Conceptual Framework for Financial Reporting 2018 (IFRS Framework)

Conceptual Framework for Financial Reporting 2018 (IFRS Framework)



hi and welcome to today's video in which I sum up the very basic document in IFRS conceptual framework as issued in 2018 I'm Sylvia of IFRS Bolcom that place to be if you want to understand and apply IFRS easily I have created the IFRS kit a comprehensive offers learning platform for you plus lots of free materials so you're welcome to check them out at IFRS box.com well in 1989 the framework for the preparation and presentation of the financial statements was issued but then International Accounting Standards Board made amendments to it and the new although unfinished framework was issued in September 2010 with a new name the conceptual framework for financial reporting and it stayed in progress for many years and then in March 2018 the final version was issued with everything completed so let's take a look well the new framework has eight chapters in total and here's the list and we will take a closer view at each chapter so the first one is about the objective of general purpose financial reporting which is to provide financial information about the reporting entity that is useful to existing at potential investors lenders and other creditors to make various decisions for example about trading with equity and debt instruments providing loans and so on so what financial information shall be reported in the general purpose reports well note that we are not talking about the financial statements yet because they are subject to chapter 3 so the entity shall present the information about its economic resources and claims which is basically a financial position then changes in economic resources and claims resulting from entity's financial performance and from other events while financial performance shall be reflected by the accrual accounting so in the periods when the effects of the transactions occur regardless the related cash flows however information about past cash flows is very important to assess management's ability to generate future cash flows to discusses qualitative characteristics of the financial information so that the information is really useful for its users and there are two types of characteristics fundamental and enhancing the first fundamental characteristic is relevance so relevant financial information is capable of making a difference in the decisions made by the users and here the concept of materiality applies so the material information should not be omitted and the second fundamental characteristics is faithful representation in financial information must not only be relevant but must faithfully represent what it is to represent so therefore it must be complete neutral and free from error and financial information shall have both fundamental characteristics enhancing characteristics are comparability so information should be comparable between different entities or time periods that verifiability independent and knowledgeable observers are able to verify the information timeliness information is available in time to influence the decisions of users and understandability so the information shall be classified presented clearly and concisely and enhancing characteristics shall be applied to the maximum possible extent chapter 3 is about the financial statements and reporting entity so here we are focusing on the financial statements not just the reporting itself so the relevant information is provided in the statement of financial position by recognizing assets liabilities and equity in the statement of financial performance by recognizing income and expenses and in other statements where you show the information about recognized and unrecognized assets and other elements of the financial statements cash flows contributions from and distributions to shareholders assumptions methods used judgments apply estimates and other relevant information financial reports are always prepared for a specified period of time or the reporting period and going concern assumption applies while it means that an entity will continue its operations in the foreseeable future and will not liquidate or materially curtail operations well if you're not going concern then you should report under different basis and you can check out ifs Bolcom I have one Q&A session where I answer specifically how to report when you're not going concern okay then chapter 3 speaks about the concept of a reporting entity and that is an entity that must or chooses to prepare financial statements and this entity can be single entity one company or even a portion of an entity for example some division of one company or more than one entities for example parent and its subsidiary as a result we have few types of financial statements consolidated where parent and subsidiary provide information as a single reporting entity unconsolable where parent alone provides the financial information and even combined financial statements of reporting entity comprises two or more entities not linked by parent-subsidiary relationship chapter 4 is about elements of the financial statements and they can relate to the financial position here we have assets liabilities and equity and an arrow elements relate to financial performance and these are income and expenses and then the framework defines each element and provides examples it is very extensive chapter full of details and lies good foundation to build upon so if you'd like to learn more about it and please check out AI far as voxcom chapter 5 is about recognition and de recognition recognition means inclusion of an element into financial statements when it means the definition and it links the elements in the statement of financial position and the statement of financial performance as follows well in the statement of financial position at the beginning and at the end of the reporting period assets minus liabilities equal equity and we have also income minus expenses recognized in the statement of financial performance and contributions from and distributions to holders of equity and these two items are recognized changes during the period dereck ignition is the removal of all or part of recognized as an or liability from entities statement of financial position and framework sets the number of criteria for both recognition and recognition chapter six talks about the measurement so while recognition means when or whether to recognize measurement means in what amounts to recognize more specifically the selection of measurement basis while which is a way of measuring monetary amount for elements of financial statements and the framework discusses two basic measurement basis which is historical cost that's basically the transaction price at the time of recognition of the element and the second one is current value which measures the element updated to reflect the conditions at measurement date and here it includes fair value value in use and current cost framework then discusses many factors to consider when you're selecting the appropriate measurement basis and the most important is to make sure that the financial information is relevant and provides faithful representation of the financial performance and position or but there are also factors specific to initial recognition enhancing characteristics and error that are discussed by the framework in a detail Chapter seven is about the presentation and disclosure so presentation and disclosure are communication tools and in order to make the communication effective it requires focusing on presentation and disclosure objectives and principles not the rules and then classifying the information so that similar items are grouped and dissimilar ones separated and here the framework speaks about offsetting classification of equity income and expenses and other items and finally aggregating information but need to prevent too many unnecessary details and also the opposite extreme over aggregation and then all these concepts are discussed in detail finally chapter number 8 is about concepts of capital and capital maintenance and is essentially copied from previous version of framework so nothing new here while framework explains two concepts of capital financial capital is synonymous with a net assets of equity of the entity and under the financial capital maintenance concept the profit is earned only when a amount of net assets at the end of the period is greater than the amount of net assets in the beginning after excluding contributions and distributions with equity holders and this financial capital maintenance can be measured here in some nominal monetary units or units of constant purchasing power physical capital is regarded as the productive capacity of the entity based on for example units of output per day and here the profit is earned way if physical productive capacity increases during the period of course after excluding the movements with equity holders and a main difference between these concepts is how the entity treats the effect of changes in prices of assets and liabilities so that was the short summary of the new conceptual framework as issued in 2018 and if you need to learn more you're very welcome to check our first box com thanks for watching

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