IASC Conceptual Framework for Financial Reporting

Conceptual Framework for Financial Reporting

Although such statements may appear similar from one country to another, there are differences probably caused by a variety of social, economic, and legal factors.

The International Accounting Standards Committee (IASC) is committed to narrowing these differences by seeking harmony between the regulations, accounting standards, and procedures for the preparation and submission of financial statements.

Key Points of the Framework

The Framework addresses the following points:

• (a) The objective of financial statements;
• (b) The qualitative characteristics that determine the usefulness of the information in the financial statements;
• (c) The definition, recognition, and measurement of the elements of financial statements; and
• (d) Concepts of capital and capital maintenance.

Preparation and Assumptions

To meet its objectives, the financial statements are prepared on the basis of earning or accrual accounting. The financial statements are normally prepared on the assumption that an entity is a going concern, meaning it is in operation and will remain active for the foreseeable future.

Qualitative Characteristics

Qualitative characteristics are the attributes that make the information provided in the financial statements useful for users. The four principal qualitative characteristics are:

• Understandability
• Relevance
• Reliability
• Comparability

Elements of Financial Statements

The elements directly related to the measurement of financial position are assets, liabilities, and net worth.

• Assets: A resource controlled by the entity as a result of past events.
• Liability: A present obligation of the entity that arises from past events, the settlement of which is intended to cancel it.
• Equity: The residual assets of the entity after deducting all its liabilities.
• Income: Increases in economic benefits during the accounting period in the form of inflows or increases in the value of assets.
• Expenses: Decreases in economic benefits during the accounting period in the form of outflows or depletions of the value of assets.

Measurement and Capital Maintenance

Measurement is the process of determining the monetary amounts at which the elements of financial statements are recognized and accounted for inclusion in the balance sheet and income statement.

The concept of capital maintenance is concerned with how an entity defines the capital that it wants to keep. It provides the linkage between the concepts of capital and the concept of profit because it provides the benchmark for measuring such an outcome, which is a prerequisite to distinguish between what is return on equity and what is capital recovery.