Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information with diligence. [2.11], General purpose financial reports represent economic phenomena in words and numbers. Hence, they are not regarded as constituting a separate element in the IFRS Framework. [3.8-3.9], A reporting entity is an entity that is required, or chooses, to prepare financial statements. The information must be readily understandable to users of the financial statements. [F 4.33 and F 4.34], Recognition of the elements of financial statements, Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition: [F 4.37 and F 4.38], Measurement of the elements of financial statements, Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported. [F 4.54], The IFRS Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including: [F 4.55]. As the project to revise the Framework progresses, relevant paragraphs in Chapter 4 will be deleted and replaced by new Chapters in the IFRS Framework. International Accounting Standards Board (2008). 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. Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. You might remember the fundamental characteristics of useful financial information (per the IASB Conceptual Framework) are: Relevance, and; Faithful Representation; and how there’s a little bit more around those two points you should know. [1.21], The changes in an entity's economic resources and claims not resulting from financial performance is presented in the statement of changes in equity. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. They will need to consider pertinent information from other sources as well. The conceptual framework sets out four qualitative characteristics of financial statements: Understandable: The users should be able to understand and appreciate the information. These words serve as exceptions. [SP1.1]. [See IAS 1.106-110], Information about use of the entity’s economic resources, Information about the use of the entity's economic resources also indicates how efficiently and effectively the reporting entity’s management has used these resources in its stewardship of those resources. Once you have answered the questions, click on 'Submit Answers for Grading' to get your results. Comparability enables users to identify and understand similarities in, and differences among, items. The Conceptual Framework's purpose is to assist the IASB in developing and revising IFRSs that are based on consistent concepts, to help preparers to develop consistent accounting policies for areas that are not covered by a standard or where there is choice of accounting policy, and to assist all parties to understand and interpret IFRS. [3.13-3.14], Consolidated and unconsolidated financial statements, Generally, consolidated financial statements are more likely to provide useful information to users of financial statements than unconsolidated financial statements. The qualitative characteristics apply equally to financial information in general purpose financial reports as well as to financial information provided in other ways. [2.12], A faithful representation seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error. These qualities are outlined in Chapter 3 of the Conceptual Framework for Financial Reporting, approved by the International Accounting Standards Board (IASB). [F 4.29 and F 4.30], The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the entity. Relevance 2. Information about the claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the reporting entity. Fundamental qualitative characteristics: IASB Conceptual Framework for Financial Reporting identified two qualitative characteristics: • ‘relevance’ and • ‘faithful representation’ Relevance: Relevant financial information is capable of making a difference in the decisions made by users. You might remember the fundamental characteristics of useful financial information (per the IASB Conceptual Framework) are: and how there’s a little bit more around those two points you should know. The IASB’s Conceptual Framework for Financial Reporting. The Framework's purpose is to assist the IASB in developing and revising IFRSs that are based on consistent concepts, to help preparers to develop consistent accounting policies for areas that are not covered by a standard or where there is choice of accounting policy, and to assist all parties to understand and interpret IFRS. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. The Framework clarifies what makes financial information useful, that is, information must be relevant and must faithfully represent the substance of financial information. [2.30], Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions. This Exposure Draft incorporates the IASB’s proposals for a revised conceptual framework that are intended to improve financial reporting by providing a more complete, clear and updated set of concepts. Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the entity. [See IAS 1.81-105], Financial performance reflected by past cash flows, Information about a reporting entity's cash flows during the reporting period also assists users to assess the entity's ability to generate future net cash inflows and to assess management’s stewardship of the entity’s economic resources. Financial information is relevant if it makes a difference on the financial statement user decision. Phone: +353 (0)1 4433 400 Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. This means that information must be clearly presented, with additional information supplied in the supporting foot [2.24-2.25], Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. The cash flow statement reflects both income statement elements and some changes in balance sheet elements. [F 4.1]. Faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only. Until it is replaced, a paragraph in Chapter 4 has the same level of authority within IFRSs as those in Chapters 1-3. the objective of general purpose financial reporting, qualitative characteristics of useful financial information, financial statements and the reporting entity, concepts of capital and capital maintenance, It is probable that any future economic benefit associated with the item will flow to or from the entity; and. Relevant: The information should be relevant to the users so that they can make their decisions effectively. [See IAS 7], Changes in economic resources and claims not resulting from financial performance, Information about changes in an entity's economic resources and claims resulting from events and transactions other than financial performance, such as the issue of equity instruments or distributions of cash or other assets to shareholders is necessary to complete the picture of the total change in the entity's economic resources and claims. 1-64. Articles, Clarence Street, Dun Laoghaire, Co. Dublin, Ireland If you have any tips or techniques that you use, please contact us and let us know. Qualitative characteristics of useful financial information 6. [1.18-1.19], The changes in an entity's economic resources and claims are presented in the statement of comprehensive income. The elements directly related to financial position (balance sheet) are: [F 4.4], The elements directly related to performance (income statement) are: [F 4.25]. In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. E-mail: info@charterededucation.com, New mind map and summary note: IFRS 13 Fair Value Measurement, Update: IAS 16 Property Plant and Equipment quiz. Underlying assumption 5. The item's cost or value can be measured with reliability. Representational faithfulness London: IASB, pp. Recognition of the elements of financial statements 8. 3 June 2015 Applying IFRS – IASB issues the Conceptual Framework exposure draft In the existing Conceptual Framework’s section on qualitative characteristics of useful financial information, the IASB had not included a discussion on prudence, stating that prudence is inconsistent with neutrality. The four principal qualitative characteristics are … The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities. Closely tied to relevance is the concept of materiality. However, these are not considered a primary user and general purpose financial reports are not primarily directed to regulators or other parties. Conceptual Framework Exposure Draft 1 December 2010 Comments are requested by June 15, 2011 International Public Sector Accounting Standards Board Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: • Role, Authority and Scope; • Objectives and Users; • Qualitative Characteristics; and [2.4], Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information. Prudence is the exercise of caution when making judgements under conditions of uncertainty. [2.16], Applying the fundamental qualitative characteristics, Information must be both relevant and faithfully represented if it is to be useful. The elements of financial statements 7. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. [1.3-1.4], The IFRS Framework notes that general purpose financial reports cannot provide all the information that users may need to make economic decisions. “Prudence is defined as the exercise of caution when making judgments under condition of uncertainty” (Schroeder, Clark, & Cathy, 2017). Chapter 4 contains the remaining text of the Framework approved in 1989. [3.10], Determining the appropriate boundary of a reporting entity is driven by the information needs of the primary users of the reporting entity’s financial statements. [SP1.3], The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. 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