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”
