Conceptual Framework

Last update 17/12/2019

The Conceptual Framework for Financial Reporting 2018 (the ‘Conceptual Framework’) describes the objective of, and the concepts for, general purpose financial reporting.

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. [CF 1 1]

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. 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. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8.

The Framework is not a Standard and does not override any specific IFRS. [CF 1 2]

If the IASB decides to issue a new or revised pronouncement that is in conflict with the Framework, the IASB must highlight the fact and explain the reasons for the departure in the basis for conclusions. [CF1 3]

The International Accounting Standards Board (the IASB or the Board) issued the revised Conceptual Framework for Financial Reporting (the revised Conceptual Framework) on 29 March 2018. The revised version includes comprehensive changes to the previous Conceptual Framework, issued in 1989 and partly revised in 2010. The previous Conceptual Framework (the 2010 Conceptual Framework) was criticised for its lack of clarity, the exclusion of certain important concepts and for being outdated in terms of the IASB’s current thinking. Following the IASB’s agenda consultation in 2011, the Conceptual Framework project was added to the IASB’s work plan in September 2012. Since then, the IASB has issued a discussion paper in July 2013 and an exposure draft in June 2015.

In revising the Conceptual Framework, the Board was looking to underpin high level concepts with sufficient detail for it to set standards and to help others to better understand and interpret the standards.

Some changes from the 2010 Framework to the 2018 Framework

Chapter 4 – The elements of financial statements

Definition of an asset
New definition	Previous definition
A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits	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

The new definition clarifies that an asset is an economic resource, and that the potential economic benefits no longer need to be ‘expected’ to flow to the entity – they do not need to be certain or even likely (but if this is the case, the recognition and measurement of the asset may be affected).

Definition of a liability
New definition	Previous definition
A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty of responsibility that the entity has no practical ability to avoid	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

The main difference is that the new definition clarifies that a liability is the obligation to transfer an economic resource, and not the ultimate outflow of economic benefits. The outflow also no longer needs to be ‘expected’, similar to the change in the definition of an asset, above. The Board also introduced the concept of ‘no practical ability to avoid’ to the definition of an obligation, and factors used to assess this will depend on the nature of an entity’s duty or responsibility, which requires the use of judgement. Chapter 4 includes discussions of how to apply the concept in different circumstances.

Introduction

The Objective of General Purpose Financial Reporting