สมาคมผ สอบบ ญช ภาษ อากร

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1 สมาคมผ สอบบ ญช ภาษ อากร เอกสารประกอบการบรรยาย หล กส ตร แม บทการบ ญช ส าหร บการจ ดท าและ การน าเสนองบการเง นของประเทศไทยและต างประเทศ ว ทยากร : ดร. ปกรณ เพ ญภาคก ล ว นท 20 ต ลาคม พ.ศ ณ โรงแรมกานต มณ พาเลช กร งเทพมหานคร

2 The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. It is a practical tool that assists the IASB when developing and revising IFRSs. The objective of the Conceptual Framework project is to improve financial reporting by providing the IASB with a complete and updated set of concepts to use when it develops or revises standards. The existing Conceptual Framework has helped the IASB to improve financial reporting, but: some important areas are not covered by the existing Conceptual Framework (e.g. presentation including other comprehensive income (OCI), disclosure, measurement); and the guidance in some areas is unclear or out-of-date (e.g. some aspects of the asset and liability definitions). Consequently, restarting work on the Conceptual Framework received overwhelming support from the IASB s agenda consultation in The Discussion Paper The IASB published a Discussion Paper addressing possible changes to the Conceptual Framework on 18 July The deadline for comments on this Discussion Paper is 14 January The Discussion Paper is the first step towards revising the Conceptual Framework. It is designed to obtain initial views and comments from parties with an interest in financial reporting. After the comment period, the IASB will consider their preliminary views in the light of comments received and develop an Exposure Draft a draft Conceptual Framework for comments to the public. How does this project link with standard-setting projects? In planning and conducting the work on the Conceptual Framework, the IASB will consider interactions with the IASB s existing standard-setting projects. Those projects are likely to provide input for the Conceptual Framework and to depend, at least to some extent, on developments in this project. 1 Conceptual Framework - IFRS, IASB 1 of

3 Will this project lead to changes to existing Standards? A revised Conceptual Framework will not necessarily lead to changes to existing IFRSs. The Conceptual Framework is not an IFRS and does not override the requirements of any IFRSs. Any proposal to change an existing IFRS would need to go through the IASB s normal due process for adding a project to the agenda and conducting the project. Once finalised, the revised Conceptual Framework will be effective immediately and the IASB will use it when developing or revising IFRSs. 1 Conceptual Framework - IFRS, IASB 2 of

4 Discussion Paper and Comment letters The International Accounting Standards Board (IASB) today published for public comment a Discussion Paper exploring possible changes to the IASB s Conceptual Framework for Financial Reporting. The Discussion Paper is the first step towards issuing a revised Conceptual Framework. The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. It identifies principles for the IASB to use when it develops and revises its IFRS. The existing Conceptual Framework has enabled the IASB to develop high quality IFRS that have improved financial reporting. However, it does not cover some important areas and some guidance needs updating. In 2011, the IASB carried out an extensive public consultation to assist in identifying priorities for its agenda. Most respondents to that consultation identified work on the Conceptual Framework as a high priority. This Discussion Paper is designed to obtain initial views and comments on important issues that the IASB will consider as it develops an Exposure Draft of a revised Conceptual Framework. The issues include: definitions of assets and liabilities; recognition and derecognition; the distinction between equity and liabilities; measurement; presentation and disclosure; and other comprehensive income. Comment letter deadline The Discussion Paper is open for comments until 14 January Conceptual Framework - IFRS, IASB 3 of

5 INTERNATIONAL CONVERGENCE OF ACCOUNTING STANDARDS OVERVIEW What is Convergence, Why is it Important, and How Does it Fit into the FASB s Mission? The FASB s mission is to improve U.S. financial accounting standards for the benefit of present and potential investors, lenders, donors, creditors, and other users of financial statements. The FASB believes that pursuing convergence making global accounting standards as similar as possible is fully consistent with that mission. Investors, companies, auditors, and other participants in the U.S. financial reporting system should benefit from the increased comparability that would result from internationally converged accounting standards. More comparable standards would reduce costs to both users and preparers of financial statements and make worldwide capital markets more efficient. What Does International Convergence of Accounting Standards Mean? The phrase international convergence of accounting standards refers to both a goal and the path taken to reach it. The FASB believes that, over time, the ultimate goal of convergence is the development of a unified set of high-quality, international accounting standards that companies worldwide would use for both domestic and crossborder financial reporting. Until that ultimate goal is achieved, the FASB is committed to working with other standard setting bodies to develop accounting standards that are as converged as possible without forgoing the quality demanded by U.S. investors and other users of financial statements. From 2002 to 2013, the path toward convergence has been the collaborative efforts of the FASB and the International Accounting Standards Board (IASB) to both improve U.S. Generally Accepted Accounting Principles (U. S. GAAP) and International Financial Reporting Standards (IFRS) and eliminate or minimize the differences between them. 2 FASB International Convergence of Accounting Standards page 1 of

6 As the FASB and the IASB complete their work on the last of their joint standard-setting projects initially undertaken under the 2006 Memorandum of Understanding (MoU), that process will evolve to include cooperation and collaboration among a wider range of standard-setters around the world. Moving forward, the FASB will continue to work on global accounting issues with the IASB through its membership in the Accounting Standards Advisory Forum (ASAF), a newly established advisory body comprising twelve standard setters from across the globe. For issues of primary interest to stakeholders in U. S. capital markets, the FASB will set its own agenda. As the FASB initiates its own new projects based on feedback from its stakeholders, it will reach out to all who have an interest in improving financial reporting for companies and investors that participate in U.S. capital markets, including U.S. capital market stakeholders who live and work outside the United States. Background As early as 1999, the FASB outlined its support for the dual goals of converging global accounting standards while continuing to improve U.S. GAAP. The FASB and the IASB have been working together formally toward convergence since The two Boards have described what convergence means and their tactics to achieve it in two different documents the Norwalk Agreement issued in 2002 and the Memorandum of Understanding (MoU) between the IASB and the FASB, originally issued in 2006 and updated in 2008 and The Boards have completed several major converged accounting standards, including those on business combinations, non-controlling interests, and fair value measurement. More recently, in early 2013, the IFRS Foundation, which oversees the IASB, created a new Accounting Standards Advisory Forum (ASAF) to broaden the scope of the IASB s collaborative efforts. The FASB will participate in the ASAF as one of its 12 members. During the past ten years, the FASB and IASB collaborated through joint projects to develop common standards. The FASB has issued those standards as U.S. GAAP and the IASB has issued them as IFRS. Over time, the two sets of standards are 2 FASB International Convergence of Accounting Standards page 2 of

7 expected to both improve in quality and become increasingly similar, if not identical. The four remaining joint projects are: revenue recognition; financial instruments; leases; and insurance. (For detailed information about the current status and plans for the FASB s and IASB s joint standard-setting activities, please refer to the FASB s Technical Plan and Project Updates.) Revenue Recognition Revenue is an important indicator for users of financial reports in assessing a company s performance and prospects. However, revenue recognition guidance differs in U.S. GAAP and IFRS, and many believe both are in need of improvement. The revenue recognition project seeks to improve financial reporting by developing a single, principle-based revenue standard for U.S. GAAP and IFRS. The Boards are expected to issue a final standard in Leases Leases are an important source of financing for many companies that lease assets. However, many lease transactions currently are recognized off-balance sheet. The objective of the leases project is to increase transparency and comparability among organizations that lease assets by recognizing assets and liabilities that arise from lease transactions on a lessee s balance sheet. The Boards issued for public comment a revised Exposure Draft on Leases in May Financial Instruments The objective of the joint project on accounting for financial instruments is to provide financial statement users with a more timely and representative depiction of a company, institution, or not-for-profit organization s involvement in financial instruments, while reducing the complexity in accounting for those instruments. The Boards are conducting this project in three phases, and both have issued proposed standards on the first two phases: accounting for credit losses and recognition and measurement of financial instruments. Both Boards have proposed expected credit loss models to replace the current incurred loss model, but their proposed models differ on when those losses should be recognized. Following the conclusion of the comment period on credit losses, the Boards will determine if there is common 2 FASB International Convergence of Accounting Standards page 3 of

8 ground in developing a converged standard. On the issue of classification and measurement, the Boards are converged on the major decisions, and expect to deliberate during the second half of The third phase of the accounting for financial instruments project looks at hedging. The IASB issued its proposal on hedging in September The FASB is expected to begin its deliberations on hedging during the second half of Insurance Existing U.S. GAAP comprehensively addresses insurance accounting. However, IFRS currently lacks specific accounting requirements for insurance contracts. The Boards undertook the Insurance Contracts project to develop common, highquality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance company. In general, the Boards are developing a model that would reflect current estimates of the amount necessary to fulfill an insurance obligation. However, they have not reached consistent conclusions about some elements of the model. The FASB published an Exposure Draft in June What is the Role of the SEC and What is its Current Policy on Convergence? The SEC has directed the FASB to consider international convergence as it develops new accounting standards. In its 2003 policy statement reaffirming the FASB as the designated private-sector standard setter for the U.S., the SEC said that it expects the FASB to consider, in adopting accounting principles, the extent to which international convergence on high-quality standards is necessary or appropriate in the public interest and for the protection of investors. The FASB believes that working cooperatively with the IASB to develop common standards that improve financial reporting in the U.S. and internationally and that foster global comparability fulfills that expectation. Sometimes, as in the case of responding to the financial reporting crisis that began in late 2008, the FASB has taken timely actions to improve U.S. GAAP while also working with the IASB on longer term global solutions in the same area. Unless and until a decision is made to adopt IFRS in the U.S., or until we have achieved 2 FASB International Convergence of Accounting Standards page 4 of

9 substantial convergence between U.S. GAAP and IFRS, the FASB will need to continuously manage the challenging task of balancing the demand for improved U.S GAAP with the desire to eliminate differences between it and IFRS. In July 2012, the SEC staff issued its final staff report on the Work Plan for Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers. The report was the final phase of a work plan, initiated in February 2010, to consider specific issues relevant to the Commission s determination as to where, when and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating IFRS. The 2010 work plan followed the release by the Commission in November 2008 of a proposed rule, Roadmap for the Potential Use of Financial Statements Prepared In Accordance With International Financial Reporting Standards (IFRS) by U.S. Issuers. The 2012 staff report summarized the staff s findings regarding key issues surrounding the potential incorporation of IFRS into U.S. financial reporting, but did not make any recommendation to the Commission. Additional analysis and consideration of this threshold policy question is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for the U.S. issuers can occur, the report said. In the report, the SEC staff examined a number of unresolved issues relating to the potential incorporation of IFRS into the U.S. financial reporting system. These issues include, among others, the diversity in how accounting standards, including IFRS, are interpreted, applied and enforced in various jurisdictions around the world; the potential cost to U.S issuers of adopting or incorporating IFRS; investor education; and governance. The FASB and IASB remain committed to improving US GAAP and IFRS and achieving their convergence. Toward those ends, the FASB encourages its constituents to participate in the IASB s standard-setting activities, including projects that the IASB is undertaking independently of the FASB. Please see the IASB Work Plan on the IASB s website for a description of and timetable for all active IASB projects. Please refer to 2 FASB International Convergence of Accounting Standards page 5 of

10 the Open to Comment portion of the IASB s website to review or submit a comment on a particular IASB proposal. For more information about the history of the convergence effort, please refer to International Convergence of Accounting Standards - A Brief History, which describes the major events in the evolution and development of international accounting standards. IASB-FASB Update Report to the Financial Stability Board Plenary on Accounting Convergence [April 5, 2012] 2 FASB International Convergence of Accounting Standards page 6 of

11 RELEVANT TO ACCA QUALIFICATION PAPER F7 AND PERFORMANCE OBJECTIVES 10 AND 11 The need for and an understanding of a conceptual framework This topic forms most of Section A (and has an influence on Section B) of the syllabus for Paper F7, Financial Reporting. A conceptual framework is important to the understanding of the many principles and concepts that underpin International Financial Reporting Standards (IFRS) and is an often-neglected part of candidates studies. Questions from these areas regularly appear in Paper F7 exams usually as Question 4 and I often comment in my examiner s report that they are the least well-answered question in the exam paper; the questions also have a high incidence of candidates not attempting them at all. This article is intended to illustrate the relevance and importance of this topic. What is a conceptual framework? In a broad sense a conceptual framework can be seen as an attempt to define the nature and purpose of accounting. A conceptual framework must consider the theoretical and conceptual issues surrounding financial reporting and form a coherent and consistent foundation that will underpin the development of accounting standards. It is not surprising that early writings on this subject were mainly from academics. Conceptual frameworks can apply to many disciplines, but when specifically related to financial reporting, a conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new ones. As the purpose of financial reporting is to provide useful information as a basis for economic decision making, a conceptual framework will form a theoretical basis for determining how transactions should be measured (historical value or current value) and reported ie how they are presented or communicated to users. Some accountants have questioned whether a conceptual framework is necessary in order to produce reliable financial statements. Past history of standard setting bodies throughout the world tells us it is. In the absence of a conceptual framework, accounting standards were often produced that had serious defects that is: they were not consistent with each other particularly in the role of prudence versus accruals/matching they were also internally inconsistent and often the effect of the transaction on the statement of financial position was considered more important than its effect on income the statement 2011 ACCA

12 2 THE NEED FOR AND AN UNDERSTANDING OF A CONCEPTUAL FRAMEWORK OCTOBER 2011 standards were produced on a fire fighting approach, often reacting to a corporate scandal or failure, rather than being proactive in determining best policy. Some standard setting bodies were biased in their composition (ie not fairly representative of all user groups) and this influenced the quality and direction of standards the same theoretical issues were revisited many times in successive standards for example, does a transaction give rise to an asset (research and development expenditure) or liability (environmental provisions)? It could be argued that the lack of a conceptual framework led to a proliferation of rules-based accounting systems whose main objective is that the treatment of all accounting transactions should be dealt with by detailed specific rules or requirements. Such a system is very prescriptive and inflexible, but has the attraction of financial statements being more comparable and consistent. By contrast, the availability of a conceptual framework could lead to principles-based system whereby accounting standards are developed from an agreed conceptual basis with specific objectives. This brings us to the International Accounting Standards Board s (IASB) The Conceptual Framework for Financial Reporting (the Framework), which is in essence the IASB s interpretation of a conceptual framework and in the process of being updated. The main purpose of the Framework is to: assist in the development of future IFRS and the review of existing standards by setting out the underlying concepts promote harmonisation of accounting regulation and standards by reducing the number of permitted alternative accounting treatments assist the preparers of financial statements in the application of IFRS, which would include dealing with accounting transactions for which there is not (yet) an accounting standard. The Framework is also of value to auditors, and the users of financial statements, and more generally help interested parties to understand the IASB s approach to the formulation of an accounting standard. The content of the Framework can be summarised as follows: Identifying the objective of financial statements The reporting entity (to be issued) Identifying the parties that use financial statements The qualitative characteristics that make financial statements useful The remaining text of the old Framework dealing with elements of financial statements: assets, liabilities equity income and expenses and 2011 ACCA

13 3 THE NEED FOR AND AN UNDERSTANDING OF A CONCEPTUAL FRAMEWORK OCTOBER 2011 when they should be recognised and a discussion of measurement issues (for example, historic cost, current cost) and the related concept of capital maintenance. The development of the Framework over the years has led to the IASB producing a body of world-class standards that have the following advantages for those companies that adopt them: IFRS are widely accepted as a set of high-quality and transparent global standards that are intended to achieve consistency and comparability across the world. They have been produced in cooperation with other internationally renowned standard setters, with the aspiration of achieving consensus and global convergence. Companies that use IFRS and have their financial statements audited in accordance with International Standards on Auditing (ISA) will have an enhanced status and reputation. The International Organisation of Securities Commissions (IOSCO) recognise IFRS for listing purposes thus companies that use IFRS need produce only one set of financial statements for any securities listing for countries that are members of IOSCO. This makes it easier and cheaper to raise finance in international markets. Companies that own foreign subsidiaries will find the process of consolidation simplified if all their subsidiaries use IFRS. Companies that use IFRS will find their results are more easily compared with those of other companies that use IFRS. This should obviate the need for any reconciliation from local GAAP to IFRS when analysts assess comparative performance. It is not the purpose of this article to go through the detailed content of the Framework; this is well documented in many textbooks. At this point I would stress that it is important to think about what the content of the Framework really means; it is not enough merely to rote learn the principles/definitions. This is because an understanding and application of these topics will be tested in exam questions and it is on these aspects that candidates perform rather poorly. As previously mentioned, this topic is generally examined as Question 4 (worth 15 marks). Typically, the question will identify two or three areas of the Framework and ask for a definition or explanation of them for example, the definition of assets and liabilities, an explanation of accounting concepts such as substance over form or materiality, or qualitative characteristics such as relevance and reliability. This section will usually be followed by short scenarios intended to test candidates understanding and their ability to apply the above knowledge ACCA

14 4 THE NEED FOR AND AN UNDERSTANDING OF A CONCEPTUAL FRAMEWORK OCTOBER 2011 Here are a few examples of past questions. June 2008 exam (a) The IASB s Framework for the Preparation and Presentation of Financial Statements requires financial statements to be prepared on the basis that they comply with certain accounting concepts, underlying assumptions and (qualitative) characteristics. Five of these are: Matching/accruals Substance over form Prudence Comparability Materiality Required Briefly explain the meaning of each of the above concepts/assumptions. (5 marks) (b) For most entities, applying the appropriate concepts/assumptions in for inventories is an important element in preparing their financial statements. Required Illustrate with an example how each of the concepts/assumptions in (a) may be applied to accounting for inventory. (10 marks) (15 marks) Observations This question illustrates the progression of the topic from Paper F3 to F7. Part (a) is not much more than expected knowledge from F3, however Part (b) progresses this knowledge. It requires the application of each of the concepts, not to just any situation, but specifically to inventory thus illustrating how a single transaction (inventory in this case) can be subject to many different accounting concepts. June 2010 exam (a) An important aspect of the International Accounting Standards Board s (IASB) Framework for the Preparation and Presentation of Financial Statements is that transactions should be recorded on the basis of their substance over their form. Required Explain why it is important that financial statements should reflect the substance of the underlying transactions and describe the features that may 2011 ACCA

15 5 THE NEED FOR AND AN UNDERSTANDING OF A CONCEPTUAL FRAMEWORK OCTOBER 2011 indicate that the substance of a transaction may be different from its legal form. Observations Part (a) is based on the important topic of substance over form. Note the question does not ask for a definition of the concept (this would be more for Paper F3); instead it asks why the concept is important and what features may indicate that the substance of a transaction may be different to its legal form. In other words, how do we identify such transactions? Most answers to this question merely gave a definition of substance and an example (inevitably leasing) of its use in financial statements. Part (b) consisted of a numerical example related to a sale and re-purchase agreement to illustrate the difference that the application of substance has on financial statements (compared to the legal form). June 2011 exam (a) Your assistant has been reading the IASB s Framework for the Preparation and Presentation of Financial Statements (the Framework) and, as part of the qualitative characteristics of financial statements under the heading of relevance, he notes that the predictive value of information is considered important. He is aware that financial statements are prepared historically (ie after transactions have occurred) and offers the view that the predictive value of financial statements would be enhanced if forward-looking information (for example, forecasts) were published rather than backward-looking historical statements. Required By the use of specific examples, provide an explanation to your assistant of how IFRS presentation and disclosure requirements can assist the predictive role of historically prepared financial statements. (6 marks) Observations Again Part (a) is themed on the Framework: the important characteristic of relevance. This is such an import characteristic that the Framework says (implicitly) that if information is not relevant, it is of no use. This question focuses on a particular aspect of relevance; that of predictability. Predictability recognises that users of financial statements are very interested the future performance of an entity. The core of this question was about how historical information can be presented, such that it enhances the predictive value of financial statements ACCA

16 6 THE NEED FOR AND AN UNDERSTANDING OF A CONCEPTUAL FRAMEWORK OCTOBER 2011 From memory I would say that this (section) question had the highest number of candidates that did not give any answer; and of those that did, very few scored more than half of the available marks. Part (a) was followed by a section on continuing and discontinued operations, and a calculation of diluted earnings per share. If these topics had been mentioned in Part (a) alone, it would have gained two of the six marks available. Conclusion Simply look out for more of this type of question it is an important area and should not be neglected. Steve Scott is examiner for Paper F ACCA

17 The Conceptual Framework for Financial Reporting The Conceptual Framework was issued by the IASB in September It superseded the Framework for the Preparation and Presentation of Financial Statements. IFRS Foundation A21

18 CONTENTS paragraphs FOREWORD THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING INTRODUCTION Purpose and status Scope CHAPTERS 1 The objective of general purpose financial reporting 2 The reporting entity to be added OB1 OB21 3 Qualitative characteristics of useful financial information QC1 QC39 4 The Framework (1989): the remaining text Underlying assumption 4.1 The elements of financial statements Recognition of the elements of financial statements Measurement of the elements of financial statements Concepts of capital and capital maintenance FOR THE ACCOMPANYING DOCUMENTS BELOW, SEE PART B OF THIS EDITION APPROVAL BY THE BOARD OF THE CONCEPTUAL FRAMEWORK 2010 BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3 TABLE OF CONCORDANCE A22 IFRS Foundation

19 Foreword The International Accounting Standards Board is currently in the process of updating its conceptual framework. This conceptual framework project is conducted in phases. As a chapter is finalised, the relevant paragraphs in the Framework for the Preparation and Presentation of Financial Statements that was published in 1989 will be replaced. When the conceptual framework project is completed, the Board will have a complete, comprehensive and single document called the Conceptual Framework for Financial Reporting. This version of the Conceptual Framework includes the first two chapters the Board published as a result of its first phase of the conceptual framework project Chapter 1 The objective of general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial information. Chapter 2 will deal with the reporting entity concept. The Board published an exposure draft on this topic in March 2010 with a comment period that ended on 16 July Chapter 4 contains the remaining text of the Framework (1989). The table of concordance, at the end of this publication, shows how the contents of the Framework (1989) and the Conceptual Framework (2010) correspond. IFRS Foundation A23

20 The Introduction has been carried forward from the Framework (1989). This will be updated when the IASB considers the purpose of the Conceptual Framework. Until then, the purpose and the status of the Conceptual Framework are the same as before. Introduction Financial statements are prepared and presented for external users by many entities around the world. Although such financial statements may appear similar from country to country, there are differences which have probably been caused by a variety of social, economic and legal circumstances and by different countries having in mind the needs of different users of financial statements when setting national requirements. These different circumstances have led to the use of a variety of definitions of the elements of financial statements: for example, assets, liabilities, equity, income and expenses. They have also resulted in the use of different criteria for the recognition of items in the financial statements and in a preference for different bases of measurement. The scope of the financial statements and the disclosures made in them have also been affected. The International Accounting Standards Board is committed to narrowing these differences by seeking to harmonise regulations, accounting standards and procedures relating to the preparation and presentation of financial statements. It believes that further harmonisation can best be pursued by focusing on financial statements that are prepared for the purpose of providing information that is useful in making economic decisions. The Board believes that financial statements prepared for this purpose meet the common needs of most users. This is because nearly all users are making economic decisions, for example: (a) (b) (c) (d) (e) (f) (g) (h) to decide when to buy, hold or sell an equity investment. to assess the stewardship or accountability of management. to assess the ability of the entity to pay and provide other benefits to its employees. to assess the security for amounts lent to the entity. to determine taxation policies. to determine distributable profits and dividends. to prepare and use national income statistics. to regulate the activities of entities. The Board recognises, however, that governments, in particular, may specify different or additional requirements for their own purposes. These requirements should not, however, affect financial statements published for the benefit of other users unless they also meet the needs of those other users. Financial statements are most commonly prepared in accordance with an accounting model based on recoverable historical cost and the nominal financial capital maintenance concept. Other models and concepts may be more appropriate in order to meet the objective of providing information that is useful for making economic decisions although there is at present no consensus for change. This Conceptual Framework has been developed so that it is applicable to a range of accounting models and concepts of capital and capital maintenance. A24 IFRS Foundation

21 Purpose and status This Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The purpose of the Conceptual Framework is: (a) (b) (c) (d) (e) (f) (g) to assist the Board in the development of future IFRSs and in its review of existing IFRSs; to assist the Board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs; to assist national standard-setting bodies in developing national standards; to assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form the subject of an IFRS; to assist auditors in forming an opinion on whether financial statements comply with IFRSs; to assist users of financial statements in interpreting the information contained in financial statements prepared in compliance with IFRSs; and to provide those who are interested in the work of the IASB with information about its approach to the formulation of IFRSs. This Conceptual Framework is not an IFRS and hence does not define standards for any particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides any specific IFRS. The Board recognises that in a limited number of cases there may be a conflict between the Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements of the IFRS prevail over those of the Conceptual Framework. As, however, the Board will be guided by the Conceptual Framework in the development of future IFRSs and in its review of existing IFRSs, the number of cases of conflict between the Conceptual Framework and IFRSs will diminish through time. The Conceptual Framework will be revised from time to time on the basis of the Board s experience of working with it. Scope The Conceptual Framework deals with: (a) (b) (c) (d) the objective of financial reporting; the qualitative characteristics of useful financial information; the definition, recognition and measurement of the elements from which financial statements are constructed; and concepts of capital and capital maintenance. IFRS Foundation A25

22 CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING paragraphs INTRODUCTION OBJECTIVE, USEFULNESS AND LIMITATIONS OF GENERAL PURPOSE FINANCIAL REPORTING INFORMATION ABOUT A REPORTING ENTITY S ECONOMIC RESOURCES, CLAIMS, AND CHANGES IN RESOURCES AND CLAIMS Economic resources and claims Changes in economic resources and claims Financial performance reflected by accrual accounting Financial performance reflected by past cash flows Changes in economic resources and claims not resulting from financial performance OB1 OB2 OB11 OB12 OB21 OB13 OB14 OB15 OB21 OB17 OB19 OB20 OB21 A26 IFRS Foundation

23 Chapter 1: The objective of general purpose financial reporting Introduction OB1 The objective of general purpose financial reporting forms the foundation of the Conceptual Framework. Other aspects of the Conceptual Framework a reporting entity concept, the qualitative characteristics of, and the constraint on, useful financial information, elements of financial statements, recognition, measurement, presentation and disclosure flow logically from the objective. Objective, usefulness and limitations of general purpose financial reporting OB2 OB3 OB4 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 about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. Decisions by existing and potential investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, for example dividends, principal and interest payments or market price increases. Similarly, decisions by existing and potential lenders and other creditors about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. 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. Consequently, existing and potential investors, lenders and other creditors need information to help them assess the prospects for future net cash inflows to an entity. To assess an entity s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about the resources of the entity, claims against the entity, and how efficiently and effectively the entity s management and governing board have discharged their responsibilities to use the entity s resources. Examples of such responsibilities include protecting the entity s resources from unfavourable effects of economic factors such as price and technological changes and ensuring that the entity complies with applicable laws, regulations and contractual provisions. Information about management s discharge of its responsibilities is also useful for decisions by existing investors, lenders and other creditors who have the right to vote on or otherwise influence management s actions. * Throughout this Conceptual Framework, the terms financial reports and financial reporting refer to general purpose financial reports and general purpose financial reporting unless specifically indicated otherwise. Throughout this Conceptual Framework, the term management refers to management and the governing board of an entity unless specifically indicated otherwise. IFRS Foundation A27

24 OB5 OB6 OB7 OB8 OB9 OB10 OB11 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 existing and potential investors, lenders and other creditors need. Those users 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. 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 Board, in developing financial reporting standards, will 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. 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. 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. As with most goals, the Conceptual Framework s vision of ideal financial reporting 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 analysing 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. Information about a reporting entity s economic resources, claims, and changes in resources and claims OB12 General purpose financial reports provide information about the financial position of a reporting entity, which is information about the entity s economic resources and the claims against the reporting entity. Financial reports also provide information about the effects of transactions and other events that change a reporting entity s economic resources and claims. Both types of information provide useful input for decisions about providing resources to an entity. A28 IFRS Foundation

25 Economic resources and claims OB13 OB14 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. 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. Different types of economic resources affect a user s assessment of the reporting entity s prospects for future cash flows differently. Some future cash flows result directly from existing economic resources, such as accounts receivable. Other cash flows result from using several resources in combination to produce and market goods or services to customers. Although those cash flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and amount of the resources available for use in a reporting entity s operations. Changes in economic resources and claims OB15 OB16 Changes in a reporting entity s economic resources and claims result from that entity s financial performance (see paragraphs OB17 OB20) and from other events or transactions such as issuing debt or equity instruments (see paragraph OB21). To properly assess the prospects for future cash flows from the reporting entity, users need to be able to distinguish between both of these changes. Information about a reporting entity s financial performance helps users to understand the return that the entity has produced on its economic resources. Information about the return the entity has produced provides an indication of how well management has discharged its responsibilities to make efficient and effective use of the reporting entity s resources. Information about the variability and components of that return is also important, especially in assessing the uncertainty of future cash flows. Information about a reporting entity s past financial performance and how its management discharged its responsibilities is usually helpful in predicting the entity s future returns on its economic resources. Financial performance reflected by accrual accounting OB17 Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity s past and future performance than information solely about cash receipts and payments during that period. IFRS Foundation A29

26 OB18 OB19 Information about a reporting entity s financial performance during a period, reflected by changes in its economic resources and claims other than by obtaining additional resources directly from investors and creditors (see paragraph OB21), is useful in assessing the entity s past and future ability to generate net cash inflows. That information indicates the extent to which the reporting entity has increased its available economic resources, and thus its capacity for generating net cash inflows through its operations rather than by obtaining additional resources directly from investors and creditors. Information about a reporting entity s financial performance during a period may also indicate the extent to which events such as changes in market prices or interest rates have increased or decreased the entity s economic resources and claims, thereby affecting the entity s ability to generate net cash inflows. Financial performance reflected by past cash flows OB20 Information about a reporting entity s cash flows during a period also helps users to assess the entity s ability to generate future net cash inflows. It indicates how the reporting entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends or other cash distributions to investors, and other factors that may affect the entity s liquidity or solvency. Information about cash flows helps users understand a reporting entity s operations, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance. Changes in economic resources and claims not resulting from financial performance OB21 A reporting entity s economic resources and claims may also change for reasons other than financial performance, such as issuing additional ownership shares. 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. A30 IFRS Foundation

27 CHAPTER 2: THE REPORTING ENTITY [to be added] IFRS Foundation A31

28 CHAPTER 3: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION paragraphs INTRODUCTION QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION Fundamental qualitative characteristics Relevance Materiality Faithful representation Applying the fundamental qualitative characteristics Enhancing qualitative characteristics Comparability Verifiability Timeliness Understandability Applying the enhancing characteristics THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING QC1 QC3 QC4 QC34 QC5 QC18 QC6 QC11 QC11 QC12 QC16 QC17 QC18 QC19 QC34 QC20 QC25 QC26 QC28 QC29 QC30 QC32 QC33 QC34 QC35 QC39 A32 IFRS Foundation

29 Chapter 3: Qualitative characteristics of useful financial information Introduction QC1 QC2 QC3 The qualitative characteristics of useful financial information discussed in this chapter identify the types of information that are likely to be most useful to the existing and potential investors, lenders and other creditors for making decisions about the reporting entity on the basis of information in its financial report (financial information). Financial reports provide information about the reporting entity s economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims. (This information is referred to in the Conceptual Framework as information about the economic phenomena.) Some financial reports also include explanatory material about management s expectations and strategies for the reporting entity, and other types of forward-looking information. The qualitative characteristics of useful financial information * apply to financial information provided in financial statements, as well as to financial information provided in other ways. Cost, which is a pervasive constraint on the reporting entity s ability to provide useful financial information, applies similarly. However, the considerations in applying the qualitative characteristics and the cost constraint may be different for different types of information. For example, applying them to forward-looking information may be different from applying them to information about existing economic resources and claims and to changes in those resources and claims. Qualitative characteristics of useful financial information QC4 If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. Fundamental qualitative characteristics QC5 The fundamental qualitative characteristics are relevance and faithful representation. Relevance QC6 QC7 Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both. * Throughout this Conceptual Framework, the terms qualitative characteristics and constraint refer to the qualitative characteristics of, and the constraint on, useful financial information. IFRS Foundation A33