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IFRS and its Conceptual Framework

“If you learn only methods, you’ll be tied to your methods, but if you learn principles you can
devise your own methods.”
Ralph Waldo Emerson

What is this IFRS about?

I nternational Financial Reporting Standards (IFRS) are a set of accounting standards developed
with the aim of providing a level-platform to all preparers of financial statements over the globe
with the intention of enabling a single voice to the preparation and presentation of financial
information of various entities to all the stakeholders who provide resources to the entities.
Why do we need IFRS?
Imagine you have a new product that you intend to sell but everyone around you doesn’t
understand your language. How will you be able to convince them to buy your product?
So also, Accounting is widely referred to as the language of business. And as a result of the
unending upsurge in financial transactions all over the world and the increasing rate of cross-
border transactions. You obviously can’t decide to stick to your mother-tongue any longer. If you
want to beat them, you have to join them.
The Roadmap to IFRS
Every field has its roots. Ditto for the IFRS. It all started a long time ago , in the year 1966 when a
group of independent accounting standard-setting bodies came together to form a single body
that will be in charge of setting international standards that will guide preparers of financial
statements all over the world.
The main objective of these international standards is to allow investors, organizations, and
governments to compare financial statements with greater ease.
A brief timeline

1966: started as a study group.

1973, June: became a recognized international standard-setting body.
1973: were referred to as the IASC (International Accounting Standards Committee).
1975: issued the first final standards –IAS 1 and IAS 2.
1997: formed a committee for interpreting its standards –SIC (Standing Interpretations
Committee).
2001, April: announced a change of name to IASB (International Accounting Standards Board).

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2001: moved into its new office at 30 Cannon street, London.

2001: adopted all IAS and SIC issued by its predecessor (IASC).
2003: issued the first final standards.
2003: issued first final interpretations to its standards. –IFRIC (International Financial
Reporting Standards Interpretations Committee).
2011: issued IFRS 10 to 13.
2016: issued IFRS 16

Who are the founders?

The IASB is an independent accounting standard-setting body, registered in the United
States of America, but based in London. It consists of 16 members from different countries of
various continents. The IASB started out with the concerted efforts of the Institute of Chartered
Accountants of England and Wales (ICAEW), Canadian Institute of Chartered Accountants (CICA)
and American Institute of Certified Public Accountants (AICPA). It is funded by contributions from
major accounting firms, private financial institutions and industrial companies, central and
development banks, national funding regimes, and other international and professional
organizations throughout the world. The IASB is saddled with the responsibility of writing and
developing standards for international use.

Challenges Facing IFRS Adoption

The principal impeding factors in the adoption process of IFRS in Europe, America and
Africa are not technical but cultural issues, legal impediments, educational complacency and
political influences. Other critical challenges may include:
- Consistent adoption, application and regulatory review
- Compliance issues and enforcement mechanisms
- Cultural and structural differences in various institutions in the countries

Every innovation has its pros and cons. Suffice it to say that the benefits of IFRS far
outweighs its cost. The necessary recipe is to develop a strong institutional framework for IFRS
adoption. In doing this, a large pool of researches and implementation issues must be conducted
with adequate consideration for investors, firms, industries, money and capital market, national
economy and the global market.

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Changes in Terminology
As a result of the incorporation of the new accounting standards that has supplanted the local
standards of various countries, the following terminologies have changed.
Local Standards IFRS
 Balance sheet  Statement of Financial Position
 Profit or loss account  Statement of profit or loss and other
comprehensive Income
 Fund flow statement  Statement of Cash Flows
 For company: Appropriation account  Statement of Changes in Equity
 For partnership: Appropriation account  Statement of Distribution of Income
 Debtors  Trade Receivables
 Creditors  Trade Payables
 Stock  Inventory
 Sales  Revenue/Turnover
 Capital  Equity/Net worth
 Fixed Assets  Non-current assets
 Long-term liabilities  Non-current liabilities
 Net Book value  Carrying amount

Hey! Let’s take a break

Just for laughs…

An auditor and an accountant were walking in the woods when a bear suddenly

Jumped out and came at them.

“Do you think we can outrun the bear?” The auditor asked.

The accountant replied, “I don’t have to outrun the bear. I only have to outrun you.”

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H aving learnt the genesis of IFRS, let’s delve into the most important part of it –the conceptual
framework and its constituents.

What does the Conceptual Framework mean?

Let’s break it down…
Imagine you are a contractor. You are paid to construct a hospital for your community. It is
obvious that you will definitely need to create a blueprint for the construction. You can’t just
build it haphazardly.
This is in no way different from the essence of the Conceptual Framework. The IASB is in charge
of producing and issuing standards. These standards have to be carefully created. What then
should be the basis for preparing these standards? Your guess is as good as mine –the conceptual
framework.
Concisely, it was previously called ‘Framework’ when it was issued in July 1989 by the defunct
International Accounting Standard Committee (IASC). It was later revised and re-issued by the
International Accounting Standard Board (IASB) in September 2010 as ‘The Conceptual
Framework for Financial Reporting’.
The Conceptual Framework was basically issued for the purpose of providing assistance in the
development of accounting standards. It serves as a source of reference for the IASB in the
development of new accounting standards or in revisiting previously issued standards.

Note: The Conceptual Framework is not an IAS nor IFRS and so does not overrule any individual
IAS/IFRS. In the (rare) cases of conflict between an IAS/IFRS and the Conceptual Framework, the
IAS will prevail. These cases will diminish over time as the Conceptual Framework will be used as
a guide in the production of future Standards. The Conceptual Framework itself will be revised
occasionally depending on the experience of the IASB in its use.

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SCOPE OF THE FRAMEWORK

The existing framework deals with the
■ Objectives of financial statements;
■ Qualitative characteristics of financial statements;
■ Elements of financial statements;
■ Underlying Assumptions;
■ Recognition of the elements of financial statements;
■ Measurement of the elements of financial statements; and
■ Concepts of capital and capital maintenance

OBJECTIVES
The objective is to provide financial information about the financial position, performance and
changes in financial position of an entity that is useful to a wide range of users (existing and
potential investors, lenders and other creditors) in making economic decisions about providing
resources to the entity.
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
Qualitative characteristics are the attributes that make the information provided in financial
statements useful to users. Their characteristics are classified into two:
Fundamental qualitative characteristics …imagine the foundation of a building
•Relevance: This is the extent to which the information makes the difference in economic
decision taken by present and potential investors and other users of financial statements. It
also relates to the predictive value and the confirmatory value of information.
- Predictive value exists if financial information can be used as an input to processes
employed by users to predict future outcomes.
- Confirmatory value exists if it provides feedback about (confirms or changes) previous
evaluations after stakeholders have made decisions about the entity.

The predictive value and confirmatory value of financial information are interrelated.

•Faithful representation: This relates to the representational faithfulness of numbers and

balances in the financial statement to the true state of transactions and financial events that
the financial statements represent. To be a perfectly faithful representation, a depiction would
have three characteristics. It would be complete, neutral and free from error.

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Enhanced qualitative characteristics …imagine the paintings and designs of a building

•Timeliness: financial statement should be made available in a timely manner before its
relevance is overtaken by events.

•Reliability: This is the degree of confidence in the financial statement. The reported financial
statement should be verifiable to assure users that it is free from material error and bias and
can be depended on to represent what it purports to represent. This is also called verifiability.

•Understandability: This refers to ease of understanding the content of financial statement by

users with reasonable degree of financial knowledge and a willingness to study the information
with reasonable diligence.

•Comparability: financial statements that facilitate comparison with prior period financial
statements of the same entity and financial statement of other entities in the same industry.

ELEMENTS OF FINANCIAL STATEMENTS

Elements directly related to financial position are;
Assets: are resources controlled by an entity as a result of past events from which future
economic benefits are expected to flow to the entity.
Liabilities: are present obligations of an entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic benefit.

Equity: the residual interest in the assets of the entity after deducting all of its liabilities.

Elements directly related to performance

Income: the increases in economic benefits during an accounting period in the form of inflows
or enhancements to assets or decreases in liabilities that results in increases in equity, other
than those contributed by equity participants.

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Expenses: Expenses are decreases in economic benefits during an accounting period in the
form of outflows or depletion of assets or incurrence of liabilities that result in decreases in
equity, other than those distributed to equity participants.
UNDERLYING ASSUMPTIONS
 Accrual: Financial statements are prepared based on the accrual basis of accounting. Under
this basis, transactions are recorded when they occur and not as the cash flows take place.
 Going concern: Financial statements are prepared on the assumption that an entity is a going
concern and will be in operation for the foreseeable future. Hence it is assumed that the entity
has neither the intention nor the need to liquidate or materially curtail the scale of its
operations.
RECOGNITION OF ELEMENTS OF FINANCIAL STATEMENTS
Recognition is the process of incorporating in the statement of financial position or statement
of comprehensive income an item that meets the definition of an element and satisfies the
criteria for recognition.
Elements (assets, liabilities, equity, income, and expenses) should only be recognized in the
financial statements 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.

MEASUREMENT OF ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognized and carried in the statement of financial position
and statement of comprehensive income. The following bases are used to different degrees and
in varying combinations to measure elements of financial statements:
Historical cost. Assets are recorded at the amount paid or fair value of consideration given to
acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds
received in exchange for the obligation.
Current cost. Assets are carried at the amount of cash and cash equivalents that would have to
be paid if the same or equivalent asset were acquired currently. Liabilities are carried at the
undiscounted amount of cash or cash equivalents that would be required to settle the
obligation currently.

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Realizable (settlement) value. Assets are carried at the amount of cash and cash equivalents
that would be obtained by selling the assets in an orderly disposal. Liabilities are carried at their
settlement values, that is, the undiscounted amount of cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal course of business.
Present value. Assets are carried at the present discounted value of the future net cash inflows
that the item is expected to generate in the normal course of business. Liabilities are carried at
the present discounted value of the future net cash outflows that are expected to be required
to settle the liabilities in the normal course of business.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

The Framework distinguishes between a financial concept of capital and a physical concept of
capital. Most entities use a financial concept of capital, under which capital is defined in
monetary terms as the net assets or equity of the entity.
Financial capital maintenance concept, profit is earned if the financial amount of the net assets
at the end of the period exceeds the financial amount of net assets at the beginning of the
period, after excluding any distributions to, and contributions from, owners during the period.
Physical capital maintenance concept, profit is earned if the physical productive capacity (or
operating capability e.g. number of units of goods produced) of the entity (or the resources or
funds needed to achieve that capacity) at the end of the period exceeds the physical productive
capacity at the beginning of the period, after excluding any distributions to, and contributions
from, owners during the period.

I hope this material threw more light on the Introduction to the study of Financial Reporting
and the Conceptual Framework.
You can get more topics on Financial Reporting on adedamolaotun.blogspot.com.
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Regards,
Adedamola Otun
tnadedamola@gmail.com
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