Conceptual Framework

The Conceptual Framework for Financial Reporting

The Conceptual Framework was issued by the IASB in September 2010. It superseded the
Framework for the Preparation and Presentation of Financial Statements.

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CONTENTS
paragraphs
FOREWORD

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING
INTRODUCTION
Purpose and status
Scope
CHAPTERS
1

The objective of general purpose financial

reporting

The reporting entity to be added

Qualitative characteristics of useful financial information

The Framework (1989): the remaining text

OB1OB21

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Underlying assumption
The elements of financial statements
Recognition of the elements of financial statements
Measurement of the elements of financial statements
Concepts of capital and capital maintenance
FOR THE ACCOMPANYING DOCUMENTS BELOW, SEE PART B OF THIS EDITION
APPROVAL BY THE BOARD OF THE CONCEPTUAL FRAMEWORK 2010
BASIS FOR CONCLUSIONS ON CHAPTERS 1 AND 3
TABLE OF CONCORDANCE

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Conceptual Framework

Foreword
The International Accounting Standards Board is currently in the process of updating its
conceptual framework. This conceptual framework project is conducted in phases.
As a chapter is finalised, the relevant paragraphs in the Framework for the Preparation and
Presentation of Financial Statements that was published in 1989 will be replaced. When the
conceptual framework project is completed, the Board will have a complete,
comprehensive and single document called the Conceptual Framework for Financial Reporting.
This version of the Conceptual Framework includes the first two chapters the Board published
as a result of its first phase of the conceptual framework projectChapter 1 The objective of
general purpose financial reporting and Chapter 3 Qualitative characteristics of useful financial
information. Chapter 2 will deal with the reporting entity concept. The Board published an
exposure draft on this topic in March 2010 with a comment period that ended on
16 July 2010. Chapter 4 contains the remaining text of the Framework (1989). The table of
concordance, at the end of this publication, shows how the contents of the Framework
(1989) and the Conceptual Framework (2010) correspond.

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The Introduction has been carried forward from the Framework (1989). This will be updated
when the IASB considers the purpose of the Conceptual Framework. Until then, the purpose
and the status of the Conceptual Framework are the same as before.

Introduction
Financial statements are prepared and presented for external users by many entities
around the world. Although such financial statements may appear similar from country
to country, there are differences which have probably been caused by a variety of social,
economic and legal circumstances and by different countries having in mind the needs of
different users of financial statements when setting national requirements.
These different circumstances have led to the use of a variety of definitions of the elements
of financial statements: for example, assets, liabilities, equity, income and expenses. They
have also resulted in the use of different criteria for the recognition of items in the
financial statements and in a preference for different bases of measurement. The scope of
the financial statements and the disclosures made in them have also been affected.
The International Accounting Standards Board is committed to narrowing these
differences by seeking to harmonise regulations, accounting standards and procedures
relating to the preparation and presentation of financial statements. It believes that
further harmonisation can best be pursued by focusing on financial statements that are
prepared for the purpose of providing information that is useful in making economic
decisions.
The Board believes that financial statements prepared for this purpose meet the common
needs of most users. This is because nearly all users are making economic decisions, for
example:
(a)

to decide when to buy, hold or sell an equity investment.

(b)

to assess the stewardship or accountability of management.

(c)

to assess the ability of the entity to pay and provide other benefits to its employees.

(d)

to assess the security for amounts lent to the entity.

(e)

to determine taxation policies.

(f)

to determine distributable profits and dividends.

(g)

to prepare and use national income statistics.

(h)

to regulate the activities of entities.

The Board recognises, however, that governments, in particular, may specify different or
additional requirements for their own purposes. These requirements should not, however,
affect financial statements published for the benefit of other users unless they also meet
the needs of those other users.
Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital maintenance
concept. Other models and concepts may be more appropriate in order to meet the
objective of providing information that is useful for making economic decisions although
there is at present no consensus for change. This Conceptual Framework has been developed
so that it is applicable to a range of accounting models and concepts of capital and capital
maintenance.

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Purpose and status

This Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the Conceptual
Framework is:
(a)

to assist the Board in the development of future IFRSs and in its review of existing
IFRSs;

(b)

to assist the Board in promoting harmonisation of regulations, accounting

standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRSs;

(c)

to assist national standard-setting bodies in developing national standards;

(d)

to assist preparers of financial statements in applying IFRSs and in dealing with

topics that have yet to form the subject of an IFRS;

(e)

to assist auditors in forming an opinion on whether financial statements comply

with IFRSs;

(f)

to assist users of financial statements in interpreting the information contained in

financial statements prepared in compliance with IFRSs; and

(g)

to provide those who are interested in the work of the IASB with information about
its approach to the formulation of IFRSs.

This Conceptual Framework is not an IFRS and hence does not define standards for any
particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides
any specific IFRS.
The Board recognises that in a limited number of cases there may be a conflict between the
Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements
of the IFRS prevail over those of the Conceptual Framework. As, however, the Board will be
guided by the Conceptual Framework in the development of future IFRSs and in its review of
existing IFRSs, the number of cases of conflict between the Conceptual Framework and IFRSs
will diminish through time.
The Conceptual Framework will be revised from time to time on the basis of the Boards
experience of working with it.

Scope
The Conceptual Framework deals with:
(a)

the objective of financial reporting;

(b)

the qualitative characteristics of useful financial information;

(c)

the definition, recognition and measurement of the elements from which financial
statements are constructed; and

(d)

concepts of capital and capital maintenance.

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CHAPTER 1: THE OBJECTIVE OF GENERAL PURPOSE

FINANCIAL REPORTING
paragraphs
INTRODUCTION

OB1

OBJECTIVE, USEFULNESS AND LIMITATIONS OF GENERAL

PURPOSE FINANCIAL REPORTING

OB2OB11

INFORMATION ABOUT A REPORTING ENTITYS ECONOMIC

RESOURCES, CLAIMS, AND CHANGES IN RESOURCES AND
CLAIMS

OB12OB21

Economic resources and claims

OB13OB14

Changes in economic resources and claims

OB15OB21

Financial performance reflected by accrual accounting

Financial performance reflected by past cash flows
Changes in economic resources and claims not resulting from
financial performance

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Conceptual Framework

Chapter 1: The objective of general purpose financial

reporting
Introduction
OB1

The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Frameworka reporting entity
concept, the qualitative characteristics of, and the constraint on, useful financial
information, elements of financial statements, recognition, measurement,
presentation and disclosureflow logically from the objective.

Objective, usefulness and limitations of general purpose financial

reporting
OB2

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 about providing
resources to the entity. Those decisions involve buying, selling or holding equity
and debt instruments, and providing or settling loans and other forms of credit.

OB3

Decisions by existing and potential investors about buying, selling or holding

equity and debt instruments depend on the returns that they expect from an
investment in those instruments, for example dividends, principal and interest
payments or market price increases. Similarly, decisions by existing and
potential lenders and other creditors about providing or settling loans and other
forms of credit depend on the principal and interest payments or other returns
that they expect. Investors, lenders and other creditors expectations about
returns depend on their assessment of the amount, timing and uncertainty of (the
prospects for) future net cash inflows to the entity. Consequently, existing and
potential investors, lenders and other creditors need information to help them
assess the prospects for future net cash inflows to an entity.

OB4

To assess an entitys prospects for future net cash inflows, existing and potential
investors, lenders and other creditors need information about the resources of the
entity, claims against the entity, and how efficiently and effectively the entitys
management and governing board have discharged their responsibilities to use
the entitys resources. Examples of such responsibilities include protecting the
entitys resources from unfavourable effects of economic factors such as price and
technological changes and ensuring that the entity complies with applicable laws,
regulations and contractual provisions.
Information about managements
discharge of its responsibilities is also useful for decisions by existing investors,
lenders and other creditors who have the right to vote on or otherwise influence
managements actions.

Throughout this Conceptual Framework, the terms financial reports and financial reporting refer to
general purpose financial reports and general purpose financial reporting unless specifically indicated
otherwise.

Throughout this Conceptual Framework, the term management refers to management and the governing
board of an entity unless specifically indicated otherwise.

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OB5

Many existing and potential investors, lenders and other creditors cannot require
reporting entities to provide information directly to them and must rely on
general purpose financial reports for much of the financial information they
need. Consequently, they are the primary users to whom general purpose
financial reports are directed.

OB6

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.

OB7

General purpose financial reports are not designed to show the value of a
reporting entity; but they provide information to help existing and potential
investors, lenders and other creditors to estimate the value of the reporting
entity.

OB8

Individual primary users have different, and possibly conflicting, information

needs and desires. The Board, in developing financial reporting standards, will
seek to provide the information set that will meet the needs of the maximum
number of primary users. However, focusing on common information needs does
not prevent the reporting entity from including additional information that is
most useful to a particular subset of primary users.

OB9

The management of a reporting entity is also interested in financial information

about the entity. However, management need not rely on general purpose
financial reports because it is able to obtain the financial information it needs
internally.

OB10

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.

OB11

To a large extent, financial reports are based on estimates, judgements and

models rather than exact depictions. The Conceptual Framework establishes the
concepts that underlie those estimates, judgements and models. The concepts are
the goal towards which the Board and preparers of financial reports strive.
As with most goals, the Conceptual Frameworks vision of ideal financial reporting is
unlikely to be achieved in full, at least not in the short term, because it takes time
to understand, accept and implement new ways of analysing transactions and
other events. Nevertheless, establishing a goal towards which to strive is essential
if financial reporting is to evolve so as to improve its usefulness.

Information about a reporting entitys economic resources, claims,

and changes in resources and claims
OB12

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General purpose financial reports provide information about the financial position
of a reporting entity, which is information about the entitys economic resources
and the claims against the reporting entity. Financial reports also provide
information about the effects of transactions and other events that change a
reporting entitys economic resources and claims. Both types of information
provide useful input for decisions about providing resources to an entity.

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Economic resources and claims

OB13

Information about the nature and amounts of a reporting entitys economic

resources and claims can help users to identify the reporting entitys financial
strengths and weaknesses. That information can help users to assess the
reporting entitys liquidity and solvency, its needs for additional financing and
how successful it is likely to be in obtaining that financing. Information about
priorities and payment requirements of existing claims helps users to predict how
future cash flows will be distributed among those with a claim against the
reporting entity.

OB14

Different types of economic resources affect a users assessment of the reporting

entitys prospects for future cash flows differently. Some future cash flows result
directly from existing economic resources, such as accounts receivable. Other
cash flows result from using several resources in combination to produce and
market goods or services to customers. Although those cash flows cannot be
identified with individual economic resources (or claims), users of financial
reports need to know the nature and amount of the resources available for use in
a reporting entitys operations.

Changes in economic resources and claims

OB15

Changes in a reporting entitys economic resources and claims result from that
entitys financial performance (see paragraphs OB17OB20) and from other
events or transactions such as issuing debt or equity instruments (see paragraph
OB21). To properly assess the prospects for future cash flows from the reporting
entity, users need to be able to distinguish between both of these changes.

OB16

Information about a reporting entitys financial performance helps users to

understand the return that the entity has produced on its economic resources.
Information about the return the entity has produced provides an indication of
how well management has discharged its responsibilities to make efficient and
effective use of the reporting entitys resources. Information about the variability
and components of that return is also important, especially in assessing the
uncertainty of future cash flows. Information about a reporting entitys past
financial performance and how its management discharged its responsibilities is
usually helpful in predicting the entitys future returns on its economic
resources.

Financial performance reflected by accrual accounting

OB17

Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entitys economic resources and claims in the
periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period. This is important because information
about a reporting entitys economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for
assessing the entitys past and future performance than information solely about
cash receipts and payments during that period.

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OB18

Information about a reporting entitys financial performance during a period,

reflected by changes in its economic resources and claims other than by obtaining
additional resources directly from investors and creditors (see paragraph OB21),
is useful in assessing the entitys past and future ability to generate net cash
inflows. That information indicates the extent to which the reporting entity has
increased its available economic resources, and thus its capacity for generating
net cash inflows through its operations rather than by obtaining additional
resources directly from investors and creditors.

OB19

Information about a reporting entitys financial performance during a period

may also indicate the extent to which events such as changes in market prices or
interest rates have increased or decreased the entitys economic resources and
claims, thereby affecting the entitys ability to generate net cash inflows.

Financial performance reflected by past cash flows

OB20

Information about a reporting entitys cash flows during a period also helps users
to assess the entitys ability to generate future net cash inflows. It indicates how
the reporting entity obtains and spends cash, including information about its
borrowing and repayment of debt, cash dividends or other cash distributions to
investors, and other factors that may affect the entitys liquidity or solvency.
Information about cash flows helps users understand a reporting entitys
operations, evaluate its financing and investing activities, assess its liquidity or
solvency and interpret other information about financial performance.

Changes in economic resources and claims not resulting from

financial performance
OB21

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A reporting entitys economic resources and claims may also change for reasons
other than financial performance, such as issuing additional ownership shares.
Information about this type of change is necessary to give users a complete
understanding of why the reporting entitys economic resources and claims
changed and the implications of those changes for its future financial
performance.

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CHAPTER 2: THE REPORTING ENTITY

[to be added]

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CHAPTER 3: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION
paragraphs
INTRODUCTION

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QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION

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Fundamental qualitative characteristics

QC5QC18

Relevance
Materiality
Faithful representation
Applying the fundamental qualitative characteristics
Enhancing qualitative characteristics

QC19QC34

Comparability
Verifiability
Timeliness
Understandability
Applying the enhancing characteristics
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value and pension liabilities are carried at their present value. Furthermore,
some entities use the current cost basis as a response to the inability of the
historical cost accounting model to deal with the effects of changing prices of
non-monetary assets.

Concepts of capital and capital maintenance

Concepts of capital
4.57

A financial concept of capital is adopted by most entities in preparing their

financial statements. Under a financial concept of capital, such as invested
money or invested purchasing power, capital is synonymous with the net assets
or equity of the entity. Under a physical concept of capital, such as operating
capability, capital is regarded as the productive capacity of the entity based on, for
example, units of output per day.

4.58

The selection of the appropriate concept of capital by an entity should be based

on the needs of the users of its financial statements. Thus, a financial concept of
capital should be adopted if the users of financial statements are primarily
concerned with the maintenance of nominal invested capital or the purchasing
power of invested capital. If, however, the main concern of users is with the
operating capability of the entity, a physical concept of capital should be used.
The concept chosen indicates the goal to be attained in determining profit, even
though there may be some measurement difficulties in making the concept
operational.

Concepts of capital maintenance and the determination of

profit
4.59

4.60

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The concepts of capital in paragraph 4.57 give rise to the following concepts of
capital maintenance:
(a)

Financial capital maintenance. Under this concept a profit is earned only if the
financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of
the period, after excluding any distributions to, and contributions from,
owners during the period. Financial capital maintenance can be measured
in either nominal monetary units or units of constant purchasing power.

(b)

Physical capital maintenance. Under this concept a profit is earned only if the
physical productive capacity (or operating capability) of the entity (or the
resources or funds needed to achieve that capacity) at the end of the period
exceeds the physical productive capacity at the beginning of the period,
after excluding any distributions to, and contributions from, owners
during the period.

The concept of capital maintenance is concerned with how an entity defines the
capital that it seeks to maintain. It provides the linkage between the concepts of
capital and the concepts of profit because it provides the point of reference by
which profit is measured; it is a prerequisite for distinguishing between an entitys
return on capital and its return of capital; only inflows of assets in excess of

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amounts needed to maintain capital may be regarded as profit and therefore as a

return on capital. Hence, profit is the residual amount that remains after expenses
(including capital maintenance adjustments, where appropriate) have been
deducted from income. If expenses exceed income the residual amount is a loss.
4.61

The physical capital maintenance concept requires the adoption of the current
cost basis of measurement. The financial capital maintenance concept, however,
does not require the use of a particular basis of measurement. Selection of the
basis under this concept is dependent on the type of financial capital that the
entity is seeking to maintain.

4.62

The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the
entity. In general terms, an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the period.
Any amount over and above that required to maintain the capital at the beginning
of the period is profit.

4.63

Under the concept of financial capital maintenance where capital is defined in

terms of nominal monetary units, profit represents the increase in nominal
money capital over the period. Thus, increases in the prices of assets held over the
period, conventionally referred to as holding gains, are, conceptually, profits.
They may not be recognised as such, however, until the assets are disposed of in
an exchange transaction. When the concept of financial capital maintenance is
defined in terms of constant purchasing power units, profit represents the
increase in invested purchasing power over the period. Thus, only that part of the
increase in the prices of assets that exceeds the increase in the general level of
prices is regarded as profit. The rest of the increase is treated as a capital
maintenance adjustment and, hence, as part of equity.

4.64

Under the concept of physical capital maintenance when capital is defined in

terms of the physical productive capacity, profit represents the increase in that
capital over the period. All price changes affecting the assets and liabilities of the
entity are viewed as changes in the measurement of the physical productive
capacity of the entity; hence, they are treated as capital maintenance adjustments
that are part of equity and not as profit.

4.65

The selection of the measurement bases and concept of capital maintenance will
determine the accounting model used in the preparation of the financial
statements. Different accounting models exhibit different degrees of relevance
and reliability and, as in other areas, management must seek a balance between
relevance and reliability. This Conceptual Framework is applicable to a range of
accounting models and provides guidance on preparing and presenting the
financial statements constructed under the chosen model. At the present time, it
is not the intention of the Board to prescribe a particular model other than in
exceptional circumstances, such as for those entities reporting in the currency of
a hyperinflationary economy. This intention will, however, be reviewed in the
light of world developments.

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