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IFRS Technical Update
The Revised Conceptual Framework: A Practical Guide or a Strict Constitution
By KC Rottok Chesaina
IASeminars Faculty Member
The Oxford dictionary defines a constitution as “a body of fundamental principles or established precedents to which a state or other organisation is acknowledged to be governed”. Most countries are governed by a constitution and the general principle is that no laws passed will contradict that constitution.
Many accountants have long thought of the Conceptual Framework (“the Framework”) similarly in relation to International Financial Reporting Standards (IFRS), with the Framework as the constitution and the standards and interpretations as the subsequently enacted laws.
Yet scholars have identified areas where these conflict with the Framework’s definitions and principles. For instance, IAS 17, the standard on leases, requires that operating leases must not be recognised on the lessee’s balance sheet despite the fact that the lease creates assets and liabilities which meet both the Framework’s definitions of assets and liabilities and its recognition criteria. Because the Framework is not itself a standard and does not override the requirements of the standards, IFRS 16, which has been developed to replace IAS 17 from 2019, will correct this inconsistency.
The Framework was originally published in 1989 and partly revised in 2010. In March 2018 the International Accounting Standards Board (IASB/The Board) published a comprehensively improved Framework. The updated version clarifies some issues, updates definitions and recognition criteria, and introduces new concepts on derecognition, measurement and presentation and disclosure.
The question in many minds lingers as to whether the status of the revised Framework has been elevated to constitutional levels as a result. This was discussed in a webinar delivered by the IFRS Foundation in April 2018.
Board member Francoise Flores remarked: “Stakeholders expressed different views when the Framework was being revised. Some wanted it to be a highly aspirational document setting out an ideal vision of financial reporting. In their view, the Board would aim for these ideal standards but may not always meet these ideals. Others wanted the Framework to be a constitutional document that would bind everyone to its requirements.”
The Board chose the latter, more practical, option. The Framework’s purpose, as stated in its introduction, 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”.
The Board acknowledges that there may be instances where it may need to depart from the Framework in the development of new or improved standards. Conceptual thinking or the economic environment may change, and the Board may need to develop new standards to reflect these changes without necessarily amending the Framework beforehand. It follows therefore that the revised Framework does not result in immediate changes to accounting standards. It is still not considered to be a standard itself and does not override the requirements of the standards.
The improved Framework is primarily designed for the IASB and the IFRS Interpretations Committee and, for them, is effective immediately.
The Framework may also impact on preparers of financial statements who need to develop accounting policies in the absence of applicable accounting standards. This would rarely happen, given that the standards have extensive coverage of the recognition and measurement of the elements of financial statements. The need to develop policies outside of IFRS is only likely to happen in specialised industries or unusual circumstances. For preparers, the revised Framework is effective for annual periods beginning on or after 1 January 2020.
In a nutshell, the revised Conceptual Framework addresses three key issues:
- It discusses the objective of financial reporting which is to provide information to users that is useful in decision making. To make decisions, users assess the prospects for future net cash inflows to the entity and management’s stewardship of the entity’s economic resources. To make these assessments, they need information about an entities resources and claims and how management has discharged its responsibilities.
- The document outlines the fundamental qualitative characteristics of financial statements as relevance and faithful representation. Information is relevant if it is capable of making a difference in the decisions made by users. In addition, it must faithfully represent the substance of what it purports to represent. There are other enhancing characteristics to consider namely comparability, timeliness, verifiability and understandability.
- The Framework defines assets, liabilities, equity, income and expenses and stipulates when they should be recognised. One of the main improvements in the revised Conceptual Framework is that it filled in gaps identified in outlining measurement, presentation and disclosure principles including guidance on the use of profit or loss and other comprehensive income.
It is worth pointing out that the Board also issued Amendments to References to the Conceptual Framework in IFRS Standards. Several standards make reference and include quotations relating to the Conceptual Framework and therefore this Amendments document is necessary to clarify which version of the Framework the Standards are referring to. The document is effective for annual periods beginning on or after 1 January 2020.
The Webinar introducing the revised Conceptual Framework for Financial Reporting conducted by the IFRS Foundation is available on the ifrs.org website.
Featured author, KC Rottok Chesaina regularly teaches for IASeminars, and you will see him in classrooms in London and Cape Town later this year! For full details of our IFRS programme for the year, please visit our website - or contact our Customer Services Team.
As well as teaching IFRS, KC offers consulting services to customers of IASeminars. His comprehensive experience in the accounting world positions him well to provide advisory services for those seeking advice.
If you have a requirement for IFRS consulting services, contact our Customer Services Team today, and we will connect you with KC!
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