1. THE IASB CONCEPTUAL FRAMEWORK
ACTG CHAPTER 2
THE IASB CONCEPTUAL FRAMEWORK

2. Scope of the IASB Conceptual Framework
The IASB Conceptual Framework identifies the concepts that underlie general purpose financial statements prepared and presented for the benefit of external users.

3. Purpose of the IASB Conceptual Framework
To assist in development of IFRS/IAS
To provide a basis for reducing alternatives
To assist national standard-setters in developing national standards
To assist preparers of financial statements in applying international standards
To assist auditors in forming an opinion as to whether international standards have been complied with
To assist users in interpreting financial statements

4. Evolution of the Conceptual Framework 1970s
1974: Discussion memorandum, Objectives of Financial Reporting by Business Enterprises
1978: SFAC No. 1, Objectives of Financial Reporting by Business Enterprises
FASB
1972: Wheat Report
1976: Tentative conclusions on Objectives of Financial Reporting by Business Enterprises
1971: Trueblood Study
1973: FASB formed
1970
1972
1974
1976
1978
1973: IASC formed
: Countries joining IASC
IASB

5. Evolution of the Conceptual Framework 1980s
1980: SFAC No. 3, Elements of Financial Statements of Business Enterprises
1984: SFAC No. 5, Recognition and Measurement in Financial Statements of Business Enterprises
FASB
1980: SFAC No. 2, Qualitative Characteristics of Accounting Information
1985: SFAC No. 6, Elements of Financial Statements (supersedes SFAC No. 3)
1980
1982
1984
1986
1988
1989: Final Statement, Framework for the Preparation and Presentation of Financial Statements
IASB

6. Evolution of the Conceptual Framework 1990s and 2000s
2006: Norwalk Agreement reaffirmed
2000: SFAC No. 7, Using Cash Flow Information and Present Value in Accounting Measure
FASB
2010: Converged Chapters 1 and 3 of the FASB’s SFAC No. 8, Conceptual Framework for Financial Reporting
2002: Norwalk Agreement to converge
1998
2000
2002
2006
2010
1997: Decision to re-examine structure
2010: Converged Chapters 1 and 3 of the IASB’s Conceptual Framework for Financial Reporting
2002: Norwalk Agreement to converge
1999: IASC restructured to form IASB
IASB
2006: Norwalk Agreement reaffirmed

7. Convergence with FASB
In 2002 the FASB and the IASB agreed to make their accounting standards compatible, including the Conceptual Framework.
Framework broken into eight phases as follows:
Phase A – Objectives and Qualitative Characteristics – issued Sept. 2010
Phase B – Elements and Recognition – Discussion Paper expected soon????
Phase C – Measurement – Discussion Paper expected soon????
Phase D – Reporting Entity Concept – Discussion Memorandum out
Not started yet:
Phase E – Presentation and Disclosure
Phase F – Framework Purpose and Status in US GAAP
Phase G – Applicability to the Not-for-Profit Sector
Phase H – Remaining Issues

8. The Objective of General Purpose Financial Reporting
“The 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 creditors (‘primary users’) in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.”3
Consequently, primary users need information to help them assess the prospects of future net cash inflows to an entity.
To assess an entity’s prospects for future cash inflows, primary users need information about the resources of the entity, claims against the entity and how efficiently and effectively the entity’s management and governing board have discharged the responsibilities to use the entity’s resources.
3SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 1, “The Objective of General Purpose Financial Reporting,” OB2.

9. The Objective of General Purpose Financial Reporting
Continued:
General purpose financial reports do not and cannot provide all the information that primary users need, therefore, pertinent information from other sources needs to be considered, such as general economic conditions, political events and climate and industry outlook.
General purpose financial statements are not designed to show the value of the reporting entity, are not designed for the sole use of management and are not directed towards regulators or other parties that are not primary users.
4SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 1, “The Objective of General Purpose Financial Reporting,” OB11.

10. Users of general purpose financial reports
Primary users:
existing/potential investors
existing/potential lenders and other creditors
Others (not listed in Conceptual Framework):
employees
customers
governments and their agencies
the public

11. Qualitative Characteristics of Useful Financial Information
Pervasive constraint: Costs
Comparability, verifiability, timeliness and understandability
Enhancing characteristics:
Fundamental characteristics:
Relevance
and
faithful representation
Costs
Costs
Pervasive constraint: Costs

12. Fundamental Qualitative Characteristics of Useful Financial Information
Relevance:
Capable of making a difference in the decisions made by users.
Capable of making a difference in decisions if it has predictive value, confirming value or both.
Materiality:
“Materiality is an element of relevance and is entity-specific based on the nature or magnitude or both of the items to which the information relates, in the context of an individual entity’s financial report.”14
“Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.”15
14SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC11.
15Ibid.

13. Fundamental Qualitative Characteristics of Useful Financial Information
Faithful representation: “Financial reports represent economic phenomena in words and numbers. To be useful, financial information must be relevant but also must faithfully represent the phenomena that it purports to represent.”16
Completeness: “all information that is necessary for a user to understand the phenomena being depicted.”17
Neutrality: there should not be bias in the selection or presentation of financial information. Financial information should not be slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably.
Free from error: “no errors or omissions in the description of the phenomenon, and the process used to produce the reported information.”18
16SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC12.
17Ibid, QC13.
18Ibid, QC15.

14. Enhancing Qualitative Characteristics of Useful Financial Information
Enhance the usefulness of information that is relevant and faithfully represented.
Comparability: “Enables users to identify and understand similarities and differences among items.”24
Consistency is not the same as comparability although related and is described as “the use of the same methods for the same item either from period to period within a reporting entity or in a single period across entities.”25
Verifiability:
“Assures users that information faithfully represents the economic phenomena it purports to represent.”26
“Means that different and knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.”27
23SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC33. 24Ibid, QC21.25Ibid, QC22.26Ibid, QC26. 27Ibid.

15. Enhancing Qualitative Characteristics of Useful Financial Information
Timeliness: providing information to decision makers in time to be capable of influencing their decisions.
Understandability: “Classifying, characterizing, and presenting information clearly and concisely.”28
Pervasive constraint on useful financial information: costs, which are a pervasive constraint on financial information, should be assessed as to whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use the information.
28SFAC No. 8, Conceptual Framework for Financial Reporting, Chapter 3, “Qualitative Characteristics of Useful Financial Information,” QC30.

16. Underlying assumption
Financial statements are normally prepared on the “going concern basis”.
It is assumed that the entity will continue in operation for the foreseeable future and has neither the intention nor the need to close down or to materially reduce the scale of its operations.

17. Elements: Financial position
Asset
"a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity"
Liability
"a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits"
Equity
"the residual interest in the assets of the entity after deducting all its liabilities"

18. Convergence Phase B – Elements and Recognition
Purpose is to revise and clarify various issues:
definition of asset and liability.
other elements and their definitions.
Revise recognition criteria, resolve derecognition and unit of account.
Asset “… is a present economic resource to which an entity has a right or other access that others do not have,” which is:
Present – at date of financial statements.
Economic resource – scarce, provides cash.
A right or other access that others do not have – legally enforceable or equivalent.
Liability “… is a present economic obligation for which the entity is the obligor,” which is:
Present – at date of financial statements.
Economic obligation – to provide resources.
Entity is the obligor – enforceable against entity.
The Boards are to reconsider the definition of a liability.
A Discussion Paper was expected in 2011???

19. Elements: Financial performance
Income
"increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants"
Expenses
"decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants"

20. Recognition of an element
Recognition is "the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition".
An item is recognised if:
(a) it is probable that any future economic benefit associated with the item will flow to or from the entity, and
(b) the item has a cost or value that can be measured with reliability.

21. Measurement bases Historical cost Current cost Realisable value
Present value
The measurement basis most commonly used is historical cost but this is sometimes combined with other bases (e.g. when valuing inventory at the lower of cost and net realisable value). Some entities use current cost to deal with the effects of changing prices of non-monetary assets (e.g. property).

22. Financial capital maintenance
Under this concept, a profit is earned only if the financial or money amount of the net assets at the end of an accounting period is greater than the financial or money amount of the net assets at the beginning of that period, after adjusting for any amounts contributed by or distributed to owners during the period.
Financial capital can be measured either in nominal monetary units or in units of purchasing power, where purchasing power is determined in accordance with changes in an index of general prices.

23. Physical capital maintenance
Under this concept, a profit is earned only if the physical operating capability of the entity at the end of the accounting period is greater than its physical operating capability at the start of the period, after adjusting for any amounts contributed by or distributed to owners during the period.