IASB’s Conceptual Framework: Subject-Matter and Uses

In this article we will discuss about the subject matter and uses of IASB’s conceptual framework.

Subject-Matter of IASB’S Framework:

IASB’s conceptual framework deals with:

(a) The objective of financial statements;

(b) The qualitative characteristics that determine the usefulness of information in financial statements,

(c) The definition, recognition and measurements of the elements from which financial statements are constructed; and

(d) Concepts of capital and capital maintenance.

The conceptual framework is concerned with general purpose financial statements (hereafter referred to as “financial statements”) including consolidated financial statements. Such financial statements are prepared and presented at least annually and are directed toward the common information needs of a wide, range of users.

Some of those users may require, and have the power to obtain information in addition to that contained in the financial statements. Many users, however, have to rely on the financial statements as their major source of financial information and such financial statements should, therefore, be prepared and presented with their needs in view.

Special purpose financial reports, for example, prospectuses and computations prepared for taxation purposes, are outside the scope of this framework. Nevertheless, the framework may be applied in the preparation of such special purpose reports where their requirements permit.

Financial statements form part of the process of financial reporting. A complete set of financial statements normally includes a balance sheet, an income statement, a statement of changes in financial position (which may be presented in a variety of ways, for example, as a statement of cash flows or a statement of funds flow), and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements.

Such schedules and supplementary information may deal, for example, with financial information about industrial and geographical segments and disclosures about the effects of changing prices. Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report.

IASB’s conceptual framework applies to the financial statements of all commercial, industrial and business reporting enterprise, whether in the public or the private sectors. A reporting enterprise is an enterprise for which there are users who rely on the financial statements as their major source of financial information about the enterprise.

The IASB 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, to:

(a) Decide when to buy, hold or sell an equity investment;

(b) Assess the stewardship or accountability of management;

(c) Assess the ability of the enterprise to pay and provide other benefits to its employees;

(d) Assess the security for amounts lent to the enterprise;

(e) Determine taxation policies;

(f) Determine distributable profits and dividends;

(g) Prepare and use national income statistics; or

(h) Regulate the activities of enterprises.

The IASB 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 presently no consensus for change. This framework has been developed so that it is applicable to a range of accounting models and concepts of capital and capital maintenance.

Uses of IASB’S Conceptual Framework:

The Framework has a variety of uses.

1. Most importantly, the Framework guides the IASB and International Financial Reporting Interpretations Committee (IFRIC) members in deliberating and establishing International Financial Reporting Standards and interpretations of these standards.

In the absence of a framework, each board member inevitably would debate accounting standards questions premised on his or her own professional experience—their personal frameworks. Unfortunately, as in any debate, different premises can lead to different equally logical conclusions.

For example, a board member who felt that accounting should smooth earnings volatility to help financial analysts assess long-term trends might favour a deferral-and-amortisation approach for certain kinds of costs.

Another board member, however, who felt that assets must have clear future benefits in terms of expected cash flows to the entity might reject a deferral-and-amortisation approach. Both board members would have logic on their side. The difference, of course, is in the premises to their reasoning. The Framework provides a set of ‘givens’ in the debate over accounting standards.

2. Basing a set of accounting standards on the underlying IASB Framework helps ensure that the body of standards is internally consistent, at least to the maximum extent possible. For instance, one of the things the Framework does is define the basic elements of financial statements —assets, liabilities, equity, income and expenses.

When an accounting issue that comes before the IASB involves whether to accrue a provision (liability and related expense) for a contingency of uncertain amount or timing—such as a pending lawsuit—the Framework definition of a liability becomes a ‘given’; and the debate should centre on whether the particular contingency in question meets the agreed definition of a liability.

3. Preparers and auditors of financial statements use the Framework as a point of reference to resolve an accounting question in the absence of a standard or interpretation that specifically deals with the question. It is not possible for any set of accounting standards to provide clear answers to all accounting questions.

Judgement is required in answering specific questions that the standards do not address. The Framework establishes boundaries for the exercise of judgement in preparing financial statements.

4. The IASB Framework establishes precise terminology by which people can discuss accounting questions. To illustrate, agreement on the definition of ‘liability’ helps in deciding whether things known variously as obligations, commitments, contingencies, provisions, accruals and the like qualify for recognition as liabilities in the balance sheet.

5. The Framework reduces the volume of standards. Without the Framework, each accounting question would have to be answered ad hoc, and there would be pressure from the preparers, auditors and users of financial statements for more detailed standards. The Framework provides direction for resolving questions without the need for increasingly specific standards.

6. By providing parameters for the exercise of judgement, the Framework reduces the need for interpretations and other detailed implementation guidance.

7. By adding rigour and discipline, the Framework enhances public confidence in financial reports. Users of financial statements make comparisons, and comparability is diminished if financial statement preparers use their own judgement on an ad hoc, company-by-company basis. No matter how well intentioned that judgement may be, financial statements can lose credibility if they lack a conceptual underpinning.