Exploring the IFRS Framework | CFA Level I FSA

Today, we’re diving into the IFRS framework, which outlines the principles on which the IASB establishes its standards and the requirements for financial statements.

Conceptual Framework for Financial Reporting

Adopted in 2010, the “Conceptual Framework for Financial Reporting” is designed to help:

• Standard setters develop and review standards,
• Preparers apply standards and handle issues not specifically covered,
• Auditors form opinions on financial statements, and
• Users interpret financial statement information.

Core Objective: Providing Useful Information

The central objective is to provide financial information that is useful in making decisions about providing resources to an entity. This information includes the entity’s financial position, financial performance, and cash flow.

What Constitutes Useful Information?

Information is useful if it is relevant (has predictive or confirmatory value) and faithfully represented (complete, neutral, and free from error). There are four characteristics that enhance usefulness:

1. Comparability – consistent presentation among firms and across time periods,
2. Verifiability – independent observers can reach similar conclusions,
3. Timeliness – available before becoming stale, and
4. Understandability – users with basic knowledge can comprehend the information.

Reporting Elements

The framework outlines the essential reporting elements, such as assets, liabilities, equity, income, and expenses.

Recognition and Measurement

An item should be recognized in the balance sheet or income statement if a future economic benefit is probable, and its value or cost can be measured reliably. The measurement bases include historical cost, amortized cost, current cost, realizable value, present value, and fair value.

Underlying Assumptions

Two key assumptions of financial statements are accrual accounting and going concern. Accrual accounting reflects transactions when they occur, while going concern assumes the company will continue to exist for the foreseeable future.

Constraints and Trade-offs

Optimal financial statements balance costs and benefits. Constraints include the cost of providing information and the inability to directly capture non-quantifiable information like reputation and brand loyalty.

International Accounting Standard Number 1 (IAS 1)

IAS 1 defines the required financial statements, their general features, and their structure and content.

Required Financial Statements

1. Statement of financial position (balance sheet),
2. Statement of comprehensive income,
3. Statement of changes in owners’ equity,
4. Statement of cash flows, and
5. Explanatory notes, including a summary of accounting policies.

General Features for Preparing Financial Statements

These include fair presentation, going concern basis, accrual basis of accounting, materiality, aggregation of similar items and separation of dissimilar items, no offsetting of assets against liabilities or income against expenses, reporting frequency of at least annually, and consistency between periods in presentation and classification.

Structure and Content of Financial Statements

The main aspects of financial statement structure and content include:

1. Classified balance sheet showing current and non-current assets and liabilities for most entities,
2. Minimum information required on the face of each financial statement (e.g., cash and cash equivalents, plant, property and equipment, inventories),
3. Minimum specified note disclosures in a systematic manner and cross-referenced from the face of the financial statements, and
4. Comparative information for prior periods, unless a specific standard states otherwise.