Building blocks of the conceptual framework for financial reporting

Reproduced with permission of the Australian Accounting Research Foundation

Annotation of Conceptual Framework for Financial Reporting

1. Financial Reporting
This part of the Framework is concerned with defining the discipline of financial reporting
and is relevant for determining the borders of the domain to which accounting requirements
apply.
2. Reporting Entity
The reporting entity is the entity (for example, economic entity, legal entity etc.) that is to be
subject to financial reporting requirements. Its borders also need to be defined and this
definition will then help determine the characteristics of the elements (see below) used to
compile financial statements.

3. Objective of Financial Reporting

This building block is concerned with specifying the basic reason for financial reporting to
occur (eg usefulness for the allocation of scarce economic resources) and for whose benefit it
is intended (eg external users) and the types of information that they will need. This block
again shapes the definition of the elements of financial reports and indeed the measurement
and display aspects of the Framework.
4. Qualitative Characteristics of Financial Information
This part of the framework establishes that hierarchy of characteristics that financial
information should have to be able to serve the objective of financial reporting. The
Framework specifies that relevance and reliability are the primary characteristics for
inclusion of financial information in financial reports. These characteristics are supported by
those relating to the preparation and presentation of financial information: comparability,
understandability, timeliness, and cost versus benefit.
Materiality is used as a filter of relevant and reliable information so that only information
which could alter the decision-making of users in the context of a particular reporting entity
is required to be reported.
Relevance and reliability are fundamental drivers for when the elements of financial reports
need to be recognised. Materiality also limits the applicability of requirements.
5. Elements
This is a critical part of the Framework. It is concerned with defining the economic
phenomena to be reported; equity, assets, liabilities, revenues and expenses. An economic
objective (see above) demands an economic definition (eg assets are future economic benefits
controlled by the entity). The border of the reporting entity likewise must relate to net assets
controlled (as opposed to owned).
6. Basis of Recognition
Having decided what to include in financial statements, this part of the Framework is
concerned with when to recognise those elements. The recognition criteria established
revolve around probability of existence of the elements (eg probability of enjoyment of future
economic benefits in the case of an asset) and the ability to reliably measure their stock or
flow.
7-8. Basis of Measurement/Techniques of Measurement
Having decided what to include in financial reports (elements) and when (basis of
recognition), it remains to specify the basis and techniques of measurement. An economic
objective, for example, may suggest a current value based measurement system. This part of
the Framework is not complete.
9-12. Display
In the presentation of financial statements categories of information are needed to serve the

objective of financial reporting. The structure of financial statements and the type and level of
disclosure flow from that objective.
13-17. Standard-setting Policy
These are the guiding rules/policies for the development of financial reporting requirements.
18-19. Standards Monitoring/Regulation
Application of standards need to be monitored both for the sake of future development of
requirements and to facilitate compliance activity.