IFRS Framework Notes

IFRS Framework

Introduction

  • The IFRS Framework describes the objective and basic qualitative concepts underlying IFRS financial statements.
  • It serves as the primary source for preparers or auditors seeking a standard or interpretation.
  • The Framework is NOT an IASB standard or a principle to be applied.
Purpose and Status
  • The framework is produced at least annually.
  • It's intended for a wide range of external users who rely on financial statements to meet their information needs.
General Purpose Financial Statements/Reports
  • Primary users: Investors, lenders, suppliers, and trade creditors.
  • Secondary users: Employees, customers, governments and their agencies, and the general public.
  • Information needs: Forecasting economic decisions and some non-financial information.

Responsibility and Objectives of Financial Statements

  • Primary responsibility rests with management.
  • The objective is to provide information about the entity's financial position, changes in it, and performance.
  • Information should be useful to users primarily for economic decision-making and secondarily for recording past stewardship (decision usefulness).

Underlying Assumptions of the Framework

  1. Accrual Basis of Accounting
    • The Framework recognizes when events occur, not when cash changes hands.
  2. Going Concern
    • The Framework assumes cash flow from operations, not from liquidation sales.

Qualitative Characteristics in the Framework

  • The Framework identifies four principal qualitative characteristics of financial statements:
    • Understandability
    • Relevance
    • Reliability
    • Comparability
Understandability
  • Involves assuming reasonable business/economic/accounting knowledge and diligent study of the information.
Relevance

  • Includes components of materiality and timeliness.

    • Materiality
      • Information is material if its omission or misstatements could influence the economic decisions of users.
      • Immaterial information lacks relevance.
      • Several IFRSs contain specific guidance on materiality.
      • There is no overall quantifiable measure.
    • Timeliness
      • Information must be provided to users within the timeframe in which it is most likely to bear on their decisions.
Reliability
  • Includes:
    • Faithful Representation
      • It is important to represent accurately the transaction.
    • Substance over Form
      • Transactions should reflect the economic substance rather than the legal form (e.g., finance leases).
    • Neutrality
      • Information must be decision-neutral.
Reliability (cont.)
  • Includes:
    • Prudence
      • Involves incorporating a degree of caution to ensure:
        • Assets and revenue are not overstated.
        • Liabilities and expenses are not understated.
    • Completeness
    • Benefit/Cost Balance
      • The benefit of providing the information should exceed the cost of providing the information.
Comparability
  • Includes comparability over:
    • Time
    • Different entities
Relevance vs. Reliability
  • The two are often traded off; yet
  • Each is equally as important as the overriding priority when preparing financial statements.
  • True and fair view.

Format of Financial Statements

  • Balance Sheet: Summarizes financial position
  • Income Statement: Summarizes financial performance
  • Statement of Changes in Equity
  • Cash Flow Statement
  • Notes & supplementary schedule
Balance Sheet: Financial Position
  • Addresses assets owned, amounts owed, residual equity interests in net assets.
  • Is affected by resources controlled, financial structure, liquidity/solvency, and adaptability.
Income Statement: Financial Performance
  • Summarizes the entity's ability to earn a profit on the resources invested in it.
  • Helps forecasting cash flows.
Statement of Changes in Equity
  • Includes income/expenses reported directly in equity including:
    • Fair value changes in for-sale assets
    • Assets remeasured to fair value now reported in 'revaluation reserve'
    • Foreign currency translation adjustments
Cash Flow Statement
  • Summarizes financial position changes involving cash (and cash equivalents) flowing through its:
    • operations
    • investments
    • financing

The Elements of Financial Statements

  • Assets: Controlled resources, as a result of past events, expected to reap future economic benefits.
  • Liabilities: A present obligation, resulting from past events, requiring resources to settle.
  • Equity: The residual interest in assets minus liabilities.
  • Income: Increases in economic benefits from inflows, asset enhancements, or decreased liabilities.
  • Expenses: Decreases in economic benefits from outflows, asset depletions, or increased liabilities.
  • Capital Maintenance Adjustments: Revaluation/restatement of assets and liabilities gives rise to increases/decreases in equity.

Recognition of the Elements of Financial Statements

  • Recognition is the process of incorporating into the financial statement an asset, liability, income, or expense that has:
    • probable economic benefits, and
    • measurement reliability
  • Special recognition criteria for revenue from:
    • the sale of goods
    • the rendering of services
    • interest, royalties, and dividends

Measurement of the Elements of Financial Statements

  • Measurement involves assigning monetary amounts where elements are recognized and reported.
  • Measurement bases include:
    • historical cost
    • current replacement cost
    • net realizable value
    • present value
Other Measurement Bases (Outside the Framework)
  • IAS 16.30: carrying value (cost less accumulated depreciation)
  • IAS 2.6: net realizable value
  • IAS 36.6 / IFRS 5.15: fair value less cost to sell
  • IAS 36.6: value in use
  • IAS 36.6 / IAS 16.6: recoverable amount
  • IAS 32.11: fair value