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IASB publishes revised Conceptual Framework

  • IASB document (blue) Image

29 Mar 2018

The International Accounting Standards Board (IASB) has published its revised 'Conceptual Framework for Financial Reporting'. Included are revised definitions of an asset and a liability as well as new guidance on measurement and derecognition, presentation and disclosure. The new Conceptual Framework does not constitute a substantial revision of the document as was originally intended when the project was first taken up in 2004. Instead the IASB focused on topics that were not yet covered or that showed obvious shortcomings that needed to be dealt with.

 

Background

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 after only Phase A of the original joint project had been finalised and introduced into the existing framework as Chapters 1 and 3 in September 2010. Phase D saw the publication of a discussion paper and an exposure draft but was never finalised. The Boards discussed Phases B and C quite extensively without any consultation document ever being issued, and Phases E to H largely remained untouched.

During the 2011 agenda consultation many participants called for the IASB to reactivate and finalise the conceptual framework project given the multitude of open conceptual issues it is facing in many of its current projects. 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.

 

Summary of main aspects of the Conceptual Framework

The 2018 Conceptual Framework is structured into an introductory explanation on the status and purpose of the Conceptual Framework, eight chapters, and a glossary:

Chapter Topic
Status and purpose of the Conceptual Framework
1 The objective of general purpose financial reporting
2 Qualitative characteristics of useful financial information
3 Financial statements and the reporting entity
4 The elements of financial statements
5 Recognition and derecognition
6 Measurement
7 Presentation and disclosure
8 Concepts of capital and capital maintenance
Appendix A Glossary

The key content of each chapter is summarised below:

Status and purpose of the Conceptual Framework. The first section notes that the Conceptual Framework's purpose is to assist the IASB in developing and revising IFRSs that are based on consistent concepts, to help preparers to develop consistent accounting policies for areas that are not covered by a standard or where there is choice of accounting policy, and to assist all parties to understand and interpret IFRS. It maintains that the framework does not override any specific IFRS. Should the IASB decide to issue a new or revised pronouncement that is in conflict with the framework, the IASB will highlight the fact and explain the reasons for the departure  in the basis for conclusions.

Chapter 1 - The objective of general purpose financial reporting. This is the first of the two chapters that were finalised as part of the joint project with the FASB in 2010, so there are only limited changes. The chapter notes that objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. This is identified as information about the entity’s economic resources and the claims against the reporting entity as well as information about the effects of transactions and other events that change a reporting entity’s economic resources and claims. The chapter newly stresses that information can also help users to assess management’s stewardship of the entity’s economic resources.

Chapter 2 - Qualitative characteristics of useful financial information. This is the second of the two chapters that were finalised as part of the joint project with the FASB in 2010 (published as Chapter 3 in the 2010 Conceptual Framework). Again, changes are limited. The chapter explains the fundamental qualitative characteristics (relevance and faithful representation) and the enhancing qualitative characteristics (comparability, verifiability, timeliness, and understandability) of useful financial information and notes the cost constraint. Materiality is noted as an entity-specific aspect of relevance. The chapter reintroduces an explicit reference to the notion of prudence and states that the exercise of prudence supports neutrality. Prudence is defined as the exercise of caution when making judgements under conditions of uncertainty. New is also a clarification that faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only.

Chapter 3 - Financial Statements and the reporting entity. The chapter states the objective of financial statements (to provide information about an entity's assets, liabilities, equity, income and expenses that is useful to financial statements users in assessing the prospects for future net cash inflows to the entity and in assessing management's stewardship of the entity's resources) and sets out the going concern assumption. It only mentions two statements explicitly: the statement of financial position and the statement(s) of financial performance (the latter being the former statement of comprehensive income); the rest are "other statements and notes". The chapter notes that financial statements are prepared for a specified period of time and provide comparative information and under certain circumstances forward-looking information. New to the framework is the definition of a reporting entity and the boundary of a it. The chapter also states the IASB's conviction that, generally, consolidated financial statements are more likely to provide useful information to users of financial statements than unconsolidated financial statements.

Chapter 4 - The elements of financial statements. The main focus of this chapter is on the definitions of assets, liabilities, and equity as well as income and expenses. The definitions are quoted below:
Asset. 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.
Liability. A present obligation of the entity to transfer an economic resource as a result of past events.
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 holders of equity claims.
Expenses. Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims.
New is the introduction of a separate definition of an economic resource to move the references to future flows of economic benefits out of the definitions of an asset and a liability. The expression "economic resource" instead of simply "resource" stresses that the IASB no longer thinks of assets as physical objects but as sets of rights. The definitions of asets and liabilities also no longer refer to "expected" inflows or outflows. Instead, the definition of an economic resource refers to the potential of an asset/liability to produce/to require a transfer of economic benefits. Distinguishing between liabilities and equity is not part of the new framework but has been transferred to the IASB's research project on financial instruments with the characteristics of equity.

Chapter 5 - Recognition and derecognition. The Conceptual Framework states that only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial position and only items that meet the definition of income or expenses are to be recognised in the statement(s) of financial performance. However, their recognition depends on two criteria: their recognition provides users of financial statements with (1) relevant information about the asset or the liability and about any income, expenses or changes in equity and (2) a faithful representation of the asset or the liability and of any income, expenses or changes in equity. The framework also notes a cost constraint. New to the framework is the discussion of derecognition. The requirements as presented in the framework are driven by two aims: the assets and liabilities retained after the transaction or other event that led to derecognition must be presented faithfully and the change in the entity's assets and liabilities as a result of that transaction or other event must also be presented faithfully. The framework also describes alternatives when it is not possible to achieve both aims.

Chapter 6 - Measurement. This chapter is dedicated to the description of different measurement bases (historical cost and current value (fair value, value in use/fulfilment value, and current cost)), the information that they provide and their advantages and disadvantages. Current cost is newly introduced into the Conceptual Framework as it is widely advocated in academic literature. A table offers an overview of the information provided by various measurement bases. The framework also sets out factors to consider when selecting a measurement basis (relevance, faithful representation, enhancing qualitative characteristics and the cost constraint, factors specific to initial measurement, as well as more than one measurement basis) and points out that consideration of the objective of financial reporting, the qualitative characteristics of useful financial information and the cost constraint are likely to result in the selection of different measurement bases for different assets, liabilities and items of income and expense. The framework does not provide detailed guidance on when a particular measurement basis would be suitable because the suitability of particular measurement bases will vary depending on facts and circumstances. On equity, the framework offers some limited discussion, although total equity is not measured directly. Still, the framework maintains, it may be appropriate to measure directly individual classes of equity or components of equity to provide useful information.

Chapter 7 - Presentation and disclosure. In this chapter, the framework discusses concepts that determine what information is included in the financial statements and how that information should be presented and disclosed. The statement of statement of comprehensive income is newly described as "statement of financial performance", however, the framework does not specify whether this statement should consist of a single statement or two statements, it only requires that a total or subtotal for profit or loss must be provided. It also notes that the statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period and that only in "exceptional circumstances" the Board may decide that income or expenses are to be included in other comprehensive income. Notably, the framework does not define profit or loss, thus the question of what goes into profit or loss or into other comprehensive income is still unanswered.

Chapter 8 - Concepts of capital and capital maintenance. The content in this chapter was taken over from the existing Conceptual Frameworkand and discusses concepts of capital (financial and physical), concepts of capital maintenance (again financial and physical) and the determination of profit as well as capital maintenance adjustments. The IASB decided that updating the discussion of capital and capital maintenance could have delayed the completion of the framework significantly. The Board might consider revising the description and discussion of capital maintenance in the future if it considers such a revision necessary.

The Conceptual Framework does not have a stated effective date and the Board will start using it immediately.

 

References to the Conceptual Framework

Together with the revised Conceptual Framework, the IASB has also issued  Amendments to References to the Conceptual Framework in IFRS Standards. The document contains amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32. Not all amendments, however update those pronouncements with regard to references to and quotes from the framework so that they refer to the revised Conceptual Framework. Some pronouncements are only updated to indicate which version of the framework they are referencing to (the IASC framework adopted by the IASB in 2001, the IASB framework of 2010, or the new revised framework of 2018) or to indicate that definitions in the standard have not been updated with the new definitions developed in the revised Conceptual Framework.

The amendments, where they actually are updates, are effective for annual periods beginning on or after 1 January 2020.

 

Additional information

The IASB also announces that on 18 April 2018, there will be two live web presentations to introduce the revised Conceptual Framework. Please click for more information and registration on the IASB website.

 

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.