Disclaimer:
-The Framework is not a Standard and does not override any specific IFRS. [SP1.2]
-If
the IASB decides to issue a new or revised pronouncement that is in
conflict with the Framework, the IASB must highlight the fact and
explain the reasons for the departure in the basis for conclusions.
[SP1.3]
The Framework
Scope
The Framework addresses:
· 1. the objective of general purpose financial reporting
· 2. qualitative characteristics of useful financial information
· 3. financial Statements and the reporting entity
4. the elements of financial statements
· 5. recognition and derecognition
· 6. measurement
· 7. presentation and disclosure
· 8. concepts of capital and capital maintenance
Chapter 1: The Objective of general purpose financial reporting
The primary users of general purpose financial reporting are present and
potential investors, lenders and other creditors, who use that
information to make decisions about buying, selling or holding equity or
debt instruments, providing or settling loans or other forms of credit,
or exercising rights to vote on, or otherwise influence, management’s
actions that affect the use of the entity’s economic resources. [1.2]
The primary users need information about the resources of the entity not
only to assess an entity's prospects for future net cash inflows but
also how effectively and efficiently management has discharged their
responsibilities to use the entity's existing resources (i.e.,
stewardship). [1.3-1.4]
The IFRS Framework notes that general purpose financial reports cannot
provide all the information that users may need to make economic
decisions. They will need to consider pertinent information from other
sources as well. [1.6]
The IFRS Framework notes that other parties, including prudential and
market regulators, may find general purpose financial reports useful.
However, these are not considered a primary user and general purpose
financial reports are not primarily directed to regulators or other
parties. [1.10]
Information about a reporting entity's economic resources, claims, and changes in resources and claims
Economic resources and claims
Information about the nature and amounts of a reporting entity's
economic resources and claims assists users to assess that entity's
financial strengths and weaknesses; to assess liquidity and solvency,
and its need and ability to obtain financing. Information about the
claims and payment requirements assists users to predict how future cash
flows will be distributed among those with a claim on the reporting
entity. [1.13]
A reporting entity's economic resources and claims are reported in the statement of financial position. [See IAS 1.54-80A]
Changes in economic resources and claims
Changes in a reporting entity's economic resources and claims result
from that entity's performance and from other events or transactions
such as issuing debt or equity instruments. Users need to be able to
distinguish between both of these changes. [1.15]
Financial performance reflected by accrual accounting
Information about a reporting entity's financial performance during a
period, representing changes in economic resources and claims other than
those obtained directly from investors and creditors, is useful in
assessing the entity's past and future ability to generate net cash
inflows. Such information may also indicate the extent to which general
economic events have changed the entity's ability to generate future
cash inflows. [1.18-1.19]
The changes in an entity's economic resources and claims are presented
in the statement of comprehensive income. [See IAS 1.81-105]
Financial performance reflected by past cash flows
Information about a reporting entity's cash flows during the reporting
period also assists users to assess the entity's ability to generate
future net cash inflows and to assess management’s stewardship of the
entity’s economic resources. This information indicates how the entity
obtains and spends cash, including information about its borrowing and
repayment of debt, cash dividends to shareholders, etc. [1.20]
The changes in the entity's cash flows are presented in the statement of cash flows. [See IAS 7]
Changes in economic resources and claims not resulting from financial performance
Information about changes in an entity's economic resources and claims
resulting from events and transactions other than financial performance,
such as the issue of equity instruments or distributions of cash or
other assets to shareholders is necessary to complete the picture of the
total change in the entity's economic resources and claims. [1.21]
The changes in an entity's economic resources and claims not resulting
from financial performance is presented in the statement of changes in
equity. [See IAS 1.106-110]
Information about use of the entity’s economic resources
Information about the use of the entity's economic resources also
indicates how efficiently and effectively the reporting entity’s
management has used these resources in its stewardship of those
resources. Such information is also useful for predicting how
efficiently and effectively management will use the entity’s economic
resources in future periods and, hence, what the prospects for future
net cash inflows are. [1.22]
Chapter 2: Qualitative characteristics of useful financial information
The qualitative characteristics of useful financial reporting identify
the types of information are likely to be most useful to users in making
decisions about the reporting entity on the basis of information in its
financial report. The qualitative characteristics apply equally to
financial information in general purpose financial reports as well as to
financial information provided in other ways. [2.1, 2.3]
Financial information is useful when it is relevant and represents
faithfully what it purports to represent. The usefulness of financial
information is enhanced if it is comparable, verifiable, timely and
understandable. [2.4]
Fundamental qualitative characteristics
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information. [2.5]
Relevance
Relevant financial information is capable of making a difference in the
decisions made by users. Financial information is capable of making a
difference in decisions if it has predictive value, confirmatory value,
or both. The predictive value and confirmatory value of financial
information are interrelated. [2.6-2.10]
Materiality is
an entity-specific aspect of relevance based on the nature or magnitude
(or both) of the items to which the information relates in the context
of an individual entity's financial report. [2.11]
Faithful representation
General purpose financial reports represent economic phenomena in words
and numbers. To be useful, financial information must not only be
relevant, it must also represent faithfully the phenomena it purports to
represent. Faithful representation means representation of the
substance of an economic phenomenon instead of representation of its
legal form only. [2.12]
A faithful representation seeks to maximise the underlying
characteristics of completeness, neutrality and freedom from error.
[2.13]
A neutral depiction is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements under conditions of uncertainty. [2.16]
Applying the fundamental qualitative characteristics
Information must be both relevant and faithfully represented if it is to be useful. [2.20]
Enhancing qualitative characteristics
Comparability, verifiability, timeliness and understandability are
qualitative characteristics that enhance the usefulness of information
that is relevant and faithfully represented. [2.23]
Comparability
Information about a reporting entity is more useful if it can be
compared with a similar information about other entities and with
similar information about the same entity for another period or another
date. Comparability enables users to identify and understand
similarities in, and differences among, items. [2.24-2.25]
Verifiability
Verifiability helps to assure users that information represents
faithfully the economic phenomena it purports to represent.
Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
[2.30]
Timeliness
Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions. [2.33]
Understandability
Classifying, characterising and presenting information clearly and
concisely makes it understandable. While some phenomena are inherently
complex and cannot be made easy to understand, to exclude such
information would make financial reports incomplete and potentially
misleading. Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities and who review
and analyse the information with diligence. [2.34-2.36]
Applying the enhancing qualitative characteristics
Enhancing qualitative characteristics should be maximised to the extent
necessary. However, enhancing qualitative characteristics (either
individually or collectively) cannot render information useful if that
information is irrelevant or not represented faithfully. [2.37]
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided
by general purpose financial reporting. Reporting such information
imposes costs and those costs should be justified by the benefits of
reporting that information. The IASB assesses costs and benefits in
relation to financial reporting generally, and not solely in relation to
individual reporting entities. The IASB will consider whether different
sizes of entities and other factors justify different reporting
requirements in certain situations. [2.39; 2.43]
Chapter 4: The Framework: the remaining text
Chapter
4 contains the remaining text of the Framework approved in 1989. As the
project to revise the Framework progresses, relevant paragraphs in
Chapter 4 will be deleted and replaced by new Chapters in the IFRS
Framework. Until it is replaced, a paragraph in Chapter 4 has the same
level of authority within IFRSs as those in Chapters 1-3.
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Underlying assumption
The IFRS Framework states that the going concern assumption is an
underlying assumption. Thus, the financial statements presume that an
entity will continue in operation indefinitely or, if that presumption
is not valid, disclosure and a different basis of reporting are
required. [F 4.1]
The elements of financial statements
Financial statements portray the financial effects of transactions and
other events by grouping them into broad classes according to their
economic characteristics. These broad classes are termed the elements of
financial statements.
The elements directly related to financial position (balance sheet) are: [F 4.4]
· Assets
· Liabilities
· Equity
The elements directly related to performance (income statement) are: [F 4.25]
· Income
· Expenses
The cash flow statement reflects both income statement elements and some changes in balance sheet elements.
Definitions of the elements relating to financial position
· Asset. An
asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity. [F 4.4(a)]
· Liability. A
liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow from
the entity of resources embodying economic benefits. [F 4.4(b)]
· Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities. [F 4.4(c)]
Definitions of the elements relating to performance
· Income. Income is
increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
contributions from equity participants. [F 4.25(a)]
· Expense. Expenses
are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to
distributions to equity participants. [F 4.25(b)]
The definition of income encompasses both revenue and gains. Revenue
arises in the course of the ordinary activities of an entity and is
referred to by a variety of different names including sales, fees,
interest, dividends, royalties and rent. Gains represent other items
that meet the definition of income and may, or may not, arise in the
course of the ordinary activities of an entity. Gains represent
increases in economic benefits and as such are no different in nature
from revenue. Hence, they are not regarded as constituting a separate
element in the IFRS Framework. [F 4.29 and F 4.30]
The definition of expenses encompasses losses as well as those expenses
that arise in the course of the ordinary activities of the entity.
Expenses that arise in the course of the ordinary activities of the
entity include, for example, cost of sales, wages and depreciation. They
usually take the form of an outflow or depletion of assets such as cash
and cash equivalents, inventory, property, plant and equipment. Losses
represent other items that meet the definition of expenses and may, or
may not, arise in the course of the ordinary activities of the entity.
Losses represent decreases in economic benefits and as such they are no
different in nature from other expenses. Hence, they are not regarded as
a separate element in this Framework. [F 4.33 and F 4.34]
Recognition of the elements of financial statements
Recognition is the process of incorporating in the balance sheet or
income statement an item that meets the definition of an element and
satisfies the following criteria for recognition: [F 4.37 and F 4.38]
· It is probable that any future economic benefit associated with the item will flow to or from the entity; and
· The item's cost or value can be measured with reliability.
Based on these general criteria:
· An asset is recognised in
the balance sheet when it is probable that the future economic benefits
will flow to the entity and the asset has a cost or value that can be
measured reliably. [F 4.44]
· A liability is recognised in
the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present
obligation and the amount at which the settlement will take place can
be measured reliably. [F 4.46]
· Income is recognised in
the income statement when an increase in future economic benefits
related to an increase in an asset or a decrease of a liability has
arisen that can be measured reliably. This means, in effect, that
recognition of income occurs simultaneously with the recognition of
increases in assets or decreases in liabilities (for example, the net
increase in assets arising on a sale of goods or services or the
decrease in liabilities arising from the waiver of a debt payable). [F
4.47]
· Expenses are recognised when
a decrease in future economic benefits related to a decrease in an
asset or an increase of a liability has arisen that can be measured
reliably. This means, in effect, that recognition of expenses occurs
simultaneously with the recognition of an increase in liabilities or a
decrease in assets (for example, the accrual of employee entitlements or
the depreciation of equipment). [F 4.49]
Measurement of the elements of financial statements
Measurement involves assigning monetary amounts at which the elements of
the financial statements are to be recognised and reported. [F 4.54]
The
IFRS Framework acknowledges that a variety of measurement bases are
used today to different degrees and in varying combinations in financial
statements, including: [F 4.55]
· Historical cost
Current cost
Net realisable (settlement) value
Present value (discounted)
Historical cost is the measurement basis most commonly used today, but
it is usually combined with other measurement bases. [F. 4.56] The IFRS
Framework does not include concepts or principles for selecting which
measurement basis should be used for particular elements of financial
statements or in particular circumstances.
Source: IASplus
Source: IASplus
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