Revised Conceptual Framework

The International Accounting Standards Board (IASB) on March 2018 issued the revised version of the Conceptual Framework with the main objective of  assisting the Board to develop IFRS Standards based on consistent concepts, resulting in financial information that is useful to investors, lenders and other creditors, and also to assist preparers of financial reports to develop consistent accounting policies for transactions or other events when no Standard applies or a Standard allows a choice of accounting policies.

The revised conceptual framework comprises the following inclusions and amendments:

Amendments

·       Definition of Elements of Financial Statements

·       Recognition criteria for Elements of Financial Statements

Inclusions

·       New chapter on “Financial Statements and the Reporting Entity”

·       Guidance on Derecognition of Elements of Financial Statements

·       Factors to consider in selecting a measurement basis

·       Presentation and Disclosure

Let’s take a quick sweep through the revisions in the Conceptual Framework:

Definition of Elements of Financial Statements

The revised definitions and previous are as below.

Assets

Previous 

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Revised

An asset is a present economic resource controlled by an entity as a result of past events.

An economic resource is a right that has the potential to produce economic benefits.

Wait! Don’t get it twisted

Reason for changes made:

·       A separate definition of an economic resource—this is to clarify that an asset is the economic resource, not the ultimate inflow of economic benefits;

·       The deletion of ‘expected flow’—means that it does not need to be certain, or even likely, that economic benefits will arise

Liability

Previous 

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Revised 

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. 

An obligation is a duty or responsibility that the entity has no practical ability to avoid.

Wait! Don’t get it twisted

Reason for changes made:

·       A liability is an obligation to transfer the economic resource, that is, a liability is not the ultimate outflow of economic benefits, it is only an obligation, not the outflow itself;

·       The deletion of ‘expected outflow’—means that it does not need to be certain, or even likely, that economic benefits will arise (cos an entity may become insolvent and unable to eventually pay).

Income

Previous 

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Revised 

Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.

Wait! Don’t get it twisted

Reason for changes made:

·       The changes reflect the explanations made on the revised assets and liabilities.

Expenses

Previous 

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Revised 

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

Wait! Don’t get it twisted

Reason for changes made:

·       The changes reflect the explanations made on the revised assets and liabilities.

No change was made to the definition of Equity.

Read also What does the Conceptual Framework mean?

Recognition criteria for Elements of Financial Statements

Recognition criteria refers to the conditions that permits an element (asset, liability, equity, income or expense) to be included (recorded) in the financial statements (statement of financial position or statement(s) of financial performance). It involves the depiction of the item in words and by a monetary amount.

The revised criteria and previous are as below.

Previous 

An item that meets the definition of an element should be recognized if:

·       it is probable that any future economic benefit associated with the item will flow to or from the entity; and

·       the item has a cost or value that can be measured with reliability.

Revised 

An item that meets the fundamental qualitative characteristics of information for an element should be recognized if:

·       it results in relevant information about assets, liabilities, equity, income or expenses; and

·       it results in a faithful representation of those items.

Wait! Don’t get it twisted

(IASB Conceptual Framework Project Summary 2018):

 “Relevance of an information could be as a result of existence uncertainty, high or low probability of a flow of economic benefits, among others.

Faithful representation could be as a result of measurement uncertainty, recognition inconsistency, and presentation and disclosure.”

Financial Statements and the Reporting Entity

Financial Statements

Refers to a particular form of financial reports that provide information about the reporting entity’s assets, liabilities, equity, income and expenses.

Consolidated financial statements: provide information about assets, liabilities, equity, income and expenses of both the parent and its subsidiaries as a single reporting entity.

Unconsolidated financial statements: provide information about assets, liabilities, equity, income and expenses of the parent only

Combined financial statements: provide information about assets, liabilities, equity, income and expenses of two or more entities that are not all linked by a parent-subsidiary relationship

Reporting entity 

Reporting entity is one that is required, or chooses, to prepare financial statements. It is not necessarily a legal entity—could be a portion of an entity or comprise more than one entity.

Derecognition of Elements of Financial Statements

This refers to the removal of all or part of a recognized asset (when the entity loses control of all or part of the recognized asset) or liability (when the entity no longer has a present obligation for all or part of the recognized liability) from an entity’s statement of financial position.

Factors to consider when selecting a Measurement Bases

In selecting a measurement basis, relevance and faithful representation is considered as well.

Wait! Don’t get it twisted

(IASB Conceptual Framework Project Summary 2018):

 “Relevance of information provided by a measurement basis is affected by: 

·       Characteristics of the asset or liability (that is, the variability of cash flows; and sensitivity of the value to market factors or other risks) 

·       contribution to future cash flows (that is, whether cash flows are produced directly or indirectly in combination with other economic resources; and the nature of the entity’s business activities)

Whether a measurement basis can provide a faithful representation is affected by:

·       Measurement inconsistency; and 

·       Measurement uncertainty”