The Conceptual Framework (CF) is a set of principles used to develop financial reporting standards (IFRS) and assist preparers and others in understanding those standards
Chapter 1: The Objective of Financial Reporting
The primary objective of financial reporting is to provide useful information to a company's main users—investors and creditors—so they can make informed decisions
Financial reporting also serves a
stewardship role, holding directors and fund managers accountable for how they've managed the company's economic resources
Financial Performance: Financial statements provide information on a company's economic resources (assets), obligations (liabilities), and equity
. These statements, such as the Statement of Financial Position (SOFP) and the Statement of Profit or Loss (SOPL), show changes in a company's economic resources and financial performance over time . Accrual vs. Cash: The CF applies the accrual concept to all financial statements except the Statement of Cash Flows (SOCF)
. The accrual concept recognizes transactions when they occur, not just when cash is exchanged . The CF states that the accrual concept is better than the cash concept, but it doesn't explain why .
Chapter 2: Qualitative Characteristics of Useful Financial Information
For financial information to be useful, it must have two fundamental qualitative characteristics and four enhancing characteristics
Fundamental Characteristics:
Relevance: Information is relevant if it can influence a user's decisions
. This includes: Predictive Value: It can be used to predict future outcomes
. Confirmatory Value: It confirms or changes prior expectations
. Materiality: An item is material if its omission or misstatement could influence the decisions of users
.
Faithful Representation: The financial information must be reliable and accurately represent the underlying economic phenomena
.
Enhancing Characteristics:
These characteristics make information even more useful
Comparability: Users can compare information from different companies or from the same company over different periods
. Consistency, or using the same accounting methods period after period, helps achieve this goal . Understandability: The information should be clear and concise, using straightforward language and a logical structure
. Timeliness: Information should be available to users in time to influence their decisions
. Verifiability: Different knowledgeable and independent observers should be able to agree that the information faithfully represents what it claims to represent
.
Pervasive Constraint:
The
Cost Constraint is a key limitation
Chapter 4: Elements of Financial Statements
This chapter defines the key elements reported in financial statements
Asset: A present economic resource controlled by the entity as a result of past events
. It has the potential to produce economic benefits . The CF 2018 removed the word "expected" to reflect that assets can be recognized even if the probability of an inflow of economic benefits is low . Liability: A present obligation of the entity to transfer an economic resource as a result of past events
. It's an obligation the company cannot avoid . Like assets, the CF 2018 states that a liability can exist even with a low probability of an outflow of economic benefits . Equity: The residual interest in the assets of the entity after deducting all its liabilities
. Income: Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity holders
. Expenses: Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity holders
.
Chapter 5: Recognition and Derecognition
Recognition is the process of recording an item in the financial statements
The CF 2018 removed the "probable" recognition criterion for assets and liabilities because different standards used varying probability thresholds
Derecognition is the removal of a previously recognized asset or liability from the Statement of Financial Position
Chapter 6: Measurement
The CF states that a single measurement basis is not mandatory
mixed measurement basis to provide the most useful information to users
Historical Cost (HC): The original price of the transaction
. HC may be less relevant to investors when prices change significantly . Fair Value (FV): The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
. FV can be highly relevant when prices change .
Chapter 7: Presentation and Disclosure
The goal of presentation and disclosure is to facilitate effective communication of financial information to users
Clarity: Information should be presented clearly to avoid obscuring important details with unnecessary information
. Grouping: Similar items should be grouped together, while dissimilar items should be presented separately
. Entity-Specific: Information should be specific to the company rather than boilerplate
. Offsetting: Assets and liabilities or income and expenses should generally not be offset unless permitted by a specific standard
.
By understanding these core principles, you'll be well-equipped to navigate your exams and understand the fundamental logic behind financial reporting standards.
