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101 Concepts for the Level I Exam

Concept 41: International Accounting Standards Board’s (IASB) Conceptual Framework


Objective of financial statements: As per the IFRS framework, the objective of financial statements is ‘to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity’.

Qualitative characteristics: The two fundamental qualitative characteristics are:

  • Relevance: Financial statements should be useful both for making forecasts as well as to evaluate past forecasts. They should be timely and sufficiently detailed and important facts should not be omitted.
  • Faithful representation: Information presented should be complete, neutral and free from errors.

The four supplementary qualitative characteristics are:

  • Comparability: Financial statements should be consistent over time and across firms to facilitate comparisons.
  • Verifiability: Independent observers should be able to verify that information reflects true economic reality.
  • Timeliness: Information should be available in a timely manner.
  • Understandability: Information should be presented in simple manner, such that even users with basic business knowledge can understand it.

Constraints

  • Tradeoff between reliability and timeliness. If a firm tries to make statements that have no errors and are highly reliable it will need a lot of time. Similarly, if a firm tries to make statements in the least amount of time they will have more errors and be less reliable.
  • Cost: The benefit that the users gain from using the reports should be more than the cost of preparing the reports
  • Intangible aspects: Intangible information such as brand name and customer loyalty cannot be captured directly in financial statements.

Assumptions

  • Accrual basis: Revenue should be recognized when earned and expenses should be recognized when incurred, irrespective of when the cash is actually paid.
  • Going concern: Assumption that the company will continue operating for the foreseeable future.

Reporting elements

  • Elements related to measurement of financial position are: assets, liabilities, equity.
  • Elements related to measurement of financial performance are: income, expenses.