate. However, a representation of that estimate
can be faithful if the amount is described clearly and accurately as being an estimate,
the nature and limitations of the estimating process are explained, and no errors have
been made in selecting and applying an appropriate process for developing the estimate.
[CF 2.18].
5.1.3
Applying the fundamental qualitative characteristics
In order to be useful, information must be both relevant and provide a faithful
representation. In the IASB’s words ‘neither a faithful representation of an irrelevant
phenomenon nor an unfaithful representation of a relevant phenomenon helps users
make good decisions’. [CF 2.20].
The most efficient and effective process for applying the fundamental qualitative
characteristics would, subject to the effects of the enhancing qualitative characteristics
(see 5.2 below) and the cost constraint (see 5.3 below), usually be as follows:
• identify an economic phenomenon, information about which is capable of being
useful to users of the reporting entity’s financial information;
• identify the type of information about that phenomenon that would be most
relevant; and
• determine whether that information is available and whether it can provide a
faithful representation of the economic phenomenon.
If so, the process of satisfying the fundamental qualitative characteristics ends at that
point. If not, the process is repeated with the next most relevant type of information.
[CF 2.21].
The Framework notes that, potentially, a trade-off between the fundamental qualitative
characteristics may need to be made in order to meet the objective of financial
reporting, which is to provide useful information about economic phenomena. This is
illustrated by reference to estimation which, as noted at 5 above, is an essential part of
the preparation of financial information and does not undermine the usefulness of it.
The example given is where the most relevant information about a phenomenon may
be a highly uncertain estimate. In some cases, the level of measurement uncertainty
involved in making that estimate may be so high that it may be questionable whether
the estimate would provide a sufficiently faithful representation of that phenomenon.
In some such cases, the most useful information may be the highly uncertain estimate,
accompanied by a description of the estimate and an explanation of the uncertainties
that affect it. In other such cases, if that information would not provide a sufficiently
faithful representation of that phenomenon, the most useful information may include
an estimate of another type that is slightly less relevant but is subject to lower
measurement uncertainty. In limited circumstances, there may be no estimate that
provides useful information. In those limited circumstances, it may be necessary to
provide information that does not rely on an estimate. [CF 2.22].
54 Chapter
2
5.2 Enhancing
qualitative
characteristics
The usefulness of relevant and faithfully represented financial information is enhanced
by the characteristics of comparability (see 5.2.1 below), verifiability (see 5.2.2 below),
timeliness (see 5.2.3 below) and understandability (see 5.2.4 below). These enhancing
characteristics may also help determine which of two ways should be used to depict a
phenomenon if both are considered equally relevant and faithfully represented.
[CF 2.4, 2.23].
5.2.1 Comparability
The IASB notes that decisions made by users of financial information involve choices
between alternatives, such as selling or holding an investment, or investing in one entity
or another. Consequently, information about a reporting entity is more useful if it can
be compared with similar information about other entities, and about the same entity
for another period or as at another date. [CF 2.24]
.
Comparability is the qualitative characteristic that enables users to identify and
understand similarities in, and differences among, items. Unlike the other qualitative
characteristics, comparability does not relate to a single item, since – by definition – a
comparison requires at least two items. The IASB clarifies that, for information to be
comparable, like things must look alike and different things must look different, adding
that ‘comparability of financial information is not enhanced by making unlike things
look alike any more than it is enhanced by making like things look different.’ [CF 2.25-2.27].
Although a single economic phenomenon can be faithfully represented in more than
one way, permitting alternative accounting methods for the same economic
phenomenon diminishes comparability. [CF 2.29].
The Framework stresses that consistency (that is, the use of the same methods for
the same items, either from period to period within a reporting entity or in a single
period across entities) helps to achieve comparability, but is not the same as
comparability. The IASB adds that comparability is not the same as uniformity, but
without any definition of ‘uniformity’ or clarification of how it differs from
comparability. Some degree of comparability is likely to be attained simply by
satisfying the fundamental qualitative characteristics. In other words, a faithful
representation of a relevant economic phenomenon by one entity should naturally
be comparable with a faithful representation of a similar relevant economic
phenomenon by another entity. [CF 2.26-2.28].
5.2.2 Verifiability
Verifiability helps assure users that information faithfully represents the economic
phenomena that it purports to depict. Verifiability means that different knowledgeable
and independent observers could reach a consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation. Quantified
information need not be a single point estimate to be verifiable. A range of possible
amounts and their related probabilities can also be verified. [CF 2.30].
The IASB notes that verification can be direct or indirect. Direct verification means
verifying an amount or other representation through direct observation. Indirect
verification means checking the inputs to a model, formula or other technique and
The IASB’s Conceptual Framework
55
recalculating the outputs using the same methodology. Some explanations and
forward-looking financial information may not be verifiable until a future period, if
at all. To help users decide whether to use such information, it would normally be
necessary to disclose the assumptions, other factors and circumstances underlying
the information, together with the methods of compiling the information.
[CF 2.31, 2.32].
5.2.3 Timeliness
Timeliness means that information is available to decision-makers in time to be
capable of influencing their decisions. Generally, the older the information is the
less useful it is. However, some information may continue to be timely long after the
end of a reporting period, for example because some users may need to identify and
assess trends. [CF 2.33].
5.2.4 Understandability
Information is made understandable by classifying, characterising and presenting it
clearly and concisely. [CF 2.34]. The IASB concedes that some phenomena are so
inherently complex and difficult to understand that financial reports might be easier
to understand if information about those phenomena were excluded. However,
reports prepared without that information would be incomplete and therefore
possibly misleading. Moreover, financial reports are prepared for users with a
reasonable knowledge of business and economic activities who can review and
analyse the information diligently. Even such users, however, may need to seek
specialist advice in order to understand information about complex economic
phenomena. [CF 2.35, 2.36].
5.2.5
Applying the enhancing qualitative characteristics
The Framework stresses that, while the enhancing qualitative characteristics should be
maximised to the extent possible, they cannot, either individually or as a group, make
information useful if that information is irrelevant or does not give a faithful
representation. [CF 2.37].
Applying the enhancing qualitative characteristics is an iterative process that does not
follow a prescribed order. Sometimes, one enhancing qualitative characteristic may
have to be diminished in order to maximise another. For example, applying a new
standard prospectively (that is, with no restatement of prior periods) will reduce
comparability in the short term. However, that may be a price worth paying for
improved relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for the lack of comparability. [CF 2.38].
5.3
The cost constraint
The IASB acknowledges that cost is a pervasive constraint on the information provided
by financial reporting, and that the cost of producing information must be justified by
the benefits that it provides. Interestingly, the IASB argues that, while there is clearly an
explicit cost to the preparers of financial information, the cost is ultimately borne by
users, since any cost incurred by the reporting entity reduces the returns earned by
users. In addition, users incur costs not only in analysing and interpreting any
56 Chapter
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information that is provided, but also in obtaining or estimating any information that is
not provided. [CF 2.39, 2.40, 2.42].
Relevant and faithfully representative financial information helps users to make
decisions with more confidence, resulting in a more efficient functioning of capital
markets and a lower cost of capital for the economy as a whole. An individual provider
of capital also receives benefits by making more informed decisions. However, it is not
possible for general purpose financial reports to provide all information relevant to
every user. [CF 2.41].
In assessing whether the benefits of reporting particular information are likely to justify
the cost, the IASB seeks information from providers of financial information, users,
auditors, academics and others about the expected nature and quantity of the benefits
and costs of that standard. In most situations, assessments are based on a combination
of quantitative and qualitative information, and will normally be considered in relation
to financial reporting generally, and not in relation to individual reporting entities.
However, an assessment of costs and benefits will not always justify the same reporting
requirements for all entities. Differences may be appropriate because of different sizes
of entities, different ways of raising capital (publicly or privately), different needs of
users or other factors. [CF 2.42, 2.43].
6
CHAPTER 3: FINANCIAL STATEMENTS AND THE
REPORTING ENTITY
Chapter 3 of the Framework deals with two questions:
• what are financial statements (discussed at 6.1 below); and
• what is the ‘reporting entity’ w
hich prepares financial statements? (discussed at 6.2
below). [CF 3.1, 3.10].
6.1 Financial
statements
Financial statements provide information about economic resources of the reporting
entity, claims against the entity, and changes in those resources and claims, that meet
the definitions of the elements of financial statements (discussed at 7 below). [CF 3.1].
6.1.1
Objective and scope of financial statements
The objective of financial statements is to provide financial information about the
reporting entity’s assets, liabilities, equity, income and expenses that is useful to users
of financial statements in assessing the prospects for future net cash inflows to the
reporting entity and in assessing management’s stewardship of the entity’s economic
resources (discussed at 4 above). [CF 1.1-1.2, 3.2].
That information is provided:
• in the statement of financial position, by recognising assets, liabilities and equity;
• in the statement(s) of financial performance, by recognising income and expenses; and
The IASB’s Conceptual Framework
57
• in other statements and notes, by presenting and disclosing information about:
• recognised assets, liabilities, equity, income and expenses, including
information about their nature and about the risks arising from those
recognised assets and liabilities;
• assets and liabilities that have not been recognised, including information
about their nature and about the risks arising from them;
• cash flows;
• contributions from holders of equity claims and distributions to them; and
• the methods, assumptions and judgements used in estimating the amounts
presented or disclosed, and changes in those methods, assumptions and
judgements. [CF 3.3].
The subject of presentation and disclosure is discussed at 10 below; recognition and
derecognition is discussed at 8 below.
6.1.2
Reporting period and comparative information
Financial statements are prepared for a specified period of time (reporting period) and
provide information about:
• assets and liabilities (including unrecognised assets and liabilities) and equity that
existed at the end of the reporting period, or during the reporting period; and
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