Chapter 2

Purpose of the Conceptual Framework:

• Assist IASB in development and revision of accounting standards

• assist users in application of IFRS (interpretation of guidance)

• Restrict IASB’s judgment

• Protect IASB against political pressure from constituents

• Ensure consistency of accounting standards

Three Levels:

• first level = Basic objective

• second level = qualitivie characteristics and elements of financial satements

• third level = recognition, measurement and disclosure concepts

• provide financial information about company to existing and potential investors, lenders and other creditors in making decision about investing

Decisions:

• buying, selling holding equity and debt instriuments

• exercising voting rights influencing managments actions

Useful information:

• helps to estimate the value of the reporting entity

• helps in assesment of prospects for future net cash inflows (amount. timing and certainty)

• helps in assesment of management’s stewardship of the entity’s economics resources

Coneptual dominance of assets-liabilities- approach:

• Primacy is given to assets and liabilities

• Definition and recognition of income statment elements is a directs consequence of change in assets and liabilites

• Approximation of entity value in the balance sheet

• Measurment at net present value (discounted future cash flows)/ fair vale (market price)

Remaining elemts of revenue-expense-apporach in older standards:

• profit (changes in assets and liabilities) as an indicator of an entity’s perfomance and logn-term earnings power

• realization pricinple and matching principle

• Recognition of (deffered) items in the balance sheet taht do not represent resources or obligations:

  • recognitions of a claim towards the customer during construction even thoiught claim only arises when finished (IFRS 15)

  • recongitnion of government grants as liability and systimatic allocation over accounting periods even though no obligation exists (IAS 20)

Relevance:

• Predective value

• confirmatory value

Use:

• prediction of futre outcomes

• provides feedback about previous evaluations

Faithful Representation:

• completness

• neutrality

• free from error

information must faithfully represent the relevant economic phenomena

Enhancing qualities:

• comparability

• verifiability

• timeliness

• understandability

• economic resource = right with potential to produce economic benefits

• control

• as a result of past events

previous recognition principles:

• Porbability of future economic benefit

• reliable measurement of cost value of the element

new recognition principles:

• Relevance

• faithful representation

• benefits exceed costs

previous measurent principles:

• historical cost: acquisition or production costs

• fair value: price that would be received to sell asset

• NPV: present discounted value of futre net cash inflow

IAS 2 (Invesntories): lower of historical cost and net reliazable value

IAS 40 (Investment Properties): historical cost or fair value

IAS 41 (Agriculture): fair value

new measurment principles:

• measurment basis must reflect the nature of the information that the measurment basis will produce

• selct measurment basis that provides most useful information, i.e. must meet qualitative characteristics

• Histrical cost

• current value

  • fair value

  • vlaue in use/ fulfilment value

  • current cost