Status
The status of the Framework is not that of an International
Financial Reporting Standard (IFRS). The Framework
does not define standards for the recognition, measurement
and disclosure of financial information. Nothing
in it overrides any specific IFRS [F.2]. However,
in the absence of a specific IFRS, management uses
its judgement in developing an accounting policy
that provides the most useful information to users
of the entity's financial statements. Management
should consider the principles set out in the Framework
in making such judgement [P.8] [F.1(d)] [IAS8R.11,12].
Scope
The scope of the Framework embraces general-purpose
financial statements including consolidated financial
statements, but not special purpose financial reports
[F.6]. The Framework applies to the financial statements
of all commercial, industrial and business reporting
entities, whether in the public or the private sectors.
A reporting entity is one for which there are users
who rely on the financial statements as a major source
of financial information about the entity [F.8].
Users of financial statements
The Framework identifies users as investors and
potential investors, employees, lenders, suppliers,
creditors, customers, governments and the public
at large [F.9(a)-(g)].
Objectives of financial statements
The Framework identifies the central objective
of financial statements as providing information
about the entity that is useful in making economic
decisions [F.12]. Financial statements prepared
for this purpose will meet the needs of most users
[F.13]. Users generally want information about the
entity's financial performance, financial position,
cash flows, and the entity's ability to adapt to
changes in the economic environment in which it
operates [F.15-19].
Underlying assumptions
Financial statements must be prepared on the accrual
basis of accounting, and on the assumption that
the entity is a going concern. The accrual basis
requires that the effects of transactions and other
events are recognised as and when they occur and
not when cash is received or paid. Financial statements
should be prepared on the assumption that the entity
is a going concern and will continue to operate
for the foreseeable future. Hence the user can assume
that the entity has neither the intention nor the
need to liquidate or curtail materially the scale
of its activities. The going concern basis of accounting
should only be abandoned when the entity cannot
or will not continue to operate for the foreseeable
future [F.22-23].
Qualitative characteristics
The Framework prescribes a number of qualitative
characteristics of financial statements. The key
characteristics are relevance and reliability. Preparers
can face a dilemma in satisfying both criteria at
once. For example, information about the outcome
of a lawsuit may be relevant, but the financial
impact cannot be measured reliably [F.26-38] .
Financial information is relevant if it has the
capacity to influence user's economic decisions.
Relevant information will help users to evaluate
the past, present and, importantly, the future events
in an entity [F.26-30] .
To be reliable, financial information must represent
faithfully the effect of transactions and events
that it reflects. The true impact of transactions
and events can be compromised by the difficulty
of measuring transactions reliably [F.31-34].
Financial information faithfully represents transactions
and events when accounted for in accordance with
their substance and economic reality and not merely
their legal form. Commonly, a legal agreement will
purport that an entity has "sold" assets
to a third party. However, an analysis of the substance
of the arrangement indicates that the entity retains
control over the future economic benefits and risks
embodied in the asset, and should continue to recognise
it on its own balance sheet [F.35].
Financial information is reliable if it is free
from material error and is complete [F.31-32,38].
Information is material if its omission or misstatement
could influence decisions that users make on the
basis of the financial statements .
Information is reliable when it is neutral or free
from bias and prudent. A degree of prudence when
preparing financial information enhances its reliability.
However, an entity should not use prudence as the
basis for the recognition of, for example, excessive
provisions [F.36-38] .
Financial information must be easily understandable
by users in addition to being relevant and reliable.
Preparers should assume that users have a reasonable
knowledge of business and economic activities, and
an ability to comprehend complex financial matters
[F.25].
Users must be able to compare (comparability) an
entity's financial statements through time in order
to identify trends in financial performance. Hence
policies on recognition, measurement and disclosure
must be applied consistently over time. Where an
entity changes its accounting for the recognition
or measurement of transactions, it should disclose
the change in the Basis of Accounting section of
its financial statements and follow the guidance
set out in IFRS [F.39-42] [IAS8R.14-31].
The application of the qualitative characteristics
and accounting standards usually results in financial
statements that show a true and fair view, or fairly
present an entity's financial position and performance
[F.46].
Elements of financial statements and recognition of elements
The Framework outlines definition and recognition
criteria for assets, liabilities, equity, revenues
and expenses as the elements of financial statements
[F.47-98].
Measurement of elements
The Framework includes a brief summary of the main
measurement bases employed by IFRS [F.99]. These
are [F.100(a)-(d)]:
| a) |
historical cost; |
|
| b) |
current cost; |
|
| c) |
realisable value; and |
|
| d) |
present value. |
The measurement basis most commonly adopted for
assets on initial recognition is historical cost.
However, subsequent to initial recognition the measurement
bases of elements may differ depending on the classification
of a particular item [F.101].
On subsequent measurement, IFRS gives an entity
the choice to remeasure certain assets such as property,
plant and equipment and investment property to fair
value [IAS16R.31-42] [IAS40R.33-55]. The re-measurement
of certain financial assets to fair value is mandatory
[IAS39R.45-46]. Similarly, IFRS mandates the remeasurement
of biological assets where a fair value can be established
reliably [IAS41.12]. Agricultural produce, which
is the harvested product of the entity's biological
assets, should be measured at fair value on initial
recognition [IAS41.13].
Financial liabilities are initially recognised
at fair value. They are subsequently recognised
at amortised cost, except for financial liabilities
classified as at fair value through profit or those
arising when a transfer of a financial asset does
not qualify for derecognition or is accounted for
using the continuing involvement approach. The latter
are measured at fair value [IAS39R.47].
Provisions are usually recognised at the present
discounted amount of the cash outflows due to an
external party, or where liabilities are based on
best estimates, the present discounted value of
the amounts expected to settle an obligation [IAS37.45-47].
Entities whose functional currency is the currency
of a hyperinflationary economy must restate all
assets and liabilities in terms of the measuring
unit current at the balance sheet date
[IAS29.8].
Concepts of capital and capital maintenance
The Framework discusses two concepts of capital
maintenance, a financial concept and a physical
concept [F.102-103]. Most entities preparing IFRS
financial statements adopt a financial concept of
capital maintenance. Under this concept a profit
is earned only if the monetary amount of net assets
at the end of the period, excluding distributions/contributions
to/from owners, exceeds the monetary amount of net
assets at the beginning of the period [F.104(a)].
Financial capital maintenance is usually measured
in monetary units [F.108]; however, the requirement
to report the impact of hyperinflation results in
the measurement of assets and liabilities in monetary
units of constant purchasing power.
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