What is the objective of general purpose financial reporting according to the Conceptual Framework?
The Conceptual Framework for the Financial Reporting (let’s title it just “Framework”) is a basic document that sets objectives and the concepts for general purpose financial reporting. Show
Its predecessor, Framework for the preparation and presentation of the financial statements was issued back in 1989. Then in 2010, IASB published the new document, Conceptual Framework for the Financial Reporting, however it was a bit unfinished as a few concepts and chapters were missing. The newest and completed Framework published in 2018 comprises 8 chapters and in this article, I would like to sum it up. Is the Framework equivalent to the Standard?Let me please make one point clear: Framework is NOT a Standard itself. Thus if you wish to decide on the financial reporting of certain transaction, you need to look into the appropriate standard – IFRS or IAS. Special For You! Have you already checked out the IFRS Kit ? It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out! Sometimes, it may even happen that the rules in that IFRS or IAS standard will be contrary to what the Framework says. In this case, you need to apply the standard, not the Framework. When should you apply the Framework? In most cases, when there are no specific rules for your transaction and you need to develop your accounting policy, then you would look to the
Framework as you cannot depart from its basic principles and definitions. Chapter 1: The objective of general purpose financial reportingThe main objective of general purpose financial reports is to provide the financial information about the reporting entity that is useful to existing and potential:
to help them make various decisions (e.g. about trading with debt or equity instruments of a reporting entity). Chapter 1 is NOT about the financial statements itself – these are described in Chapter 3. Instead, Chapter 1 describes more general purpose reports that should contain the following information about the reporting entity:
Chapter 1 puts an emphasis on accrual accounting to reflect the financial performance of an entity. It means that the events should be reflected in the reports in the periods when the effects of transactions occur, regardless the related cash flows. However, the information about past cash flows is very important to assess management’s ability to generate future cash flows. Chapter 2: Qualitative characteristics of useful financial informationIn this Chapter, the Framework describes 2 types of characteristics for financial information to be useful:
Fundamental qualitative characteristics
Enhancing qualitative characteristics
Chapter 3: Financial Statements and the Reporting EntityFinancial StatementsThe financial statements should provide the useful information about the reporting entity:
. Financial statements are always prepared for a specified period of time, or the reporting period. Normally, the financial statements are prepared on the going concern assumption. It means that an entity will continue to operate for the foreseeable future (usually 12 months after the reporting date). Special For You! Have you already checked out the IFRS Kit ? It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out! By the way – what if an entity cannot present as going concern? For example, when the liquidation is assumed within 12 months? Learn what to do here. Reporting EntityThis is a new concept introduced in 2018. Although the term “reporting entity” has been used throughout IFRS for some time, the Framework introduced it and “made it official” only in 2018. Reporting entity is an entity who must or chooses to prepare the financial statements. It can be:
As a result, we have a few types of financial statements:
Chapter 4: Elements of the financial statementsThis chapter extensively deals with the definitions of individual elements of the financial statements. There are five basic elements:
The Framework then discusses each aspect of these definitions and provides wide guidance on
how to decide what element you are dealing with. Chapter 5: Recognition and derecognitionThis chapter discusses the recognition and derecognition process. RecognitionSimply speaking, recognition means including an element of financial statements in the financial statements. In other words, if you decide on recognition, you decide on WHETHER to show this item in the financial statements. Recognition process links the elements in the financial statements according to the following formula: Please let me stress here that not all items that meet the definition of one of the elements listed above are recognized in the financial statements. The Framework requires recognizing the elements only when the recognition provides useful information – relevant with faithful representation. Then, the Framework discusses the relevance, faithful representation, cost constraints and other aspects in a detail. DerecognitionDerecognition means removal of an asset or liability from the statement of financial position and normally it happens when the item no longer meets the definition of an asset or a liability. Again, the Framework discusses the derecognition in a greater detail. Chapter 6: MeasurementMeasurement means IN WHAT AMOUNT to recognize asset, liability, piece of equity, income or expense in your financial statements. Thus, you need to select the measurement basis, or the method of quantifying monetary amount for elements in the financial statements. The Framework discusses two basic measurement basis:
Each of these measurement base is discussed in a greater detail. The Framework then gives guidance on how to select the appropriate measurement basis and what factors to consider (especially relevance and faithful representation). What I personally find really useful is the guidance on measurement of equity. The issue here is that the equity is defined as “residual after deducting liabilities from assets” and therefore total carrying amount of equity is not measured directly. Instead, it is measured exactly by the formula:
The Framework points out that it can be appropriate to measure some components of equity directly (e.g. share capital), but it is not possible to measure total equity directly. Chapter 7: Presentation and disclosureThe main aim of presentation and disclosures is to provide an effective communication tool in the financial statements. Effective communication of information in the financial statements requires:
The Framework discusses
classification of assets, liabilities, equity, income and expenses in a greater detail with describing offsetting, aggregation, distinguishing between profit or loss and other comprehensive income and other related areas. Chapter 8: Concepts of capital and capital maintenanceThis chapter is carried forward from previous versions of Framework, so there’s nothing new here. Let me recap shortly. The Framework explains two concepts of capital:
The main difference between these concepts is how the entity treats the effects of changes in prices in assets and liabilities. You can watch a video with the summary of the Conceptual Framework here: Any comments or questions? Please leave me a message below. Thank you! What are the purpose of Conceptual Framework for financial reporting Conceptual Framework )?The primary purpose of the Conceptual Framework was to assist the IASB in the development of future IFRSs and in its review of existing IFRSs. The Conceptual Framework may also assist preparers of financial statements in developing accounting policies for transactions or events not covered by existing standards.
What is the objective of producing general purpose financial reports?A GPFS prepared in accordance with CAAP should provide a structured representation of the financial position, financial performance and cash flows of the entity. It should provide information that is useful to a wide range of users in making economic decisions.
What is the objective of financial statements according to the Conceptual Framework quizlet?The objective of financial statements is to provide information about an entity's assets, liabilities, equity, income and expenses that is useful to financial statements users in assessing the prospects for future net cash inflows to the entity and in assessing management's stewardship of the entity's resources.
What is the main objective of the Conceptual Framework for financial reporting issued by International accounting Standards?Main Objective of the Conceptual Framework
This central objective is “to provide financial information which is useful to both current and potential providers of resources (investors, lenders, other creditors) in decision-making.
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