The International Accounting Standards Board (IASB) has revised its Conceptual Framework for Financial Reporting that underpins IFRS Standards.
The Conceptual Framework sets out the fundamental concepts of financial reporting that guide the IASB in developing IFRS Standards. The framework is in place so the IFRSs are conceptually consistent and that similar transactions are treated the same way.
It aims to assist companies in developing accounting policies when no IFRS Standard applies to a particular transaction and it helps stakeholders to understand the IFRSs better.
The definitions of asset and liability have been refined for the purpose of clarity which has therefore led to income and expense to be redefined to reflect this change.
Asset has been clarified and is now defined as the economic resource and not the succeeding inflow of economic benefits.
Liability has been clarified so it is clear it is the obligation to transfer the economic resource and not the ultimate outflow of economic benefits.
The IASB stated in its Conceptual Framework Project Summary that this is due to make the recognition of assets more comprehensive as opposed to an increase in volume of the assets recognised. This is to give a better summary of an entity’s financial situation.
Other revisions to the Conceptual Framework include: a new chapter on measurement; guidance on reporting financial performance; and clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.
Amendments have been made to certain IFRSs which explicitly referenced the previous Conceptual Framework so that they now reference the revised Framework. These changes are not likely to have a significant impact on the IFRSs affected.
There are a few exceptions to this when the updated Conceptual Framework would affect IFRSs significantly. When following IFRS 3, Business Combinations, acquirers will be required to refer to the definitions of asset and a liability of the previous Conceptual Framework.
The updated Conceptual Framework will also not currently alter development of accounting policies for regulatory account balances applying IAS 8 Accounting Policies, Changing in Accounting Estimates and Errors to avoid entities revising those accounting policies twice within a short period of time.
The IASB will start using the revised Conceptual Framework immediately, whereas companies will use it from 2020.
By Joe Pickard