Conceptual Framework for Financial Reporting
A conceptual framework is a set of theoretical principles and concepts that underlie the preparation and
presentation of financial statements. If no conceptual framework existed, then it is more likely that
accounting standards would be produced on a haphazard basis as particular issues and circumstances arose.
These accounting standards might be inconsistent with one another, or perhaps even contradictory.
A strong conceptual framework therefore means that there is a set of principles in place from which all
future accounting standards draw. It also acts as a reference point for the preparers of financial statements
if there is no adequate accounting standard governing the types of transactions that an entity enters into
(this will be extremely rare). This section of the text considers the contents of the Conceptual Framework
for Financial Reporting (‘the Framework’) in more detail.
Background
In 1989 the Board issued the Framework for the Preparation and Presentation of Financial Statements. In
2004 a decision was made to work with the US FASB in order to develop a common framework. The first
phase concentrated on two areas:
• The objectives of financial reporting
• The qualitative characteristics of useful financial information.
The Board issued the Conceptual Framework for Financial Reporting in 2010. This was the original 1989
version updated for the two areas above. The joint project with the FASB was then suspended.
In 2012 the Board decided to revisit the Framework, although this time without the US FASB. It decided
to focus on the following areas:
• elements of financial statements
• measurement
• reporting entity
• presentation and disclosure.
The purpose of the Framework
The purpose of the Framework is:
(a) to assist the International Accounting Standards Board (the Board)when developing new standards
(b) to help national standard setters develop new standards
(c) to provide guidance on issues not covered by IFRS Standards
(d) to assist auditors.
The Board believes that consistency within IFRS Standards, and comparability between different sets of
accounting standards, will help investors to make informed decisions about whether to buy, sell or hold an
entity’s equity and debt instruments.
The objective of financial reporting
The Framework says that the objective of financial reporting is to provide information to existing and
potential investors, lenders and other creditors which helps them when making decisions about providing
resources to the reporting entity.
Underlying assumption
The Framework identifies going concern as the underlying assumption governing the preparation of
financial statements. The going concern basis assumes that the entity will not liquidate or curtail the scale
of its operations.
Qualitative characteristics of useful financial information
The Framework identifies types of information that are useful to the users of financial statements. It
identifies two fundamental qualitative characteristics of useful financial information:
Information is relevant if it will impact decisions made by its users.
(1) Relevance
– Relevant information has predictive value or confirmatory value to a user
– Relevance is supported by materiality considerations:
– Information is regarded as material if its omission or misstatement could influence the decisions made by
users of that information
– An omission or mis-statement could be material due to its size or nature
– Materiality is an entity-specific consideration and so the Framework does not specify a minimum
threshold.
(2) Faithful representation
– complete
