Conceptual Framework for IFRS

Overview

• Conceptual framework provides the basis, guidance, and fundamental principles for IFRS standards.
• Last updated in 2018 (previously 2010, and originally in 1983).
• Provides a frame of reference for financial reporting.

Key Concepts

• Guidance: Explicit instructions within the standards.
• Judgment: Decisions made when standards are silent, using principles from the conceptual framework.
• Fundamental principles include prudence, accrual, consistency, and so on.

Applications

• Development of new accounting standards and evaluating existing ones.
• Enables consistent financial statements by following the same conceptual framework.
• Reduces political pressure in standards development.

Advantages

• Ensures consistency in financial statements.
• Develops standards not influenced by political pressures.
• Conceptual framework acts like a constitution in a country, and standards are the laws that abide by this constitution.

Disadvantages

• Financial statements have multiple users with different needs (e.g., employees, shareholders, creditors, tax authorities).
• Conceptual framework may not satisfy the information needs of all users.
• Conservative estimates might lead to financial statements that appear overly conservative (prudence).
• Different users might need to adjust financial statements to meet their specific needs.

Concept of Prudence

• Financial statements must be prepared conservatively.
• Income and assets: take lower estimates.
• Expenses and liabilities: take higher estimates.
• Results in financial statements showing a conservative view, which might understate profit and be less attractive to potential investors.
• Financial analysts often adjust for over-conservatism to get a clearer financial picture.

Framework Application

• Objective: Provide information about financial performance, position, and changes to different users for economic decision-making.
• Qualitative Characteristics: Ensure useful financial information.
• Elements of Financial Statements: Income, expenses, assets, liabilities, and capital.

Recognition, Measurement, Presentation, and Disclosure (RMPD)

• Recognition: Identifying if a transaction is an asset, liability, revenue, or expense.
• Measurement: Determining how much the recognized item is worth (valuation methods).
• Presentation: Where the recognized and measured item is shown in financial statements.
• Disclosure: Additional information provided about the recognized elements.

Detailed Breakdown

• Recognition: Determining if a transaction meets criteria to be reported as an asset, liability, etc.
• Measurement: Valuation methods include historical cost, fair value, net realizable value, etc.
• Presentation: Showing financial information in the appropriate statement (balance sheet, income statement).
• Disclosure: Supplementary notes explaining the details behind the numbers for transparency.

Importance of Disclosure

• Income statement and balance sheet provide one-line summaries, but detailed explanations are in disclosure notes.
• Financial statements can be around 100-120 pages, but main statements take 4-5 pages; the rest is disclosure notes.