In a broad sense, the conceptual framework can be seen as an attempt to define the nature and purpose of accounting. The conceptual framework considers the theoretical and conceptual issues surrounding financial reporting and form a coherent and consistent foundation that will underpin the development of accounting standards. It is a practical tool that helps the International Accounting Standards Board (IASB) to develop requirements in
International Financial Reporting Standards (IFRS) based on consistent concepts.
By definition, the conceptual framework represents the main ideas, concepts and principles upon which all IFRSs and therefore the financial statements are based.
The purposes of the Conceptual Framework are:
- To assist the Board in the development of future IFRSs and in its review of existing IFRSs.
- To assist the Board in promoting harmonization of
regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.
- To assist national standard-setting bodies in developing national standards.
- To assist the preparers of financial statements in applying IFRSs and in dealing with topics that has yet to form the subject of an IFRS.
- To assist auditors in forming an opinion as to whether
financial statements comply with IFRSs.
- To assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs.
- To provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs.
The Conceptual Framework is not an IFRS and so does not overrule any individual IFRS. In the (rare) case of conflict between an IFRS and the Conceptual Framework, the
IFRS will prevail.
The Conceptual Framework had been left largely unchanged since its inception in 1989. In 2004, the IASB and the FASB decided to review and revise the conceptual framework, however, changed priorities and the slow progress in the project led to the project being abandoned in 2010.
As a result, the IASB officially added the project to its agenda again in September 2012, this time as an IASB-only project and no longer aimed at a
substantial revision of the framework but focused on those topics that are not yet covered (e.g. presentation and disclosure) or that show obvious shortcomings that need to be dealt with. As a first step, a Discussion Paper covering all aspects of the framework project was published in July 2013, followed by a comprehensive Exposure Draft in May 2015.
The revised Conceptual Framework for Financial Reporting (Conceptual Framework) issued in March 2018 is effective immediately for the
International Accounting Standards Board (Board) and the IFRS Interpretations Committee. For companies that use the Conceptual Framework to develop accounting policies when no IFRS Standard applies to a particular transaction, the revised Conceptual Framework is effective for annual reporting periods beginning on or after 1 January 2020, with earlier application permitted.
The revised Conceptual Framework will be available to after being published the Issued IFRS Standards in
early 2019. The Conceptual Framework issued in 2010 is still available and applicable in the meantime.
History of the Framework:
The conceptual framework emphasizes on the following two
- Fundamental Qualitative Characteristics
- Enhancing Qualitative Characteristics
1. Fundamental Qualitative Characteristics: Fundamental qualitative characteristics distinguish useful financial reporting information from information that is not useful or misleading.
Two fundamental qualitative characteristics are:
- Relevance: Relevant information has predictive value or confirmatory value, or both.
It is capable of making a difference in the decisions made by users. The relevance of information is affected by its nature and its materiality.
- Faithful Representation: Information must be complete, neutral and free from error (replacing reliability’). Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it
purports to represent.
A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations.
A neutraldepiction is without bias in the selection or presentation of financial information. This means that information must not be manipulated in any way in order to influence the decisions of users.
Free from errormeans there are no
errors or omissions in the description of the phenomenon and no errors made in the process by which the financial information was produced. It does not mean that no inaccuracies can arise, particularly where estimates have to be made.
2. Enhancing Qualitative Characteristics: Enhancing qualitative characteristics distinguish more useful information from less useful information.
- Comparability: 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 another date. Comparability is not the same as uniformity. Entities should change accounting policies if those policies become inappropriate. Corresponding information for preceding periods should be
shown to enable comparison over time.
- Consistency: Consistency, although related to comparability, is not the same. It refers to the use of the same methods for the same items (i.e. consistency of treatment) either from period to period within a reporting entity or in a single period across entities. The disclosure of accounting policies is particularly important here. Users must be able to distinguish between different accounting policies in order to be able to make a
valid comparison of similar items in the accounts of different entities.
- Verifiability: Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. It means that different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.
- Timeliness: Information may become less useful if there is a delay in reporting it. There is a
balance between timeliness and the provision of reliable information. If information is reported on a timely basis when not all aspects of the transaction are known, it may not be complete or free from error. Conversely, if every detail of a transaction is known, it may be too late to publish the information because it has become irrelevant. The overriding consideration is how best to satisfy the economic decision-making needs of the users.
- Understandability: Financial
reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyses the information diligently. Some phenomena are inherently complex and cannot be made easy to understand. Excluding information on those phenomena might make the information easier to understand, but without it those reports would be incomplete and therefore misleading. Therefore matters should not be left out of financial statements simply due to their difficulty.
The 1989 Framework identified two underlying assumptions – accruals and going concern. The Conceptual Framework emphasizes that the financial information should be prepared on an accruals basis but only identifies one underlying assumption – going concern.
Accrual conceptis the most fundamental principle of accounting which requires recording revenues when they are earned and not when they are received in
cash, and recording expenses when they are incurred and not when they are paid.
An entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.
All the above mentioned characteristics and assumptions are the qualitative aspects of useful information which foundation is laid
out by the conceptual framework.
The Revised Conceptual Framework:
The revised Conceptual Framework, issued by the Board in March 2018, includes the following:
- The objective of general purpose 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 and guidance supporting these
- 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; and
- Concepts relating to capital and capital maintenance.
Conceptual Framework definitely sets the standards for accounting practices and principles. However,
there are some limitations as below:
- It is very difficult to set up. Countries which are rich and developed can have their conceptual framework but poor and developing nations can find it expensive and time consuming. Under developed countries may not have developed that culture to practice conceptual frameworks yet.
- Conceptual frameworks while providing the standard for accounting practices may lead to rigidity. It may be difficult to bring forward new ideas.
may arise between conceptual framework and the accounting standards followed prior to the introduction of Conceptual Framework.
- Conceptual Framework may not be acceptable to every party. It may only benefit only some interested groups identified as users.
What are the qualitative characteristics of IASB Conceptual Framework?
The four enhancing qualitative characteristics continue to be timeliness, understandability, verifiability and comparability.
Which of the following are qualitative characteristics of the financial statements according to the IASB Conceptual Framework?
According to the Conceptual Framework (2010), which of the following are the two fundamental qualitative characteristics that make financial information useful? Timeliness and understandability. Relevance and faithful representation.
What are the four qualitative characteristics identified by the IASB?
As figure 1 shows, the four principal qualitative characteristics are understandability, relevance, reliability and comparability (IASB, 2006).
What are two fundamental qualitative characteristics of financial reporting are identified in the Conceptual Framework and explained each briefly?
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information, and the guiding concepts that apply throughout the revised Conceptual Framework.
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