IASB Conceptual Framework 2018 ( Effective from 2020) - Part II

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Today We are going to discuss in detail about the New conceptual framework issued by IASB during 2018 which will be applicable from 01st January 2020.

The revised conceptual framework which was issued in March, 2018 is effective for accounting periods begin on or after  01st January 2020.

Content of Conceptual framework as follows;

• Objective of Financial reporting
• Qualitative characteristics of useful financial information
• Financial information and the reporting entity
• The elements of financial statements
• Recognition and de-recognition of assets and liabilities
• Measurement
• Presentation and disclosures in financial statements

Objective of Financial reporting

To provide financial information that is useful to users in making decisions relating to providing resources to the entity.

Those decisions involve,

• Buying, selling or holding equity or debt instruments
• Providing funds, credit to the entity
• Any other decision to influence management’s actions

Qualitative characteristics of useful financial information

Qualitative characteristics can be categorized in to two as fundamental qualitative characteristics and enhancing qualitative characteristics. Fundamental qualitative characteristics make financial information useful while enhancing qualitative characteristics enhance the usefulness of financial information.

Fundamental Qualitative Characteristics

To achieve the above mentioned objective, financial information should be relevant and provide faithful representation about the entity. Those two characteristics are called as fundamental qualitative characteristics of financial information.

Relevance is ability of financial information to make changes in decisions made by users of financial information. Financial information will be relevant only if it has predictive or confirmatory value.

(i) Predictive Value
(ii) Confirmatory value

Faithfull representation is that information provides the substance what it purports to represent. In other worlds, information should be complete, neutral and free from error as much as possible to represent the real picture about the entity.

(i) Complete

(ii) Neutral

(iii) Free from error

Enhancing Qualitative Characteristics

• Comparability
• Verifiability
• Timeliness
• Understandability

Reporting Entity and Financial Statements

The entity that prepares financial statements. It can be legal entity, proportion of entity or comprise more than one entity

Based on that, financial statements can be categorized as,

Consolidated financial statements - Provide information about both parent and subsidiaries in a single set of financial statements

Unconsolidated financial statements - Provide information about the parent company only.

Combined financial statements - Provide information about more than one entity which are not group of companies.

Elements of financial statements

Definitions of elements of financial statements have been revised in the new conceptual framework as follows;

Asset

A present economic resource controlled by the entity as a result of past events

An economic resource is a right that has the potential to produce economic benefits

Liability

A present obligation of the entity to transfer an economic resource as a result of past events 

An obligation is a duty or responsibility that the entity has no practical ability to avoid 

Income

Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims 

Expenses

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims 

Equity

The residual interest in the assets of the entity after deducting all its liabilities.

Recognition and De-recognition

Recognition 

Above mentioned elements are recognized in the Statement of financial position and Statement of financial performance* when it meets the definition of the particular element. Further, it is better to consider that whether the recognition provides relevant information to users and result in faithful representation of entity’s financial position or financial performance. Otherwise the recognized elements will not provide useful information to the users.

Relevance and Faithful representation may be affected by uncertainties and inconsistencies related with existence and measurement of the elements.

De-recognition

Assets and liabilities recognized in the statement of financial position are removed when they no longer satisfy the conditions specified in the definitions.

Ex:

Asset

When the entity loss the control of the asset

When the asset no longer provides economic benefits to the entity

Liability

When the entity no longer has a present obligation 

When the entity has the ability to avoid the present obligation

Measurement

Conceptual framework describes measurement bases and factors to consider when selecting a measurement basis.

Measurement

Conceptual framework describes measurement bases and factors to consider when selecting a measurement basis.

Measurement bases

1) Historical cost measurement bases

Historical cost is the original cost of an asset/liability which is used to record the transaction in the entity’s records.

Amortized cost is an example for historical cost measurement basis.

2) Current cost measurement bases

Fair Value - The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

3) Value in use (for assets) 

Value that can be derived from the use of the asset. It varies based on the entity’s expectations about present value of future cash flows which are expected to be derived from the use over it’s useful life.

4) Fulfillment value (for liabilities) - Present Value of future cash outflows which are paid to fulfill/settle an obligation.

5) Current cost  

Current amount that should be paid to acquire an equivalent asset or received from bearing equivalent liability.

Historical cost and value in use are entity-specific measurements whereas fair value and current cost are market based.

When selecting an appropriate measurement base, the nature of the information provided in the financial statements and the nature of the transactions should be considered.

Relevance and faithful representation are the factors that should be considered when selecting the most appropriate measurement base as they ensure information provided is useful.

Cost of using a particular measurement technique also affect the selection of measurement basis.

Presentation and disclosures

Statement of Profit or Loss - Includes all income and expenses of the entity for the reporting period.

Statement of Financial Performance - Includes both Profit/Loss and Other Comprehensive Income.

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References and Sources used to Write the Article

https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/

https://www.ifrs.org/projects/2018/conceptual-framework/

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Article Written By : Ishani Asangika ( Bsc Accounting (Special) Second Class Upper , CA Corporate Level

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