DipIFR Syllabus A. International sources of authority - Framework - Basics and Arguments - Notes ^{3 / 8}

Definition

It sets out the concepts which underlie the accounts. It means that basic principles do not have to re-debated for every new standard.

• It is..
  ‘a constitution, a coherent system of interrelated objectives and fundamentals which can lead to consistent standards and which prescribe the nature, function and limits of financial accounting and financial statements’

What’s its purpose?

Its purpose is to help:

• The IASB develop IFRS Standards based on consistent concepts, so they're useful to investors, lenders and other creditors

• Preparers of accounts develop consistent accounting policies, when no Standard applies or a choice of accounting policies is offered

• Everyone understand and interpret Standards

What does it ‘look’ like?

It includes the following:

1. The objective of financial reporting

2. Qualitative characteristics of useful financial information

3. A description of the reporting entity and its boundary

4. Definitions of an asset, a liability, equity, income and expenses

5. Criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition)

6. Measurement bases and guidance on when to use them

7. Concepts and guidance on presentation and disclosure

More on these in other sections

Arguments for a conceptual framework

• It may seem a very theoretical document but it has highly practical aims.

• Without a framework then standards would be developed without consistency and also the same basic principles would be continually examined. Perhaps even sometimes with differing conclusions.

• The IASB therefore becomes the architect of financial reporting with a framework as solid foundations upon which everything else relies.

• Also without such a framework then a rules based system tends to come in instead. The rules get added to as situations arise and finally become cumbersome and unadaptable.

• It also prevents political lobbyists from changing pressurising changes in standards as the principles have already been agreed upon.

So a conceptual framework basically provides a framework for:

1. what should be brought into the accounts

2. when it should be brought into the accounts and

3. at how much it should be measured

Arguments against a conceptual framework

• Financial Statements are prepared for many different users - can one set of principles be agreed by all?

• Perhaps different users need different information and hence different measurement bases and principles

• Even with framework principles - standards go through a huge analysis process, for example the revenue recognition exposure draft has now been re-exposed!

GAAP & the framework

• In some ways the framework tries to codify the current GAAP into new standards - or at least current thinking