IASB Conceptual Framework for Financial Reporting

The IASB bases its financial reporting standards on the conceptual framework that it adopted in 2010. The conceptual framework was developed by IASB and it lays down the basic concepts and principles that act as the foundation for preparation and presentation of the financial statements. The framework is also used as guide to develop / improve standards and to resolve any accounting conflicts. Note that the conceptual framework is not an accounting standard in itself and cannot be used as an alternative to the financial reporting standards applicable in your country.

The IFRS framework addresses the following:

• Objectives of financial statements
• Underlying assumptions of the financial statements
• Qualitative characteristics of financial statements
• Elements of financial statements
• Recognition of the elements of financial statements
• Measurement of the elements of financial statements

Objectives of the Financial Statements

In very simple words, the objective of Financial Statements is:

“To provide useful information to the users.”

Let's look at this statement more closely. There are three keywords here:

Useful: The useful here refers to the need for financial statements to be able to provide high quality information to the users. The usefulness is described in the form of the qualitative characteristics of the financial statements.

Information: This refers to what information should the financial statements provide. This includes financial position, financial performance, and changes in financial position. These three tips of information are provided in the three financial statements, namely, balance sheet, income statement, and statement of cash flow.

Users: This refers to the end users of financial statements such as investors, lenders, employees, government, customers, vendors, etc.

Underlying Assumptions of IFRS

There are two fundamental assumptions underlying the financial statements: Going Concern, and Accruals.

Going Concern: Here the idea is that the business will continue to operate for the forceable future. This is a really important assumption because if it was so that the business will close by the end of the year, then all the assets will have to be sold and their sale value would have to be recorded in the books. However, this is not the case and businesses use their assets and resources for many years.