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Conceptual Framework for Financial Reporting (2018) - Part 1 (Status and…
Conceptual Framework for Financial Reporting (2018) - Part 1
Status and Purpose
Assist IASB to develop IFRS
Assist preparers to develop consistent accounting policies
Assist all parties to understand and interpret IFRS
Not a standard (do not override standard)
Enhance international comparability and quality of financial statements
Reduce information gap
Improve capital allocation
Chapter 1: Objective of General Purpose Financial Reporting
Objective, usefulness and limitations of general purpose financial reporting
Provide financial information to existing and potential investors, lenders and other creditors (primary user)
Need information about economic resources, claims against the entity and changes in resources and claims as well as how efficiently and effectively the management have discharged their responsibility
Not designed to show value of reporting entity, but help to estimate value
Not primarily directed to other groups (e.g. regulators, members of the public)
Based on estimates, judgements and models rather than exact depictions.
To make decisions on providing resources to the entity
Use of entity's economic resources
Information about how efficiently and effectively the management has discharged its responsibility to use economic resources
Help user to assess management's stewardship of the resources
Useful to predict future efficiency and effectiveness of management (assess future net cash inflows)
Example - Protect resources from unfavourable effects of economic factors (price and technological changes), compliance with laws and regulations etc.
Economic resources, claims against the entity and changes in resources and claims
Changes in Economic Resources and Claims
Result from Financial Performance
Help users to understand return produced on economic resources
Help to assess management's stewardship of economic resources
Information on variability and components of return is important to assess uncertainty of future cash flow and predict future returns.
Accrual accounting (better basis to assess past and future performance as well as past and future ability to generate net cash inflows)
Past cash flows (useful to assess ability to generate future net cash inflows)
Result From Other Events or Transactions
Issuing debt or equity instrument
To give users a complete understanding of the changes and the implication for future financial performance
Economic Resources and Claims
Help to assess management's stewardship of economic resources
Predict how future cash flows will be distributed
Allow users to know the nature and amount of resources available for use
Help users to identify financial strengths and weaknesses (e.g. liquidity and solvency, needs for financing, likelihood to obtain finance)
Chapter 2: Qualitative Characteristics of Useful Financial information
Fundamental Qualitative Characteristics
Relevance
Capable of making a difference in decisions
Predictive value (used as input to predict future outcome)
Confirmatory value (provides feedback about previous evaluations)
Materiality - Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions of primary users (entity-specific)
Faithful Representation
Represent economic phenomena in words and number
Faithfully represent the substance of phenomena that it purports to represent (substance over form)
Complete depiction - include all information necessary to understand phenomenon
Neutral depiction - without bias
Prudence (exercise of caution when making judgements under conditions of uncertainty) support neutrality. (Note: deliberate understatement overstatement is not allowed).
Free from error - no errors or omissions in description, process used to produce information has been selected and applied with no error. (Note: it does not mean perfectly accurate)
Measurement uncertainty - The use of reasonable estimates is essential and does not undermine the usefulness of the information if the estimates are clearly and accurately described and explained
Enhancing Qualitative Characteristics
Comparability
With other entities or with another period / date
Consistency helps to achieve comparability
Alternative accounting methods diminishes comparability.
Verifiability
Different knowledgeable and independent observers could reach consensus (need not complete agreement) that a particular depiction is a faithful representation
Helps to assure faithful representation
Timeliness
Information available in time to be capable of influencing decisions
Understandability
Classify, characterise and present information clearly and concisely
Excluding complex phenomena makes financial reports incomplete and misleading. Hence, it should not be excluded (users may need to seek the aid of adviser)
Cost Constraints on Useful Financial Reporting
Cost is a pervasive constraint
Important that costs are justified by benefits of reporting information
Different entities with different sizes, different ways of raising capital and different users needs may have different cost and benefits.