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IFRS® Foundation

Conceptual Framework for


Financial Reporting

Yulia Feygina, Technical Principal, IASB


May 2018

The views expressed in this presentation are those of the presenter,


not necessarily those of the International Accounting Standards Board (Board) or
IFRS Foundation.
Copyright © IFRS Foundation. All rights reserved
Agenda 22

• Conceptual Framework and its role in financial reporting


• Objective of financial reporting
• Qualitative characteristics of useful financial information
• Elements of financial statements and recognition criteria
• Measurement
• Profit or loss and other comprehensive income
• Q&A
What is the Conceptual Framework? 3

A practical tool that assists

Board Preparers All


• to develop Standards • to develop consistent • to understand and
accounting policies interpret Standards

Addresses fundamental issues

What are assets, liabilities,


equity, income and expenses,
What is the objective of What makes financial when should they be
financial reporting? information useful? recognised and how should
they be measured, presented
and disclosed?
Why did we revise the Conceptual Framework? 4

Previous version of Conceptual Framework


useful but some improvements needed

incomplete out of date unclear

Main improvements

Filled in the gaps, for example, Updated, for example, the Clarified, for example, the roles
concepts on measurement and definitions of an asset and a of stewardship and prudence in
presentation and disclosure, liability and recognition criteria financial reporting
including guidance on the use
of profit or loss and OCI
Status and purpose of the Conceptual Framework 5

Not a Standard and does not override Standards

Underpins Board’s decisions in setting Standards


but Board can depart from aspects of the Conceptual Framework
to meet the objective of financial reporting

Departures need to be explained in the Basis for Conclusions

May be revised from time to time


Effects of the Conceptual Framework 6

Board and IFRS Interpretations


Preparers
Committee

• Affects development of Standards • Directly affects only those who develop


• Standards are interpreted in the context accounting policies using the Conceptual
of the revised Conceptual Framework Framework if no applicable Standard
• Amendments to References to the
• Effective immediately
Conceptual Framework in IFRS
Standards
• Effective 1 January 2020
• Indirectly affects through future
Standards
Objective of general purpose financial reporting 7

Provide financial information useful in making decisions

buy, hold or sell vote and influence


provide or settle loans
management

Assess the prospects for future net cash Assess management’s stewardship of
inflows the entity’s resources

To make those assessments users need information about

economic resources, claims and changes how efficiently/effectively management


in them discharges its responsibilities
Qualitative characteristics of useful information 8

Fundamental qualitative characteristics

Relevance Faithful representation

Capable of making a difference to the


decisions made by users: predictive or Complete, neutral and free from error
confirmatory value

Enhancing qualitative characteristics

Comparability Verifiability Timeliness Understandability

Cost constraint
Clarifying aspects of faithful representation 9

• Exercise of caution under conditions of uncertainty


Prudence • Does not allow for overstatement or understatement of
assets, liabilities, income or expenses
• Supports neutrality

• Arises when monetary amounts cannot be observed directly


and need to be estimated
Measurement
• Does not prevent information from being useful
uncertainty • If very high, may affect whether a sufficiently faithful
representation can be achieved

• Economic substance of the underlying economic


Substance over phenomenon is normally the same as the legal form
form • If not, need to represent the substance to provide faithful
representation
Elements of financial statements—
assets and liabilities 10

Asset Liability

Present economic resource Present obligation

Controlled by the entity As a result of past events

Transfer of an economic
As a result of past events
resource

A right No practical ability to avoid


Potential to produce the transfer
economic benefits
Elements of financial statements—
equity 11

The residual interest in the assets of the entity after


Equity deducting all its liabilities

Financial Instruments with Characteristics of Equity research project further


explores how to distinguish liabilities from equity
Elements of financial statements—
income and expenses 12

Increases in assets, or decreases in liabilities, that result


Income in increases in equity, other than those relating to
contributions from holders of equity claims

Decreases in assets, or increases in liabilities, that result


Expenses in decreases in equity, other than those relating to
distributions to holders of equity claims

Information about income and expenses is just as important as information


about assets and liabilities
Recognition criteria 13

Meet the definition of an element of financial statements

Relevance Faithful representation

Existence uncertainty Measurement uncertainty

Low probability of a flow of economic Recognition inconsistency


benefits (‘accounting mismatch’)
Presentation and disclosure of resulting
income, expenses and changes in equity

Cost constraint
Example 1
Purchase option 14

• An entity has entered into a contract that gives it an option to


purchase a commodity for a fixed price of CU10,000. The entity
can exercise the option at any time in the next year. The current
price of the commodity is CU9,000.
• The entity paid CU100 for the option.
• The option cannot be traded.

Does the entity have an asset?


Example 1
Purchase option 15

Criterion Met?

Right 
Potential to produce economic benefits 
Controlled by the entity 
As a result of past events 

Does the entity have an asset? 
Example 2
Production process 16

• An entity has developed an efficient process for producing a new


material. The entity has not yet patented the process, but has
successfully kept it secret. The process has the potential to
produce significant economic benefits for the entity.
• The material is not yet in commercial production, so economic
benefits are highly uncertain—the range of possible outcomes is
extremely wide and the likelihood of each outcome is
exceptionally difficult to estimate.

Does the entity have an asset?


Example 2
Production process 17

Criterion Met?

Right 
Potential to produce economic benefits 
Controlled by the entity 
As a result of past events 

Does the entity have an asset? 
Decide at Standards level if the asset is recognised
Example 3
Long service leave 18

• Employees have a statutory entitlement to two months’ paid long


service leave if they work for the same employer for 10 years. If an
employer terminates an employee’s services after five years (for
any reason other than serious misconduct), the employee is
entitled to a pro-rata payment.
• An entity has employed one group of employees for nine years;
and a second group of employees for two years.

Does the entity have a liability?


Example 3
Long service leave 19

Criterion Met?

Transfer of an economic resource 


No practical ability to avoid Standards level

As a result of past events 


Does the entity have a liability? Standards level


Example 4
Threshold levy 20

• A government charges levies on entities that generate revenue in


excess of CU50 million in a calendar year. The levy rate is two per
cent of the revenue in excess of CU50 million.
• An entity generates revenue from profitable activities evenly
through the year. Its 20X1 revenue reaches CU50 million on 17
July 20X1. The entity’s reporting period ends on 30 June 20X1.

Does the entity have a liability on 30 June 20X1 for the


20X1 levy?

IFRIC Interpretation 21 Levies Illustrative Example 4


Example 4
Threshold levy 21

Criterion Met?

Transfer of an economic resource 


No practical ability to avoid Likely 

As a result of past events Standards level

Does the entity have a liability? Standards level


Example 5
Legal requirement to fit smoke filters 22

• Under new legislation, an entity is required to fit smoke filters to


its factories by 30 June 20X1. At the end of the entity’s reporting
period (31 December 20X0), the entity has not fitted the smoke
filters.
• The entity could be fined for operating without smoke filters after
30 June 20X1.

Does the entity have a liability on 31 December 20X0?


Example 5
Legal requirement to fit smoke filters 23

Criterion Met?

Transfer of an economic resource 


No practical ability to avoid 
As a result of past events X

Does the entity have a liability? X


Example 6
A court case 24

• After a wedding, ten people died, possibly as a result of food


poisoning from products sold by the entity. Legal proceedings are
started seeking damages from the entity. The entity disputes that
its products were the cause of the deaths.

Does the entity have a liability?

Example 10 in Section C of the guidance accompanying IAS 37


Provisions, Contingent Liabilities and Contingent Assets
Example 6
A court case 25

Criterion Met?

Transfer of an economic resource Uncertain

No practical ability to avoid 


As a result of past events 

Existence
Does the entity have a liability? uncertainty

Decide at Standards level if the liability is recognised


Measurement bases 26

Historical cost Current value


Amortised cost Fair value
Value in use
Fulfilment value
Current cost

Derived from transaction or other event Updated to reflect conditions on the


that gave rise to the asset or liability measurement date

Information about changes in prices


Information about margins
and other factors
Selecting a measurement basis 27

Relevance Faithful representation

Measurement inconsistency
Characteristics of the asset or liability
(‘accounting mismatch’)

Contribution to future cash flows Measurement uncertainty

Information in both the statement of financial position and the statement(s)


of financial performance

Enhancing qualitative characteristics and cost constraint


Profit or loss and OCI at a glance 28

Statement of profit or loss Other comprehensive income

• Primary source of information about • Exceptional circumstances


performance • Only changes in current values of
• In principle, all income and expenses assets and liabilities
are included in the statement of profit or • In principle, OCI items are recycled
loss

Classification into profit or loss and OCI and recycling

Relevance Faithful representation

Only the Board can make decisions on OCI and recycling


Q&A 29
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