Corporate Financial Accounting Vs Other Disciplines – Numbing the nuances 3

The conceptual framework is a set of principles and theories that serves as the brain box to be used in specific standards by national certain bodies all over the world. It helps prevent the possibility of presenting half-hazard and inconsistent accounting standards by different standard setters. The International Accounting Standards Board issued the latest version of the conceptual framework in 2010.

The conceptual framework consists of different chapters, as listed below;

1. The objective of financial reporting,
2. Underlying Assumption,
3. The qualitative characteristics of financial information,
4. The elements of financial reporting,
5. Recognition and derecognition principles,
6. Measurement bases and
7. The concept of capital maintenance

The Objective Of Financial Reporting

The objective of financial reporting is to provide enough information to existing and potential investors, lenders and other stakeholders from which they can make informed decisions about providing resources (funds or other support needs) to the entity. Users which this objective could assist in making decisions are creditors, bankers, shareholders, government agencies, trade unions, etc.

The qualitative characteristics of financial information

The framework identifies the required characteristics of the type of financial information used. It classifies them into Fundamental and Enhancing characteristics. The Fundamental characteristic is made up of the Relevance and Faithful Representation concept, while the Enhancing characteristic is made up of Verifiability, Understandability, Timeliness and Comparability.

The Relevance concept refers to the ability of the information to be useful for users to make informed decisions. In other words, information is irrelevant if it has no material impact or value. The Relevant information has two main characteristics, predictive and confirmatory value. Predictive value enables users to evaluate or assess past, present, or future events, while Confirmatory value helps users to confirm or correct past evaluations and assessments. Where choices have to be made between mutually-exclusive options, the option selected should be the one that results in the maximum relevance of information– in other words, the one that would be most useful in taking economic decisions.

The Relevance concept leads us to the issue of Materiality of financial information. The handbook opines that “Information is material if its omission or misstatement could influence the economic decisions of users taken based on the financial statements” IFRS Framework. We should also take note the concept of Materiality as it applies to Relevance is entity-specific; what might be material to entity A might not be for entity B.

Faithful representation on the other hand, refers to transactions being presented in their proper form of substance and economic reality rather than just being a legal distinction. The qualities of information being faithfully represented are 1. Completeness, 2. Neutrality, 3. Free from error.

I would need to explain the basis of the framework before continuing with the Enhancing characteristics. The underlying assumption of the framework recognizes that most of the financial information to hold an entity must see itself has been in continuous existence for the foreseeable future, which is termed the Going concern assumption. Simply put, the entity doesn’t exist today with a mindset of shutting down tomorrow.

Till next time, happy reading