CONCEPTUAL

FRAMEWORK IN
AUSTRALIA
 LEARNING OBJECTIVES

The purpose of the Framework

Definition of the Reporting Entity

Objective of General Purpose Financial Reporting

FUNDAMENTAL:
Evaluation and Application of the fundamental and • Relevance
• Faithful representation
enhancing qualitative characteristics of financial
information
ENHANCING:
•
Evaluation and application of asset, liability, Comparability
• Verifiability
income and expense recognition criteria • Timeliness
• Understandability
BACKGROUND & HISTORY
• The Framework sets out concepts that underlie the preparation and
presentation of financial reports for external users.
• The Framework for the preparation and presentation of financial
statements was issued by the AASB as part of the implementation of
the FRC’s adoption of the standards of the IASB.
• Since 1/1/2015, relevant existing AASB standards have been replaced
with Australian Accounting Standards equivalent to those of the IASB,
and parts of the existing Australian conceptual framework that
overlapped with the Framework issued by the IASB to ensure
consistency.
THE PURPOSE OF THE FRAMEWORK IS TO
ASSIST:
• Assist Australian Accounting Standards Board (AASB) in the development of future
Australian Accounting Standards and in the review of existing Australian Accounting
Standards

• the AASB to ensure that the Australian Accounting Standards (Standards) they develop are
based on concepts which are consistent across all Standards.
• The consistency in these Standards brings transparency, accountability and efficiency
to Australian financial markets

• preparers to develop accounting policies that are consistent when no Standard exists for a
particular item, or when there is a choice of accounting policies within a Standard.
• Assist preparers of financial reports in applying Australian Accounting Standards and in
dealing with new financial reporting issues not already covered by a standard

• all individuals to understand and interpret the Standards.

 KEY ELEMENTS OF
CONCEPTUAL FRAMEWORK:

Evaluation and Evaluation and

The Objective of Application of the Application of
Nature of General fundamental asset, liability,
Purpose and enhancing income and
Reporting Financial qualitative expense
Entity Reporting characteristics recognition
of financial criteria
information
NATURE OF REPORTING
ENTITY
THE NATURE OF REPORTING ENTITY
• A reporting entity is an entity that is required, or chooses, to prepare financial
statements.
• A reporting entity is not necessarily a legal entity.
 

• A reporting entity is required to prepare financial statements if it has public

accountability.
• Public accountability means:
• accountability to: those existing and potential resource providers and others,
external to the entity who make economic decisions but are not in a position
to demand reports tailored to meet their particular information needs.

• Users of financial statements need information that is relevant and faithfully

represents what it purports to represent.
EXAMPLES OF REPORTING ENTITY

• Listed public companies:

o e.g. National Australia Bank Ltd
• Statutory authorities
o e.g. Water Corporation of Western Australia
• Government Sector
• Associations
o e.g: Australian Red Cross Inc
OBJECTIVE OF GENERAL
PURPOSE FINANCIAL
REPORTING
OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
• 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 relating to
providing resources to the entity.

• Those decisions involve decisions about:

(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence,
management’s actions that affect the use of the entity’s
economic resources (ie: to vote on the proposed final dividend)
OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
To make these decisions, existing and potential investors, lenders and other
creditors need information about:
 
• the economic resources of the entity, claims against the entity and changes in
those resources and claims;
 
• and how efficiently and effectively the entity’s management and governing
board have discharged their responsibilities to use the entity’s economic
resources.
OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING
• 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.
 
• 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.
EXAMPLES OF GENERAL PURPOSE FINANCIAL
REPORTING

GPFS Information provided

Statement of comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows
Profit performance
Financial Position
Change in equity over a period
Cash inflows and outflows
over a period
QUALITATIVE
CHARACTERISTIC
 Qualitative Characteristics (QC) of
Financial Information

Fundamental qualitative Enhancing qualitative

characteristics characteristics

basic qualitative characteristic to

To enhance the usefulness of
ensure financial information is to be
financial information
useful

1. Relevance : 1. comparability
-Materiality 2. verifiability
2. Faithful Representation 3. timeliness
4. understandability
FUNDAMENTAL
QUALITATIVE
CHARACTERISTIC
 CAPABLE OF MAKING A
DIFFERENCE
MATERIALITY Relevant financial information is capable
In terms of what relevant information of making a difference in the decisions
is, the concept of materiality must also made by users.
be considered.
Relevance Information may be capable of making a
difference in a decision even if some
users choose not to take advantage of
Information is material if omitting, (Fundamental QC)
misstating or obscuring it could it or are already aware of it from other
sources.
reasonably be expected to influence
decisions that the primary users of
general purpose financial reports
make on the basis of financial PREDICTIVE VALUE ,
information about a specific CONFIRMATORY VALUE!
reporting entity.
Financial information is capable of
making a difference in decisions if it
has predictive value, confirmatory
value or both.
Refer to next slide
 Relevance PREDICTIVE VALUE , Financial information is capable of making a
CONFIRMATORY VALUE! difference in decisions if it has predictive
(Fundamental QC) value, confirmatory value or both.

Predictive
Value predictive value and confirmatory value of
financial information are INTERRELATED.
Financial information has predictive value if it can be used
as an input to processes employed by users to predict Information that has predictive value often also
future outcomes. has confirmatory value.

Financial information need not be a prediction or forecast For example,

to have predictive value. Financial information with
predictive value is employed by users in making their own
predictions.
Confirmatory
Value
Financial information has confirmatory value if it
provides feedback about (confirms or changes)
previous evaluations.
• revenue information for the current year,
which can be used as
• the basis for predicting revenues in
future years,
• can also be compared with revenue
predictions for the current year that
were made in past years.
The results of those comparisons can help a user
to correct and improve the processes that were
used to make those previous predictions
 Def:

To be useful, financial
information must not only
Faithful represent relevant
Representation phenomena, but it must also
(Fundamental QC) faithfully represent the
phenomena that it purports
to represent.
Characteristics
(1)
To be a perfectly faithful representation, Complete
a depiction would have three
characteristics:
Refer to next
(2)
slide
Neutral

(3)
Free From Error
 Faithful Representation (3)
Characteristics Free From Error
(Fundamental QC)
To be a perfectly faithful representation, This means there are no errors or
a depiction would have three characteristics:
omissions in the description of
(1) the phenomenon, and the
Complete process used to produce the
reported information has been
A complete depiction includes all information (2)
selected and applied with no
necessary for a user to understand the Neutral errors in the process.
phenomenon being depicted, including all
necessary descriptions and explanations. Information that is neutral is
In this context, free from error
For example, a complete depiction of a group of assets
presented without bias.
does not mean perfectly accurate
would include, at a minimum:
A neutral depiction is without bias in in all respects.
o a description of the nature of the assets in the group
o a numerical depiction of all of the assets in the group the selection or presentation of
o a description of what the numerical depiction financial information. For example, an estimate of an unobservable
represents (for example, original cost, adjusted cost price or value cannot be determined to be
or fair value) A neutral depiction is not slanted, accurate or inaccurate.
o For some items, a complete depiction may also entail weighted, emphasised, o However, a representation of that
explanations of significant facts about the quality de-emphasised or otherwise estimate can be faithful if the
and nature of the items, factors and circumstances manipulated to increase the amount is described clearly and
that might affect their quality and nature, and the accurately as being an estimate,
probability that financial o the nature and limitations of the
process used to determine the numerical depiction.
information will be received estimating process are explained,
favourably or unfavourably by o and no errors have been made in
users. selecting and applying an
appropriate process for developing
the estimate.
 Applying the fundamental qualitative
characteristics
 Information must both be relevant and provide a faithful
representation of what it purports to represent if it is to be
useful.

 Neither a faithful representation of an irrelevant

phenomenon nor an unfaithful representation of a relevant
phenomenon helps users make good decisions.
ENHANCING
QUALITATIVE
CHARACTERISTIC
COMPARABILITY Timeliness
Comparability is the qualitative Timeliness means having
characteristic that enables users to information available to
identify and understand similarities in, decision makers in time to be
and differences among, items. capable of influencing their
decisions.

Enhancing
Verifiability QC
Verifiability means that different
knowledgeable and independent
Understandability
observers could reach consensus, Classifying, characterising and presenting
although not necessarily complete information clearly and concisely makes it
agreement, that a particular depiction is understandable.
a faithful representation.
COMPARABILITY

Comparability is the qualitative characteristic that enables users to

DEF: identify and understand similarities in, and differences among,
items.

Information about a reporting entity is more useful if it can be

COMPARED compared:
WITH? • with similar information about other entities and
• with similar information about the same entity for another
period or another date.

Unlike the other qualitative characteristics, comparability does not

relate to a single item. A comparison requires at least two items.
COMPARABILITY

Consistency, although related to comparability, is not the same.

CONSISTENCY • Consistency refers to the use of the same methods for the
↓ same items, either from period to period within a reporting
COMPARABILITY entity or in a single period across entities.
• Comparability is the goal; consistency helps to achieve that
goal.

Comparability is not uniformity.

COMPARABILITY For information to be comparable, like things must look alike and different
≠ things must look different.
UNIFORMITY Comparability of financial information is not enhanced by making unlike things
look alike any more than it is enhanced by making like things look different.
Verifiability DEF
Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful
representation.

Verifiability helps assure users that information faithfully

ASSURANCE represents the economic phenomena it purports to represent.

METHOD Verification can be:

verifying an amount or other
DIRECT representation through direct
VERIFICATION observation, for example, by
counting cash.

• checking the inputs to a model, formula or other technique and

INDIRECT recalculating the outputs using the same methodology.
VERIFICATION • An example is verifying the carrying amount of inventory by checking the
inputs (quantities and costs) and recalculating the ending inventory using
the same cost flow assumption (for example, using the first-in, first-out
method).
Timeliness

Timeliness means having information

DEF: available to decision makers in time to be
capable of influencing their decisions.

Generally, the older the information is the less useful

OLD→ LESS USEFUL
it is.

However, some information may continue to be timely long

ASSESS TRENDS after the end of a reporting period because, for example,
some users may need to identify and assess trend.
Understandability

DEF: Classifying, characterising and presenting information

clearly and concisely makes it understandable.

Some phenomena are inherently complex and cannot be made easy to

COMPLEX understand.
INFO? • Excluding information about those phenomena from financial reports
might make the information in those financial reports easier to
understand.
• However, those reports would be incomplete and therefore
potentially misleading.
Understandability

REASONABLE Financial reports are prepared for users who have a

KNOWLEDGE reasonable knowledge of business and economic activities
and who review and analyse the information diligently.

At times, even well informed and diligent users may need to

seek the aid of an adviser to understand information about
complex economic phenomena.
 Applying the enhancing qualitative characteristics
• Enhancing qualitative characteristics should be maximised to the
extent possible.
• However, the enhancing qualitative characteristics, either
individually or as a group, cannot make information useful if
that information is irrelevant or does not provide a faithful
representation of what it purports to represent.
ELEMENTS OF
FINANCIAL
STATEMENTS