What is the Conceptual Framework (see pg 6 of the

CP)? ‹#›

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

What is the objective of What makes financial and expenses, 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? ‹#›

Previous version of Conceptual Framework

useful but some improvements needed

incomplete out of date unclear

Main improvements

Updated, for example, the Clarified, for example, the

Filled in the gaps, for example, definitions of an asset and a roles of stewardship and
concepts on measurement and liability and recognition criteria prudence in financial reporting
presentation and disclosure,
including guidance on the use
of profit or loss and OCI
 Effects of the revised Conceptual Framework ‹#›

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

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Effects of the revised Conceptual Framework

Board and IFRS Interpretations Committee Preparers

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

• Standards are interpreted in the context of accounting policies using the Conceptual
the revised Conceptual Framework Framework if no applicable Standard
• Effective immediately • Effective 1 January 2020
• Indirectly affects through future Standards
 Outline of the Conceptual Framework ‹#›

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
Objective of financial reporting ‹#›
Provide financial information useful to PRIMARY USERS (Investors, Lenders
and creditors – see Parag.1.2 pg 8) in making decisions about whether to
provide resources to the entity
Users’ decisions involve decisions about
buying, holding or selling providing or settling loans voting and influencing
management

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To make these decisions, users assess
management’s stewardship of the entity’s
prospects for future net cash inflows to the entity economic resources

To make both these assessments, users need information about both

economic resources, claims and changes in how efficiently and effectively management has
those resources and claims discharged its responsibilities
 Meaning of Economic resources and claims and changes in
Economic resources and claims ‹#›

• Remember: Primary users (investors and lenders) what info about prospects of future net
cash flows to assess likelihood of ROI in the form of dividends, capital gains and interest
payments
• ASSETS = EQUITY + LIABILITIES + Income for period – Expenses for period

• Economic resources & Claims(liquidity) Changes in Econ. Resources & Claims

BUT…..

Don’t forget OTHER EVENTS (e.g. changes in capital

structure,, dividend decisions + info about past cash flows)
which will also bring changes to economic resources and
claims
 Changes in economic resources and claims ‹#›

• Information requirements:
1. Financial performance Parag 1.17 (income – expenses prepared
using Accrual accounting)
2. Past cash flows Parag. 1.20 (changes in cash positions and why)
3. Other events (changes in capital structure, dividend decisions)
Qualitative characteristics ‹#›

Fundamental qualitative characteristics

Relevance Faithful representation

• Information (must embed predictive value • Information must faithfully represent the
(Parag 2.8) and confirmatory value –Parag substance of what it purports to
2.9) is relevant if it is capable of making a represent. Information should be
difference to the decisions made by users. complete, neutral and free from error
Enhancing characteristics

Comparability Verifiability Timeliness Understandability

Cost constraint
Clarifying aspects of faithful representation ‹#›

• Exercise of caution under conditions of uncertainty

Prudence (Parag • Does not allow for overstatement or understatement of
2.16) 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 (Parag • If very high, may affect whether a sufficiently faithful
2.19) representation can be achieved

• Economic substance of the underlying economic

Substance over form phenomenon is normally the same as the legal form
• If not, need to represent the substance to provide faithful
(Parag 2.12) representation
Elements of financial statements—
assets, liabilities and equity (Parag 4.2, Pg 27) ‹#›

• Relate to financial position

A present economic resource controlled by the entity as a result of
past events
Asset • An economic resource is a right that has the potential to produce
economic benefits

A present obligation of the entity to transfer an economic resource

as a result of past events
Liability • An obligation is a duty or responsibility that the entity has no
practical ability to avoid

The residual interest in the assets of the entity after deducting all
its liabilities
Equity • Financial Instruments with Characteristics of Equity research
project further explores how to distinguish liabilities from equity
Meaning of control (parag 4.19 to 4.25) ‹#›

• An entity controls an economic resource if it has the present ability to

direct the use of the economic resource and obtain the economic
benefits that may flow from it. (Parag 4.20)
• Control includes the present ability to prevent other parties from
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directing the use of the economic resource and from obtaining the
economic benefits that may flow from it. (Parg 4.20)
• It follows that, if one party controls an economic resource, no other
party controls that resource.
A closer look at assets (1 of 2)
189/2010 Framework
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.
2018 framework
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
‹#›
Key Comments
Previously the ASSET was the
RESOURCE (e.g PPE,
Inventory, shares in other
companies)
Now, CONCEPTUALLY the
ASSET is a RIGHT (Parag 4.6)
over the object (not the
physical object Parag 4.12)
that has the POTENTIAL to
produce benefits BEYOND the
benefits available to other
parties (Parag 4.9)
A closer look at assets: Meaning of “Potential”
(2 of 2) ‹#›

• For that potential to exist, it does not need to be certain, or even

likely, that the right will produce economic benefits. It is only
necessary that the right already exists and that, in at least one
circumstance, it would produce for the entity economic benefits
beyond those available to all other parties (Parag 4.14)
A closer look at Liabilities
189/2010 Framework
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.
2018 framework
. A present obligation (see
parag 4.31 for types of
obligations) of the entity to
transfer an economic
resource as a result of past
events (Parag 4.26)
An obligation is a duty or
responsibility that the entity
has no practical ability to
avoid (Parag 4.29)
‹#›
Key Comments (Parag. 4.37)
the obligation must have the potential
to require the entity to transfer an
economic resource to another party
For that potential to exist, it does not
need to be certain, or even likely, that
the entity will be required to transfer an
economic resource—the transfer may,
for example, be required only if a
specified uncertain future event occurs.
It is only necessary that the obligation
already exists and that, in at least one
circumstance, it would require the
entity to transfer an economic
resource. (Parag 4.37)
A word of caution regarding assets and
liabilities ‹#›

• A right can meet the definition of an economic resource, and hence

can be an asset, even if the probability that it will produce economic
benefits is low. Nevertheless, that low probability might affect
decisions about what information to provide about the asset and how
to provide that information, including decisions about whether the
asset is recognised and how it is measured. (Parag 4.15)
• An obligation can meet the definition of a liability even if the
probability of a transfer of an economic resource is low. Nevertheless,
that low probability might affect decisions about what information to
provide about the liability and how to provide that information,
including decisions about whether the liability is recognised and
how it is measured.(Parag 4.38)
Elements of financial statements—
income and expenses ‹#›

• Relate to financial performance

Increases in assets, or decreases in liabilities, that result in

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

Decreases in assets, or increases in liabilities, that result in

Expenses 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 ‹#›

Recognition criteria (parag 5.7)

Relevance Faithful representation

Whether recognition of an item results in
relevant information may be affected by, for
example:
• low probability of a flow of economic benefits
• existence uncertainty (Parag 5.14 and 5.15)
Whether recognition of an item results in a
faithful representation may be affected by, for
example:
• measurement uncertainty (Parag 5.20)
• recognition inconsistency
• presentation and disclosure of resulting
income, expenses and changes in equity

Cost constraint
Measurement ‹#›

Historical cost (Parag 6.4, Current value (Parg 6.10)

6.7)measurement bases measurement bases
• include amortised cost • include fair value (Parag 6.12), value in use (Parag
6.17), fulfilment value and current cost (6.21)

Selecting a measurement basis

Relevance Faithful representation

• characteristics of the asset or liability • measurement inconsistency
• 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

Derecognition (Parag 5.26) ‹#›

Derecognition is the removal of all or part of a recognised asset

or liability from an entity’s statement of financial position.
Derecognition normally occurs when that item no longer meets
the definition of an asset or of a liability: (a) for an asset,
derecognition normally occurs when the entity loses control of
all or part of the recognised asset; and (b) for a liability,
derecognition normally occurs when the entity no longer has a
present obligation for all or part of the recognised liability.
Illustration ‹#›

At 31 December 2020, Blue Label plc had manufactured

whisky at a cost of Rs1,000. On 1 January 2021 it sells the
whisky to Northern Bank Ltd for $1,400 on the binding
agreement that Blue Label plc has to buy back the whisky
from Northern Bank Ltd on 31 December 2023 at a price of
$2,000. Blue Label has a calendar year end.
Prepare relevant extracts of both the income statement of
Blue Label for the year ended 31 December 2021 and its
statement of financial position as at 31 December 2021
Answer (DIY) ‹#›
Profit or loss and OCI ‹#›

Statement of profit or • Primary source of information about performance

loss • Default location for income and expenses

Other comprehensive • Exceptional circumstances

• Only changes in current values of assets and liabilities
income • In principle, OCI items are recycled

Classification into profit or loss and OCI and recycling

Relevance Faithful representation

Only the Board can take decisions on OCI and recycling

 Q&A 23
‹#›

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