The main purpose of the Framework is to guide the IASB when it develops International Financial Reporting Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, providing useful information for investors and others. The Framework can also be helpful for preparers and auditors when there are no specific or similar standards addressing a particular issue.

The main purpose of the Framework is to guide the IASB when it develops International Financial Reporting Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, providing useful information for investors and others. The Framework can also be helpful for preparers and auditors when there are no specific or similar standards addressing a particular issue.

In the previous issue of our Accounting news we dealt with the introductory explanation on the status and purpose of the Conceptual Framework and the first four chapters of the new Conceptual Framework:

Chapter 1 – The objective of general purpose financial reporting

Chapter 2 – Qualitative characteristics of useful financial information

Chapter 3 – Financial Statements and the reporting entity

Chapter 4 – The elements of financial statements

In this article we cover the next four chapters of the new Conceptual Framework.

Chapter 5 – Recognition and derecognition

The revised recognition criteria require an entity to recognise an asset or a liability (and any related income, expenses or changes in equity) if such recognition provides users of financial statements with:

• relevant information; and
• a faithful representation of the underlying transaction.

The recognition criteria no longer include a probability or a reliable measurement threshold. Instead, uncertainty about the existence of an asset or liability or a low probability of a flow of economic benefits are noted as circumstances when recognition of a particular asset or liability might not provide relevant information.

For an asset or liability to be recognised it must also be measured. Most measures must be estimated, which means that they will be measured with some uncertainty. The Framework discusses the trade‑off between providing a more relevant measure that has a high level of estimation uncertainty and a measure that might be less relevant but has lower estimation uncertainty. In limited circumstances all relevant measures may be subject to high measurement uncertainty, such that the asset or liability should not be recognised.

The chapter provides a high‑level overview of how different types of uncertainty (e.g. existence, outcome and measurement) could affect the recognition decision. There is no detailed guidance, because it is a matter of assessing several factors that will depend on the facts and circumstances of each case. The IASB will consider these factors when developing Standards. It might be that some uncertainties should result in more supplementary information being provided by reporting entities.

The new Framework states that derecognition should aim to represent faithfully both:

• any assets and liabilities retained after the transaction that led to the derecognition; and
• the change in the entity’s assets and liabilities as a result of that transaction.

The focus of this section is on cases when these two aims conflict. This is sometimes the case when an entity disposes of only part of an asset or a liability or retains some exposure.

The chapter also includes a discussion on how derecognition works in the case of contract modifications.

Chapter 6 – Measurement

The material in this chapter is new to the Framework.

Chapter 6 discusses:

• the different measurement bases and the information they provide; and
• the factors to consider when selecting a measurement basis.

The new Framework describes two measurement bases: historical cost and current value. The Framework asserts that both bases can provide predictive and confirmatory value to users but one basis might provide more useful information than the other under different circumstances. As such, the Framework does not favour one measurement basis over the other.

Historical cost

Historical cost reflects the price of the transaction or other event that gave rise to the related asset, liability, income or expense.

Current value

A current value measurement reflects conditions at the measurement date. Current value includes:

• fair value,
• value in use (for assets) and fulfilment value (for liabilities), and
• current cost.

Current cost is newly introduced into the Conceptual Framework as it is widely advocated in academic literature. A table offers an overview of the information provided by various measurement bases.

The Framework also sets out factors to consider when selecting a measurement basis (relevance, faithful representation and enhancing qualitative characteristics). The objective in selecting a measurement basis is consistent with that of financial statements: i.e. to provide relevant information that faithfully represents the underlying substance of a transaction.

The Framework does not provide detailed guidance on when a particular measurement basis would be suitable because the suitability of particular measurement bases will vary depending on facts and circumstances. On equity, the Framework offers some limited discussion, although total equity is not measured directly. Still, the Framework maintains, it may be appropriate to measure directly individual classes of equity or components of equity to provide useful information.

Chapter 7 – Presentation and disclosure

The material in this chapter is new to the Framework.

In this chapter, the Framework discusses concepts that determine what information is included in the financial statements and how that information should be presented and disclosed.

The statement of comprehensive income is newly described as a “statement of financial performance”; however, the Framework does not specify whether this statement should consist of a single statement or two statements, it only requires that a total or subtotal for profit or loss must be provided. It also notes that the statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period and that only in “exceptional circumstances” the Board may decide that income or expenses are to be included in other comprehensive income. Notably, the Framework does not define profit or loss, thus the question of what goes into profit or loss or into other comprehensive income is still unanswered.

Chapter 8 – Concepts of capital and capital maintenance

The content in this chapter was taken over from the existing Conceptual Framework and discusses concepts of capital (financial and physical), concepts of capital maintenance (again financial and physical) and the determination of profit as well as capital maintenance adjustments.

Effective date

The new Framework became effective as soon as it was published on 29 March 2018.

Updating References in Standards to the revised Conceptual Framework

Some Standards include references to the 1989 and 2010 versions of the Framework. The IASB has published a separate document Updating References to the Conceptual Framework which contains consequential amendments to affected Standards so that they refer to the new Framework. These amendments are effective for annual periods beginning on or after 1 January 2020, with earlier application permitted.

There is one exception. IFRS 3 Business Combinations states that, in a business combination, identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Framework. IFRS 3 refers to both the 1989 and 2010 Frameworks. The definitions of asset and liability in those Frameworks are also in IFRS Standards. IAS 38 Intangible Assets includes the 1989 and 2010 Framework definition of an asset and IAS 37 has the 1989 and 2010 Framework definition of a liability.

The IASB decided not to amend IFRS 3 at this stage, because they are concerned that an item that meets the definition of an asset or liability when the new Framework is applied might need to be derecognised immediately because it does not meet the asset or liability definition in IFRS Standards. The IASB will explore this issue in a separate narrow‑scope project.

Sources: www.iasplus.com
                 www.ifrs.org

The article is part of dReport – July 2018, Accounting news.