The IASB's Conceptual Framework
The IASB's Conceptual Framework (the Framework) establishes objectives and concepts for the development of accounting standards. The Framework is also useful in the preparation of financial statements by listing the objectives and the qualitative characteristics of the financial statements and providing the definition and measurement concepts of the elements of financial statements and capital maintenance.
Ideally, the Board uses the Framework in the development of future standards. The Framework should also assist users and preparers in applying and interpreting standards and financial statements. For instance, preparers may need to look to the Framework in the absence of a published standard, and auditors may want to ensure clients’ financial statements are in compliance with IFRS to form an opinion on those statements. However, occasionally a conflict arises between the Framework and previously issued IASs or IFRSs. In conflict situations, the standards override the Framework.
The Framework is to provide information regarding the objectives of financial reporting, the qualitative characteristics of financial reporting, the definition, recognition, and measurement of the elements of financial statements, and the concepts of capital and capital maintenance. It does this through four chapters: 1. The Objectives of General Purpose Financial Reporting, 2. The Reporting Entity (yet to be added), 3. Qualitative Characteristics of Useful Financial Information, and 4. The 1989 Framework: The Remaining Text. Chapters 1 and 3 are converged with U.S. GAAP. A discussion of each existing chapter appears next.
The first chapter, The Objective of General Purpose Financial Reporting, contains information regarding the objective, usefulness, and limitations of general financial reporting and information about reporting entities’ economic resources, claims to those resources, and changes in those resources and claims. The converged objective 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.”5
The third chapter, Qualitative Characteristics of Useful Financial Information, includes a discussion of the fundamental qualitative characteristics (relevance, materiality as it relates to relevance, and faithful representation) along with their application; enhancing qualitative characteristics (comparability, verifiability, timeliness, and understandability) along with their application; and the cost constraint on useful financial reporting. Information is useful if it is relevant and faithfully represented. Timeliness, comparability, verifiability, and understandability enhance the usefulness of information. Relevant information predicts or confirms prior expectations and surpasses a materiality threshold. Information with faithful representation is complete, neutral, and free from error.
The fourth chapter, The 1989 Framework: The Remaining Text, includes a discussion of all other items such as assumptions of financial reporting, going concern, the elements of the financial statements, measurement of these elements, and concepts for capital and capital maintenance. Elements of financial statements include assets, liabilities, equity, income, and expenses. Assets are future economic benefits owned by the entity, resulting in resource inflows. Liabilities are current obligations as a result of a past transaction resulting in resource outflows. Equity is the residual interest in an entity. Income is an inflow or economic benefit whereas an expense is a decrease in an economic benefit or outflow. Capital maintenance refers to return on capital and return of capital. In the process of examining global firms, revaluations of assets and liabilities occur and would appear as capital transactions.
Although the Framework is quite extensive, it is not as comprehensive as the IASB or the FASB would like. Therefore, the IASB and the FASB are continuing to work jointly to publish a new conceptual framework that will provide a principles-based, consistent, converged framework for developing future accounting standards. As previously discussed, in 2010 the IASB issued the Conceptual Framework, which superseded the Framework for the Preparation and Presentation of Financial Statements. The Conceptual Framework includes Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information, as well as the remaining text from the prior Framework not covered in Chapters 1 or 3. As of 2012, the IASB and the FASB are at various stages of due process on the remaining Framework chapters.