Content
IFRS Conceptual Framework................................................................................... 2
IFRS 15: Revenue Recognition................................................................................ 6
IAS 37: Provisions and Contingent Liabilities..........................................................8
IAS 2: Inventories................................................................................................. 10
IAS 16: PPE........................................................................................................... 14
IAS 36: Impairment of assets................................................................................ 17
IAS 38: Intangible assets...................................................................................... 20
IFRS 16 – Leases................................................................................................... 23
IAS 19: Employee benefits.................................................................................... 27
IFRS 13: Fair value measurement.........................................................................31
IFRS 2: Share-based payments............................................................................. 34
,IFRS Conceptual Framework
What is the IFRS Conceptual Framework?
The conceptual framework itself is not an accounting standard, but it is
important to understand accounting practice under IFRS. The conceptual
framework provides the underlying rules, conventions and definitions that
underpins the development of all IFRS accounting standards. The idea is to
provide a structured theory of accounting that can assist the IASB to
develop an consistent set of accounting standards, but also prepare
financial statements. It also helps auditors in forming an opinion about
compliance with accounting standards and also financial statement users
in the interpretations of information presented in IFRS financial
statements.
The IFRS conceptual framework defines the objective of IFRS financial
statements:
Qualitative
characteristics
Reporting entity Objective of General Purpose Financial
Elements Reporting
Recognition To provide financial information about the
Derecognition reporting entity that is useful to existing and
Measurement potential investors, lenders and other creditors in
Presentation & making decisions about providing resources to
disclosure the entity.
Capital To determine taxable income
maintenance To determine dividends
To fulfil certain reporting requirements in case of
bankruptcy
It could also be useful for other stakeholders:
Fundamental problem: Information asymmetry
Financial accounting tries to solve problems emerging from information
asymmetries between insiders and outsiders of the firm.
, Outsiders provide the resources to the firm, but they also expect the
return on their investment.
Insiders are typically better informed about the economic fundamentals
of the firm.
This information asymmetry leads to 2 types of problems:
1. Adverse selection = one or more parties to a business transaction or
potential transaction have a information advantage. As a result risk
inverse buyers would demand a risk premium to compensate for this
uncertainty.
2. Moral hazard = one or more parties to a contract can observe their
action in fulfilment of this contract, but other parties cannot. So there is
a need for efficient contracts. Financial accounting could help reduce
the cost of contracting and thus making contracts more efficient by
providing information that can be used in these contracts.
Role of financial accounting
The higher the information asymmetry, the higher the risk premium will
be that risk-averse investors demand as a compensation for this
uncertainty
Financial accounting can help to reduce the asymmetries by providing
the capital market and users of financial information with decision-
useful information
- Reduces the costs of capital for the corporation since, ceteris
paribus, the risk premium will
decrease as a function of decreasing information asymmetries
Role of financial accounting: Contracting perspective
For good corporate governance, contracts should be efficient. An
efficient contract is the best trade-off between contracting costs and
benefits
Role of financial reporting for contract purposes is to generate trust
- But: Generating trust is costly! (example: Debt covenants)
Accounting standards help to reduce the cost of contracting as, e.g.
- compensation plans for management
- payout restrictions with regard to dividends to investors
- debt agreements for creditors.
The problem with solving these 2 problems is that they may lead to
different recommendations for future accounting standards.
Objective of General Purpose Financial Reporting
The goal is to provide financial information that is useful for capital
providers in making decisions. These decisions are related to providing
resources to the entity and depend on capital providers assessment about
, the prospects for future cash inflows. To make this assessment, users
primarily need information about the entities resources, claims and
changes within the reporting period. Users also make decisions about
voting and influencing management. They need to assess management’s
stewardship of the entity’s economic resources, which is only possible if
they have information about how efficiently and effectively management
discharge its responsibilities in managing the firm.
Qualitative characteristics of useful financial information
There are 2 fundamental qualitative characteristics of useful financial
information:
1. Relevance = information is capable of making a difference for user’s
decision making.
2. Faithful representation = the information should be capable of
depicting substance of the phenomena. This means that information
should be neutral (no bias), complete, free from error. This
complements relevance.
The framework also sets out 4 enhancing qualitative characteristics:
1. Comparability = relevant information should enable users to identify
and understand similarities and differences between 2 sets of economic
phenomena.
2. Verifiability = It should help assure users that information faithful
represents the economic phenomena it purposed to represent.
3. Timeliness = it should be available in time to be capable of influencing
the decision making.
4. Understandability = classifying, characterizing and presenting
information clearly and concisely makes it understandable and as such
also more relevant.
Reporting information imposes costs, and those costs should be justified
by the benefits of reporting that information.
What about prudence?
= The exercise of caution when making judgements under conditions of
uncertainty:
‘asymmetric prudence’ Need for systematic asymmetry: losses are
recognised at an earlier stage than gains are.
‘cautious prudence’ Need to be cautious when making judgements
under conditions of uncertainty, but without needing to be more
cautious in judgements relating to gains and assets than those relating
to losses and liabilities.
- Assets and income are not overstated
- Liabilities and income are not understated
Going concern assumption
IFRS financial statements are prepared under the assumption that the
entity is going concern (i.e., will continue to operate for the foreseeable
future).
IFRS Conceptual Framework................................................................................... 2
IFRS 15: Revenue Recognition................................................................................ 6
IAS 37: Provisions and Contingent Liabilities..........................................................8
IAS 2: Inventories................................................................................................. 10
IAS 16: PPE........................................................................................................... 14
IAS 36: Impairment of assets................................................................................ 17
IAS 38: Intangible assets...................................................................................... 20
IFRS 16 – Leases................................................................................................... 23
IAS 19: Employee benefits.................................................................................... 27
IFRS 13: Fair value measurement.........................................................................31
IFRS 2: Share-based payments............................................................................. 34
,IFRS Conceptual Framework
What is the IFRS Conceptual Framework?
The conceptual framework itself is not an accounting standard, but it is
important to understand accounting practice under IFRS. The conceptual
framework provides the underlying rules, conventions and definitions that
underpins the development of all IFRS accounting standards. The idea is to
provide a structured theory of accounting that can assist the IASB to
develop an consistent set of accounting standards, but also prepare
financial statements. It also helps auditors in forming an opinion about
compliance with accounting standards and also financial statement users
in the interpretations of information presented in IFRS financial
statements.
The IFRS conceptual framework defines the objective of IFRS financial
statements:
Qualitative
characteristics
Reporting entity Objective of General Purpose Financial
Elements Reporting
Recognition To provide financial information about the
Derecognition reporting entity that is useful to existing and
Measurement potential investors, lenders and other creditors in
Presentation & making decisions about providing resources to
disclosure the entity.
Capital To determine taxable income
maintenance To determine dividends
To fulfil certain reporting requirements in case of
bankruptcy
It could also be useful for other stakeholders:
Fundamental problem: Information asymmetry
Financial accounting tries to solve problems emerging from information
asymmetries between insiders and outsiders of the firm.
, Outsiders provide the resources to the firm, but they also expect the
return on their investment.
Insiders are typically better informed about the economic fundamentals
of the firm.
This information asymmetry leads to 2 types of problems:
1. Adverse selection = one or more parties to a business transaction or
potential transaction have a information advantage. As a result risk
inverse buyers would demand a risk premium to compensate for this
uncertainty.
2. Moral hazard = one or more parties to a contract can observe their
action in fulfilment of this contract, but other parties cannot. So there is
a need for efficient contracts. Financial accounting could help reduce
the cost of contracting and thus making contracts more efficient by
providing information that can be used in these contracts.
Role of financial accounting
The higher the information asymmetry, the higher the risk premium will
be that risk-averse investors demand as a compensation for this
uncertainty
Financial accounting can help to reduce the asymmetries by providing
the capital market and users of financial information with decision-
useful information
- Reduces the costs of capital for the corporation since, ceteris
paribus, the risk premium will
decrease as a function of decreasing information asymmetries
Role of financial accounting: Contracting perspective
For good corporate governance, contracts should be efficient. An
efficient contract is the best trade-off between contracting costs and
benefits
Role of financial reporting for contract purposes is to generate trust
- But: Generating trust is costly! (example: Debt covenants)
Accounting standards help to reduce the cost of contracting as, e.g.
- compensation plans for management
- payout restrictions with regard to dividends to investors
- debt agreements for creditors.
The problem with solving these 2 problems is that they may lead to
different recommendations for future accounting standards.
Objective of General Purpose Financial Reporting
The goal is to provide financial information that is useful for capital
providers in making decisions. These decisions are related to providing
resources to the entity and depend on capital providers assessment about
, the prospects for future cash inflows. To make this assessment, users
primarily need information about the entities resources, claims and
changes within the reporting period. Users also make decisions about
voting and influencing management. They need to assess management’s
stewardship of the entity’s economic resources, which is only possible if
they have information about how efficiently and effectively management
discharge its responsibilities in managing the firm.
Qualitative characteristics of useful financial information
There are 2 fundamental qualitative characteristics of useful financial
information:
1. Relevance = information is capable of making a difference for user’s
decision making.
2. Faithful representation = the information should be capable of
depicting substance of the phenomena. This means that information
should be neutral (no bias), complete, free from error. This
complements relevance.
The framework also sets out 4 enhancing qualitative characteristics:
1. Comparability = relevant information should enable users to identify
and understand similarities and differences between 2 sets of economic
phenomena.
2. Verifiability = It should help assure users that information faithful
represents the economic phenomena it purposed to represent.
3. Timeliness = it should be available in time to be capable of influencing
the decision making.
4. Understandability = classifying, characterizing and presenting
information clearly and concisely makes it understandable and as such
also more relevant.
Reporting information imposes costs, and those costs should be justified
by the benefits of reporting that information.
What about prudence?
= The exercise of caution when making judgements under conditions of
uncertainty:
‘asymmetric prudence’ Need for systematic asymmetry: losses are
recognised at an earlier stage than gains are.
‘cautious prudence’ Need to be cautious when making judgements
under conditions of uncertainty, but without needing to be more
cautious in judgements relating to gains and assets than those relating
to losses and liabilities.
- Assets and income are not overstated
- Liabilities and income are not understated
Going concern assumption
IFRS financial statements are prepared under the assumption that the
entity is going concern (i.e., will continue to operate for the foreseeable
future).
