IFRSs are based on the Framework, which addresses the concepts underlying the information presented in general purpose financial statements
The objective of the Framework is to facilitate the consistent and logical formulation of IFRSs.
The Framework also provides a basis for the use of judgement in resolving accounting issues.
This Framework is not an International Accounting Standard and hence does not define standards for any particular measurement or disclosure issue.
Nothing in this Framework can override any specific IFRS
In case there is a conflict, between the Framework and the Standards, the requirements of the standards shall prevail.
Conceptual Framework sets out agreed concepts that underlie financial reporting
IASB uses Conceptual Framework to set standards
Preparers use Conceptual Framework to develop accounting policies in the absence of specific standard or interpretation
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.
Note:
Users with "reasonable" knowledge.
If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (i.e. fundamental qualities).
The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (i.e. enhancing qualities—less critical but still highly desirable)
Relevance: capable of making a difference in users' decisions
Faithful representation: faithfully represents the phenomena it purports to represent
Note: faithful representation replaces reliability
Comparability: like things look alike; different things look different
Verifiability: knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation
Timeliness: having information available to decision-makers in time to be capable of influencing their decisions
Understandability: Classify, characterise, and present information clearly and concisely
| Sr. No | Particular | Full IFRS | IFRS for SMEs |
| 1 | Relevance (Materiality being part of relevance) |
Yes | Yes |
| 2 | Faithful representation (In place of substance over legal form) |
Yes | No |
| 3 | Comparability | Yes | Yes |
| 4 | Verifiability | Yes | No |
| 5 | Timeliness | Yes | Yes |
| 6 | Understandability | Yes | Yes |
| 7 | Completeness | No | Yes |
| 8 | Substance over legal form | No | Yes |
| 9 | Prudence | No | Yes |
| 10 | Reliability | No | Yes |
Going concern: For the foreseeable future
Note:
Previously, "accrual" was also a part of the underlying assumption however the same has been removed now as it was noted that “accrual” was more of a presumption and hence no need to list it as an assumption.
Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information.
In applying the cost constraint, the IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information. Those assessments are usually based on a combination of quantitative and qualitative information.
Asset: Resource controlled as a result of past events and from which future economic benefits are expected to flow.
Note: Asset should be recognized based on “Neutrality” and not on "Conservatism/Prudence".
Liability: Present obligation arising from past events, the settlement of which is expected to result in outflow of resources embodying economic benefits
Income (expense): Increases (decreases) in economic benefits during period from inflows or enhancements (outflows or depletions) of assets (liabilities) or decreases (incurrences) of liabilities from in increases (decreases) in equity, other than contributions from (distributions to) equity.
Equity: Residual value = Assets minus liabilities
Accrual basis of accounting
Recognise item that meets element definition when
Measurement is the process of determining monetary amounts at which elements are recognised and carried. (CF.4.54)
To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Framework establishes the concepts that underlie those estimates, judgements and models (CF.OB11)
IASB guided by objective and qualitative characteristics when specifying measurements.
Presentation: financial statements portray financial effects of transactions and events by:
IAS 1
Derecognition of an asset refers to when an asset previously recognised by an entity is removed from the entity’s statement of financial position
IASB guided by objective, qualitative characteristics and elements
| The Framework does not… | Clarification—the Framework includes |
| include a matching concept | accrual basis of accounting—recognise elements when satisfy definition and recognition criteria |
| include prudence/conservatism concept | neutrality concept |
| include an element other comprehensive income (or a concept for OCI) | only the following elements—asset, liability, equity, income and expense |
| mention management intent or business model |
| Misunderstanding | Clarification |
| Uniformity = comparability | Comparability is achieved when like things are accounted for in the same way. Comparability is not achieved when accounting rules require unlike things be accounted for in the same way |
| There is a clear concept for the historical cost of an item | The Framework provides only a vague description—assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. What is cost when: - advance/deferred payment? - purchased option exercised? - contingent purchase price? |
| Principles are necessarily less rigorous than rules | Rules are the tools of financial engineers |
| There are few judgements and estimates in cost-based measurements | Inventory, e.g. allocate joint costs and production overheads PPE, e.g. costs to dismantle/restore site, useful life, residual value, depreciation method Provisions, eg uncertain timing and amount of expected future cash flows |
IAS 1 sets out overall requirements for presenting financial statements, guidelines for their structure and minimum requirements for content.
A complete set of financial statements comprises a
Financial statements must present fairly the financial position, financial performance and cash flows of an entity (paragraph 15).
Going concern
Accrual basis of accounting
Materiality
Ex 1: Before its 20X8 FS approved for issue discovered depreciation expense for 20X8 overstated by CU150. Ignored the error (reported profit for 20X8 at CU600,000, ie understated by CU150).
Ex 2: Same as Ex 1, except had the error been corrected the entity would have breached a borrowing covenant on a significant long‑term liability.
Offsetting
Frequency of reporting
Comparative information
Consistency of presentation
Presentation of current and non current assets and liabilities as separate classifications on the Statement of Financial Position
The distinction is based on:
Make current/non-current distinction unless liquidity presentation is reliable and more relevant
In liquidity presentation present assets and liabilities in order of liquidity
Current assets and current liabilities are defined
All other assets and liabilities are non-current
Deferred tax balances are non-current
Current asset if
Entity A produces whisky from barley, water and yeast in a 24-month distillation process. Inventories include barley and yeast raw materials, partly distilled whisky and distilled whisky.
Current assets-expected to be realised (ie turned into cash) in the entity’s normal operating cycle.
On 1/1/20X7 B invested CU900,000 in corporate bonds.
Fixed interest of 5% per year is payable on 1 January each year.
Capital is repayable in 3 annual instalments of CU300,000 each starting 31/12/20X8.
At 31/12/20X7 A presents
Current liability if
An obligation to suppliers for the purchase of raw materials.
Current liability—expected to settle (ie pay) the supplier in the entity’s normal operating cycle.
At 31/12/20X7 A was in breach of a covenant in a loan that is otherwise repayable 3 years later. The breach entitles (but does not oblige) the bank to require immediate repayment.
At 31/12/20X7 the loan is a current liability—at 31/12/20X7 A does not have an unconditional right to defer settlement for at least 12 months.
Same as in Ex 2 except after the end of the reporting period (31/12/20X7) and before the financial statements were approved for issue, the bank formally agreed not to demand early repayment of the loan.
At 31/12/20X7 the loan is a current liability—at 31/12/20X7 A does not have an unconditional right to defer settlement for at least 12 months.
Preparing financial statements requires judgement and the use of estimates (eg materiality judgements and going concern assessments—when it is doubtful whether the entity has no realistic alternative but to liquidate).
IAS 1 requires disclosure of:
This Standard requires particular disclosures in all the financial statements and requires disclosure of other line items either in those statements or in the notes.
An entity shall clearly identify the financial statements and distinguish them from other information in the same published document.
Additional information:
Complete set of financial statements comprises:
Statement of financial position as at the beginning of the earliest comparative period when IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors applies
Additional statements encouraged.
OCI has the following five components (all net of taxes):
An entity shall disclose:
These are amounts reclassified to profit or loss in the current period that were recognised in Other Comprehensive Income in previous periods.
The following items of the OCI shall be reclassified to profit or loss:
The other items of the OCI shall not be reclassified to profit or loss but should be transferred to Retained Earnings directly.
Separate statement
In addition either in this statement or in notes, need to present dividends recognised as distributions to owners during period and their amount per share.
Contents of Notes:
Disclosure of accounting policies
Other disclosures
| Sr. No | Accounting Issue | Comparison |
| 1 | Financial statements | Full IFRS: A statement of changes in equity is required, presenting a reconciliation of equity items between the beginning and end of the period. IFRS for SMEs: Same requirement. However, if the only changes to the equity during the period are a result of profit or loss, payment of dividends, correction of prior-period errors or changes in accounting policy, a combined statement of income and retained earnings can be presented instead of both a statement of comprehensive income and a statement of changes in equity. |
| 2 | Business combinations | Full IFRS: Transaction costs are excluded under IFRS 3 (revised). Contingent consideration is recognised regardless of the probability of payment. IFRS for SMEs: Transaction costs are included in the acquisition costs. Contingent considerations are included as part of the acquisition cost if it is probable that the amount will be paid and its fair value can be measured reliably. |
| 3 | Investments in associates and joint ventures | Full IFRS: Investments in associates are accounted for using the equity method. The cost and fair value model are not permitted except in separate financial statements. To account for a jointly controlled entity, either the proportionate consolidation method or the equity method is allowed. The cost and fair value model are not permitted. IFRS for SMEs: An entity may account of its investments in associates or jointly controlled entities using one of the following: The cost model (cost less any accumulated impairment losses). The equity method. The fair value through profit or loss model. |
| 4 | Expense recognition | Full IFRS: Research costs are expensed as incurred; development costs are capitalised and amortised, but only when specific criteria are met. Borrowing costs are capitalised if certain criteria are met. IFRS for SMEs: All research and development costs and all borrowing costs are recognised as an expense. |
| 5 | Financial instruments - derivatives and hedging | Full IFRS: IAS 39, 'Financial instruments: Recognition and measurement', distinguishes four measurement categories of financial instruments - that is, financial assets or liabilities at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. IFRS for SMEs: There are two sections dealing with financial instruments: a section for simple payables and receivables, and other basic financial instruments; and a section for other, more complex financial instruments. Most of the basic financial instruments are measured at amortised cost; the complex instruments are generally measured at fair value through profit or loss. The hedging models under IFRS and IFRS for SMEs are based on the principles in full IFRS. However, there are a number of detailed application differences, some of which are more restrictive under IFRS for SMEs (for example, a limited number of risks and hedging instruments are permitted). However, no quantitative effectiveness test required under IFRS for SMEs. |
| 6 | Non-financial assets and goodwill | Full IFRS: For tangible and intangible assets, there is an accounting policy choice between the cost model and the revaluation model. Goodwill and other intangibles with indefinite lives are reviewed for impairment and not amortised. IFRS for SMEs: The cost model is the only permitted model. All intangible assets, including goodwill, are assumed to have finite lives and are amortised. |
| Full IFRS: Under IAS 38, 'Intangible assets', the useful life of an intangible asset is either finite or indefinite. The latter are not amortised and an annual impairment test is required. IFRS for SMEs: There is no distinction between assets with finite or infinite lives. The amortisation approach therefore applies to all intangible assets. These intangibles are tested for impairment only when there is an indication. |
||
| Full IFRS: IAS 40, 'Investment property', offers a choice of fair value and the cost method. IFRS for SMEs: Investment property is carried at fair value if this fair value can be measured without undue cost or effort. |
||
| Full IFRS: IFRS 5, ‘Non-current assets held for sale and discontinued operations’, requires non-current assets to be classified as held for sale where the carrying amount is recovered principally through a sale transaction rather than though continuing use. IFRS for SMEs: Assets held for sale are not covered, the decision to sell an asset is considered an impairment indicator. |
||
| Full IFRS: In addition to the cost model, the revaluation model is an option, in which classes of PPE are carried at a revalued amount less any accumulated depreciation and subsequent accumulated impairment losses. IFRS for SMEs: Classes of PPE are carried at cost less accumulated depreciation and any impairment losses (cost model). |
||
| 7 | Employee benefits - defined benefit plans | Full IFRS: under IAS 19, 'Employee benefits', actuarial gains or losses can be recognised immediately or amortised into profit or loss over the expected remaining working lives of participating employees. IFRS for SMEs: Requires immediate recognition and splits the expense into different components. |
| 8 | Combined financial statements | Full IFRS: Not covered in full IFRS. IFRS for SMEs: Combined financial statements are a single set of financial statements of two or more entities controlled by a single investor. Combined financial statements are not compulsory as per IFRS for SMEs. |
