In March 2018 IASB has issued a revised “Conceptual Framework for Financial Reporting”, which is effective for annual periods beginning on or after 1 January 2020 for preparers who develop an accounting policy based on the Conceptual Framework.
In revising the Conceptual Framework, the IASB sought a balance between providing high-level concepts and providing enough detail for the Conceptual Framework to be useful as a practical tool to help IASB develop Standards and to discuss the factors the IASB needs to consider in making judgments when application of the concepts does not lead to a single answer.
Companies can make use of the Conceptual Framework while developing consistent accounting policies for transactions or other events when no Standard applies or a Standard allows a choice of accounting policies.
The Conceptual Framework sets out:
the objective of financial reporting
the qualitative characteristics of useful financial information
a description of the reporting entity and its boundary
definitions of an asset, a liability, equity, income and expenses
criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (de-recognition)
measurement bases and guidance on when to use them
concepts and guidance on presentation and disclosure
Chapter 1 of Conceptual Framework sets out the objective of general purpose financial reporting (financial reporting), what information is needed to achieve that objective and who the primary users (users) of financial reports are.
Chapter 2 of Conceptual Framework sets out what makes financial information useful. For information to be useful it must both be relevant and provide a faithful representation of what it purports to represent. Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information, and the guiding concepts that apply.
The IASB clarifies that neutrality is supported by the exercise of prudence, which in its turn is the exercise of caution when making judgments under conditions of uncertainty and does not allow for overstatement or understatement of assets, liabilities, income or expenses. It also clarifies that measurement uncertainty does not prevent information from being useful. However, in some cases the most relevant information may have such a high level of measurement uncertainty that the most useful information is information that is slightly less relevant but is subject to lower measurement uncertainty.
Chapter 3 describes the objective and scope of financial statements and provides a description of the reporting entity.
It clarifies that reporting entity is an entity that is required, or chooses, to prepare financial statements and it is not necessarily a legal entity - could be a portion of an entity or comprise more than one entity.
Determining the appropriate boundary of a reporting entity can be difficult if, for example, the entity is not a legal entity. In such cases, the boundary is determined by considering the information needs of the users of the entity’s financial statements.
Those users need information that is relevant and that faithfully represents what it purports to represent. A reporting entity does not comprise an arbitrary or incomplete collection of assets, liabilities, equity, income and expenses.
Chapter 4 defines the five elements of financial statements—an asset, a liability, equity, income and expenses.
Main changes in definition of an asset:
separate definition of an economic resource—to clarify that an asset is the economic resource, not the ultimate inflow of economic benefits
deletion of ‘expected flow’—it does not need to be certain, or even likely, that economic benefits will arise
low probability of economic benefits might affect recognition decisions and the measurement of the asset
Now the asset is defined as a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Main changes in definition of a liability:
separate definition of an economic resource—to clarify that a liability is the
obligation to transfer the economic resource, not the ultimate outflow of economic benefits
deletion of ‘expected flow’—with the same implications as set out above for an asset
introduction of the ‘no practical ability to avoid’ criterion to the definition of obligation
Now obligation is defined as a present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid.
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