Conceptual
Framework for
Financial Reporting
(Conceptual
Framework)
Status and Purpose of the Conceptual Framework
Conceptual Framework describes the objective of, and the concepts for, general purpose
financial reporting.
Its purpose is to
(a) assist the International Accounting Standards Board (Board) to develop IFRS Standards
(Standards) that are based on consistent concepts;
(b) assist preparers to develop consistent accounting policies when no Standard applies to a
particular transaction or other event, or when a Standard allows a choice of accounting
policy; and
(c) assist all parties to understand and interpret the Standards.
Status and Purpose of the Conceptual Framework
The Conceptual Framework is not a Standard. Nothing in the Conceptual
Framework overrides any Standard or any requirement in a Standard.
The Conceptual Framework contributes to the stated mission of the IFRS
Foundation and of the Board. That mission is to develop Standards that bring
transparency, accountability and efficiency to financial markets around the world.
The Board’s work serves the public interest by fostering trust, growth and long-
term financial stability in the global economy.
Status and Purpose of the Conceptual Framework
The Conceptual Framework provides the foundation for Standards that:
(a)
contribute to transparency by enhancing the international comparability and quality
of financial information, enabling investors and other market participants to make
informed economic decisions.
(b)
strengthen accountability by reducing the information gap between the providers of
capital and the people to whom they have entrusted their money. Standards based on
the Conceptual Framework provide information needed to hold management to
account. As a source of globally comparable information, those Standards are also of
vital importance to regulators around the world.
Status and Purpose of the Conceptual Framework
The Conceptual Framework provides the foundation for Standards
that:
(c) contribute to economic efficiency by helping investors to identify
opportunities and risks across the world, thus improving capital
allocation. For businesses, the use of a single, trusted accounting
language derived from Standards based on the Conceptual Framework
lowers the cost of capital and reduces international reporting costs.
Contents of the Conceptual Framework
Chapter 1 – The Objective of General-Purpose Financial Reporting
Chapter 2 – Qualitative Characteristics of Useful Financial Information
Chapter 3 – Financial Statements and the Reporting Entity
Chapter 4 – The Elements of Financial Statements
Chapter 5 – Recognition and Derecognition Criteria
Chapter 6 – Measurement
Chapter 7 – Presentation and Disclosure
Chapter 8 – Concepts of Capital and Capital Maintenance
CHAPTER 1 – 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 other creditors in making decisions relating to providing
resources to the entity.
Investors’, lenders’ and other creditors’ expectations about returns depend on their
assessment of the amount, timing and uncertainty of (the prospects for) future net
cash inflows to the entity and on their assessment of management’s stewardship of
the entity’s economic resources. Existing and potential investors, lenders and other
creditors need information to help them make those assessments.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
To make the assessments, existing and potential investors, lenders and other
creditors need information about:
(a) the economic resources of the entity, claims against the entity and
changes in those resources and claims; and
(b) how efficiently and effectively the entity’s management and
governing board have discharged their responsibilities to use the entity’s
economic resources.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
Many existing and potential investors, lenders and other creditors cannot require
reporting entities to provide information directly to them and must rely on general
purpose financial reports for much of the financial information they need.
Consequently, they are the primary users to whom general purpose financial
reports are directed.
However, general purpose financial reports do not and cannot provide all of the
information that users need.
They need to consider pertinent information from other sources, for example,
general economic conditions and expectations, political events and political
climate, and industry and company outlooks.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
General purpose financial reports are not designed to show the value of a
reporting entity; but they provide information to help existing and potential
investors, lenders and other creditors to estimate the value of the reporting entity.
Individual primary users have different, and possibly conflicting, information
needs and desires. The Standards should seek to provide the information set that
will meet the needs of the maximum number of primary users.
However, focusing on common information needs does not prevent the reporting
entity from including additional information that is most useful to a particular
subset of primary users.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
The management of a reporting entity is also interested in financial
information about the entity. However, management need not rely on
general purpose financial reports because it is able to obtain the financial
information it needs internally.
Other parties, such as regulators and members of the public other than
investors, lenders and other creditors, may also find general purpose
financial reports useful. However, those reports are not primarily directed
to these other groups.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
To a large extent, financial reports are based on estimates, judgements and models
rather than exact depictions. The Conceptual Framework establishes the concepts
that underlie those estimates, judgements and models.
The concepts are the goal towards which the Board and preparers of financial
reports strive. This goal is unlikely to be achieved in full, at least not in the short
term, because it takes time to understand, accept and implement new ways of
analyzing transactions and other events.
Nevertheless, establishing a goal towards which to strive is essential if financial
reporting is to evolve so as to improve its usefulness.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
Economic Resources and Claims
Information about the nature and amounts of a reporting entity’s economic
resources and claims can help users to identify the reporting entity’s
financial strengths and weaknesses.
That information can help users to assess the reporting entity’s liquidity and
solvency, its needs for additional financing and how successful it is likely to
be in obtaining that financing.
That information can also help users to assess management’s stewardship of
the entity’s economic resources.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
Economic Resources and Claims
Information about priorities and payment requirements of existing claims
helps users to predict how future cash flows will be distributed among those
with a claim against the reporting entity.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
Changes in Economic Resources and Claims
Changes in a reporting entity’s economic resources and claims result from
the entity’s financial performance and from other events or transactions
such as issuing debt or equity instruments.
To properly assess both the prospects for future net cash inflows to the
reporting entity and management’s stewardship of the entity’s economic
resources, users need to be able to identify those two types of changes.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
Changes in Economic Resources and Claims
Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic
resources.
This can help users to assess management’s stewardship of the entity’s
economic resources.
Information about the variability and components of that return is also
important, especially in assessing the uncertainty of future cash flows.
CHAPTER 1 – The Objective of General-Purpose
Financial Reporting
Changes in Economic Resources and Claims NOT Resulting from Financial
Performance
A reporting entity’s economic resources and claims may also change for
reasons other than financial performance, such as issuing debt or equity
instruments.
Information about this type of change is necessary to give users a complete
understanding of why the reporting entity’s economic resources and claims
changed and the implications of those changes for its future financial
performance.
