CPA Financial Reporting: Conceptual Framework Changes and Implications

This report examines the 2018 revised Conceptual Framework for Financial Reporting prescribed by the International Accounting Standards Board (IASB). It delves into the framework's objectives, which include assisting the IASB in developing consistent International Financial Reporting Standards (IFRS) and aiding stakeholders in understanding and interpreting these standards. The report discusses key changes, such as the redefined elements of financial statements (assets, liabilities, equity, income, and expenses), and improvements in qualitative characteristics like relevance and faithful representation. It highlights implications on financial reporting, including the recognition, measurement, presentation, and disclosure of financial information. The analysis also covers benefits for users of financial statements, such as enhanced decision-making capabilities. The report emphasizes the importance of stewardship, prudence, and measurement uncertainty within the revised framework. The content includes an introduction, discussion of the objective of General Purpose Financial Reporting (GPFR), rationale for the changes, qualitative characteristics, nature of the changes, implications of the changes, and benefits for users of financial statements, all contributing to a comprehensive overview of the revised conceptual framework.

CPA Financial Reporting
The Conceptual Framework – Changes, Implications and Perceived Benefits
Lecturer:
Group members:
March 2019

CPA Financial Reporting
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................4
Objective of GPFR.....................................................................................................................4
The rationale for changes in the Conceptual Framework..................................................5
Qualitative Characteristics.........................................................................................................5
Relevance...........................................................................................................................5
Faithful representation.......................................................................................................6
Nature of Changes in Conceptual Framework...........................................................................6
Financial Reporting....................................................................................................................6
Objective and scope of financial statements......................................................................6
Elements of Financial Statement................................................................................................7
Asset...................................................................................................................................7
Liability..............................................................................................................................7
Equity.................................................................................................................................8
Income................................................................................................................................8
Expense..............................................................................................................................8
Recognition of the elements of financial statements..........................................................9
Measurement....................................................................................................................10
Presentation and Disclosure.....................................................................................................11
Classification....................................................................................................................10
The Implications of the Changes on Reported Profit and Loss.......................................10
Benefits for Users of Financial Statements......................................................................10
Conclusion................................................................................................................................15
Reference..................................................................................................................................16
1

CPA Financial Reporting
Introduction
Recently the International Accounting Standards Board (IASB) in 2018 prescribed the
revised Conceptual Framework for Financial Reporting'. The revised framework defined the
different elements of a balance sheet. The amendment guided with a new way of
measurement, presentation, recognition including the disclosure. The amendment covered
what had previously not been covered. The main purpose of the framework is to provide
assistance to IASB in order to revise the International Financial Reporting Standards as these
are based on the consistent concepts. The amendment would help in providing consistency in
the polices of accounting. This would provide assistance to the user of the financial report in
interpreting the right meaning of the standard, in case there is no application of the Standard
or other criteria that is applicable to a particular transaction. It is the duty of the management
to apply the applicable standard so that the information available becomes reliable as well as
relevant. The amendment of the Conceptual framework covers eight specific parts that will be
discussed in the later part of this essay.
2

CPA Financial Reporting
Discussion
Objective of GPFR
The prime objective of GPFR is still helpful to the capable investors and borrowers as
well as other creditors termed as users at the time of decision framing so that an entity can be
financed by means of holding the debt instrument or equity. The affect is seen in the
resources of the entity. The amendment in this area has enabled the user to assesses the
stewardship of the economic resources that are under the control of an entity. IASB pointed
out that the stewardship prevailed earlier too but due to the ambiguous relevance made it
ruled out from the objective. The base of assessment of users for their returns rely on the
timing, figure, uncertainty that prevails in regard to net cash flow of the entity in the
upcoming period.
The Rationale for the changes in the Conceptual Framework
The Board considers the Conceptual Framework as an instrument to assist it develop
Standards. Therefore, the Conceptual Framework contains concepts that aid the Board to
develop standards and discuss the factors the Board needs to deliberate on when making
judgements, especially when applying the concept does not lead to a single solution. The
Board posit the following as the main rationale for the recent revision of the Conceptual
Framework for financial reporting:
1. To assist the Board to develop IFRS Standards with consistent concepts, producing
financial information that is useful to investors, lenders and other creditors
2. To assist preparers of an entity’s financial reports to use consistent accounting policies
for transactions when no Standard applies.
3. To assist all stakeholders to understand and interpret Standards.
3

CPA Financial Reporting
A quote from Hans Hoogervorst, the Chair of IASB on the day the revised framework
was released summarises the rationale for the revision as “The revised Conceptual
Framework will greatly assist the Board when developing IFRS Standards. It will also
help other stakeholders to better understand the concepts that underpin the Standards.”
(Source: https://www.ifrs.org/news-and-events/2018/03/iasb-completes-revisions-to-its-
conceptual-framework/)
Qualitative Characteristics
The information is useful and relevant for the users is highlighted in this area, though
the amendments in 2010 did not flawlessly clear the ambiguity. In the recent amendments the
Board has tried to bring transparency in the concepts related to prudence, that requires reports
not to overestimate the sum of revenues identified or underestimate the expenditure. The
principles of prudence require the individuals to be conservative in recording the sum of
assets and not to underestimate the liabilities. The principles require the result to be stated
conservatively in the financial statement. (Bohušová 2014).
• Prudence - the Board detected, throughout its outreach procedure, that managers recognise
‘prudence’ to mean unlike belongings, and the elimination of the perception after the 2010
Conceptual Framework had led to additional misperception between managers. The Board
have faith that prudence backs up impartiality of evidence and so defines prudence as ‘the
exercise of carefulness when creating decisions below the circumstances of uncertainty’.
• Measurement uncertainty – in the reviewed Conceptual Framework, the Board recognised
that ‘dimension uncertainty’ is an issue that can interrupt true and fair view.
Relevance
Relevance is regarded as the concept where the information is produced from the
accounting system and aims to create an impact on the decision making procedure. Financial
material is proficient of manufacturing a variance in choices if it has faithful and relevance
4

CPA Financial Reporting
representation. Relevance and faithful representation are regarded as two fundamental
qualities which makes the accounting information useful for decision making purpose.
Faithful representation
Faithful representation can be defined as the concept in financial statement that
accurately provides the true and fair reflection of the business conditions. The faithful
representation requires the transaction in accounting and events to be recorded in a way that
provides a correct reflection of economic substances (Bohušová 2014).
Comparability, verifiability, timeliness and understand ability are qualitative
characteristics that improve the helpfulness of evidence that is applicable and authentically
signified.
Nature of Changes in Conceptual Framework
There have been significant changes made in the Conceptual Framework by the IASB
during 2018 which is mainly because certain aspects were not appropriately covered in the
previous framework. Some of the major changes which have been brought about by the
Board are related to the measurements which provide financial information. In addition to
this, definitions for assets and liabilities of the business also changed due to the amendment
which was made by IASB. The amendment also clearly provided for clarifications in
important areas, such as the roles of stewardship, prudence and measurement uncertainty in
financial reporting.
The amendments which are brought about by IASB aims at improving the overall
reporting structure which is used for the management of the company. It is anticipated that
the new amendment would enhance the quality of the reporting framework and would
provide better quality of financial reports to the users of the financial statements.
5

CPA Financial Reporting
Financial Reporting
Objective and scope of financial statements
The objective of financial statements is to deliver data about an organization’s assets,
liabilities, equity, income, as well as expenses, that are used in financial statements. These
monetary statements are used by managers in evaluating the predictions for upcoming net
cash inflows to the unit and in evaluating an organisation's stewardship of the unit's capital.
This data is given in the declaration of monetary situation and the declaration(s) of monetary
outcome as well as in other declarations and transcripts.
Elements of Financial Statement
Asset
The Conceptual Framework’s definition of an asset: A resource controlled by the
entity as a result of past events and from which economic benefits are expected to flow to the
entity.
The assets are reported into the balance sheet of the company which increases the
value of the company and provide benefit to the operation of an organization.
Liability
The Conceptual Framework’s definition of a liability: A present obligation of the
entity arising from past events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
Liability can be defined as the organization’s legal financial debts or obligations that
originates during the ordinary course of business. the liabilities require the compulsory
transfer of the assets or the provision of services at the particular date or in the determinative
future. (Gebhardt, Mora and Wagenhofer 2014). To leave this or delete?
6

CPA Financial Reporting
The chief alteration to the Conceptual Framework is that the new definition explains
that a liability is the responsibility to handover a financial resource, additionally it is not the
decisive discharge of monetary reimbursements. The discharge also has no extended
requirements to be ‘expected’, comparable to the alteration in the description of an asset or
overhead. The Board too presented the perception of ‘no everyday capability to avoid’ to the
description of a responsibility, and influences used to evaluate this will be determined by the
environment of a unit’s responsibility or accountability, which needs the usage of verdict.
Equity
The Conceptual Framework’s definition of an equity: The residual interest in the
assets of the entity after deducting all its liabilities.
The concept of equity refers to the shareholder’s equity that comprises of the amount
of money that would be returned to the shareholders of the company when all the assets of
the company are liquidated and all the debts of the company are paid off. Equity is noticed in
the balance sheet and it is regarded as the most common financial metrics that are used to
assess the financial health of the company.
Income
The Conceptual Framework’s definition of an income: Increases in economic benefits during
the accounting period in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to contributions from
equity participants.
Income can be defined as revenue that is earned by a business from the sale of goods
and services or the money that is receive by an individual as the compensation for their labor.
In other words, income refers to total revenues in the accounting period after deducting all the
expenditure for the equivalent period. To leave this paragraph or to delete it?
7

CPA Financial Reporting
Expense
The Conceptual Framework’s definition of an expense: decreases in economic
benefits during the accounting period in the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in equity other than those relating to
distributions to equity participants.
Expenses can be defined as the costs which are matched with the revenues on the
income statement. An expense in the accounts refers to the money that is spent or the costs
incurred in the organisations effort to produce revenue. To leave this or no?
The explanation of income incorporates equally revenue as well as gains. Revenue
rises in the development of the normal actions of a unit. In addition it is mentioned to be a
variability of dissimilar designations together with auctions, dues, interest, bonuses, royalties
as well as rent payment. Gains characterize additional substances that come across the
description of proceeds and might or might not rise in the development of the normal events
of a unit.
The definition of expenditures includes expenditure that has occurred during the
accounting period and those expenditures that arise in the development of the everyday
actions of the unit. Expenditures that arise in the development of the regular actions of the
unit comprise, for instance, cost of auctions, salaries, as well as devaluation. They regularly
take the procedure of a discharge or reduction of assets such as cash and cash equivalents,
PPE, inventory (Gebhardt, Mora and Wagenhofer 2014). Damages characterise other
substances that meet the definition of expenditures and might or might not, go down in the
development of the regular actions of the unit. Damages characterise declines in economic
reimbursements as such they are not diverse in nature from other expenditures.
Henceforward, they are not observed as a discrete component.
8

CPA Financial Reporting
The above definitions show that significant changes have been brought about in the
definition of the terms such as assets, liabilities, revenue and expenses of the business. This
shows that the concepts of certain terms are changed so that a clear meaning of the terms can
be established by the businesses while they are reporting. The users of the financial
statements also need to have appropriate knowledge for the changes which have been made in
the new conceptual framework. As there is change in the definition of assets, the reports
which are prepared would now be more transparent considering the treatment of the assets of
the business. Similarly, the reporting for the liabilities would also be impacted as there has
been amendments in this definition as well. The definition makes it clear that liabilities create
an obligation over the businesses which they cannot avoid and therefore needs to be reported
appropriately in the financial statements of the business.
Recognition of the elements of financial statements
To recognize an item, the item should fulfil the definition of an element that is provided
under the Conceptual Framework and meet the below stated criteria;
a. It is possible that any kind of future economic benefit related to the item would flow
in or flow from the company;
b. It is also including the cost or the value of the item that can be recognized with
reliability.
As per the above mentioned criteria
An asset is acknowledged in the balance sheet as soon as it is likely that the upcoming
monetary reimbursements would flow to the unit and the asset has a price or worth that could
be restrained consistently.
A liability can be recorded in the balance sheet when it becomes probable that the
outflow of resources signifies the economic benefits which would result from the settlement
of current obligations and the settlement amount can be measured dependably. For instance,
9

CPA Financial Reporting
accounts payable represents the current obligation that would result in the outflow of the
resources embodying the economic benefits.
Income is acknowledged in the income statement at the time of an upsurge in
upcoming financial reimbursements connected to an upsurge in an asset or a reduction of a
liability has risen that can be restrained consistently. The income that is shown in the income
statements of the business needs to be appropriate, in consequence, that acknowledgement of
revenue occurs concurrently with the acknowledgement of growth in assets or reductions in
liabilities for instance, the net growth in assets rising from a sale of properties or facilities or
the reduction in liabilities arising from the relinquishment of an outstanding debt.
Expenses are acknowledged when a reduction in upcoming financial reimbursements
connected to a reduction in an asset or an upsurge of a liability has increased that can be
restrained dependably. This means that acknowledgement of expenditures occurs
concurrently through the acknowledgement of a growth in liabilities or a reduction in assets
for instance, the increase of employee rights or the devaluation of tools.
Measurement
Measurement includes allocating financial quantities at which the components of the
financial declarations are to be documented as well as described. Do I have to add more here
or not?
The IFRS Framework sets down the single fair value measurement framework and
requires the disclosure regarding the fair value measurement together with:
 Historic cost
 Present cost
 Net attainable payment price
 Current price reduced.
10

CPA Financial Reporting
Historic cost is the measurement base that is normally used nowadays, but then again it is
frequently combined with other additional measurement bases. The IFRS Framework does
not take account of perceptions or philosophies for choosing that measurement base, they
should be used for specific basics of monetary declarations or in specific conditions. Separate
values and understandings do offer this direction (Gebhardt, Mora and Wagenhofer 2014).
Measurement bases might comprise fair price, cost in use, completion price as well as
present cost. The explanation of fair price in the studied Conceptual Framework is in line
with IFRS 13 Fair Value Measurement, as well as the explanations of cost in use and
completion cost are consequent from IAS 36 Impairment of Assets.
Choice of a measurement basis – are to be reliable as per the previous sections, the features to
be well-thought-out in choosing a measurement base through the qualitative appearances of
beneficial evidence - significance as well as authentic illustration:
Significance of evidence delivered by a measurement basis is exaggerated by the
features of the asset or liability, as well as involvement to upcoming cash flows. The fair
value measurement is application to the IFRS that provides single value frameworks for
measure the fair value and disclosure regarding the fair value measurement.
(Dart.deloitte.com. 2019).
Presentation and Disclosure
The presentation and disclosure specifies the requirement of disclosing the financial
information to the users of the information and the stakeholders of the company. The
objective of this is to the help the users to have sufficient information about the financial
statement of the company. This would help them to understand the nature, timing and the
uncertainty of the revenue that arise in the company or the business organisation. This helps
the entities to have a litheness to be responsible for the applicable evidence that has been
11

CPA Financial Reporting
provided by them on the financial information of the company. This is seen that the while the
entities must specifically provide the sufficient information to meet the objectivity but it is
not specified to check the checklist of the minimum requirement for the purpose. Hence it is
considered that the entities does not require to disclose the information that is irrelevant or
immaterial. This is important for the companies to provide the operative announcements in
the monetary declarations which has to be maintained on time to time basis
(Dart.deloitte.com. 2019). The operative announcements in the monetary declarations
includes the following:
 The data that is available with the entity should provide the consistent value, as this is
seen that it is of no use where the income in the agreement with the IFRS 15 is
acknowledged where the regulator is assigned. It is considered that where the period
of this transmission in the light of the action is characterised then predetermined
preparation and the object would contain the additional value.
 It is also seen that the repetition of the evidence which is dissimilar to the portion of
the monetary declarations are considered to be redundant. This can lead to making of
the financial declarations less reasonable.
This is seen that charges that are made in the past may not be documented in the other
complete income. This attacks the objectivity of the financial tools which helps in pulling
together and covering the IFRS 9 regulations. It is the seen that consistent portion which is
related to the interest revenue comprises in the declaration of profit and loss.
Also this is seen that the additional comprehensive income explains that these components
essentially are classified into the declaration of profit or loss.
Classification
12

CPA Financial Reporting
Asset classification can be defined as the system for assigning the assets in the groups
depending upon the number of common characteristics. Numerous accounting rules are then
applied to every group of assets within the asset classification system to adequately account
for every group. This includes the following;
 The declaration of profit or loss, or
 Other comprehensive income (OCI).
The report of profit or loss is the prime foundation of evidence about financial
presentation.
It consequently follows that, in opinion, all revenue as well as expenditures for the time are
predictable in the announcement of profit or loss (Murphy and O’Connell 2013).
The Implications of the Changes on Reported Profit or Loss
These changes in definition will potentially impact the reported profits which is the
key performance measure of entities. This is because profit measurement is taken from
income statements which recognises income as increases in assets or decreases in liabilities
that result in increases in equity, other than those relating to distributions to holders of equity
claims.
Conversely, expense represents decreases in assets or increases in liabilities that result
in decreases in equity, other than those relating to distributions to holders of equity claims.
Therefore, to a very large extent since the two elements which determine an entities
reported profits would be impacted by the redefinition of assets and liabilities, reported
profits will also potentially be impacted by a similar magnitude either positively or
negatively.
13

CPA Financial Reporting
For instance, the new definition of asset may lead an entity to recognise a new asset
which hitherto was not classified as an asset which may potentially increase its income
leading to an increase in profit.
Benefits for Users of Financial Statements
The first chapter of the revised framework deals with the objective of general-purpose
financial reporting and this chapter has reintroduced the term stewardship. This allows users
to get the needed information through the financial statement to help assess management’s
stewardship for resources entrusted to them and this in turn assists users’ decision-making on
the provision of resources to the entity.
Again, chapter two also deals with qualitative characteristics of useful financial
information. This chapter has also clarified the roles of prudence, measurement uncertainty
and substance over form in evaluating information usefulness. All these changes help to
further strengthen the fundamental qualitative characteristics of financial reporting to be
relevant and faithful representation of the entity.
For instance, for existing and potential investors to buy, sell or hold equity or debt
instruments, they need to assess the prospects for future net cash inflow to the entity and
evaluate management’s stewardship. The same applies to other users of financial information
such as lenders and other creditors. Therefore, these changes are deemed to help entities to
produce more relevant and faithful representative financial information to enable users to
make the appropriate decision that relates to their respective circumstances.
Conclusion
From the above study this is seen that the IFRS has helped in defining the new and the
informed way to disclose the financial information of various entities. It is seen that the new
14

CPA Financial Reporting
conceptual framework helps in defining and adding to the current form of business a
characteristic that would help in defining the proper financial statement for the company.
while passing the IAS the accounting standard board has considered and attended the
investors to reinstated, although in dissimilar procedure, the perceptions of far-sightedness,
stewardship, and material over procedure, this helped in the presenting a perception of
making the commercial action so as to choose the explanation while choosing the dimension.
15

CPA Financial Reporting
Reference
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Anner, M., Bair, J. and Blasi, J., 2013. Toward joint liability in global supply chains:
Addressing the root causes of labor violations in international subcontracting
networks. Comp. Lab. L. & Pol'y J., 35, p.1.
Arthur, W.B., 2018. Asset pricing under endogenous expectations in an artificial stock
market. In The economy as an evolving complex system II (pp. 31-60). CRC Press.
Birkmann, J., Cardona, O.D., Carreño, M.L., Barbat, A.H., Pelling, M., Schneiderbauer, S.,
Kienberger, S., Keiler, M., Alexander, D., Zeil, P. and Welle, T., 2013. Framing
vulnerability, risk and societal responses: the MOVE framework. Natural hazards, 67(2),
pp.193-211.
Bohušová, H., 2014. General aaproach to the IFRS and US GAAP convergence. Acta
Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 59(4), pp.27-36.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by
Australian firms and whether they were impacted by AASB 136. Accounting &
Finance, 56(1), pp.259-288.
Cai, Y., 2013. Graduate employability: A conceptual framework for understanding
employers’ perceptions. Higher Education, 65(4), pp.457-469.
Dart.deloitte.com. (2019). [online] Available at:
https://dart.deloitte.com/USDART/resource/5f9f09ee-591a-11e8-a3cd-19487003ffec
[Accessed 10 Feb. 2019].
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), pp.107-116.
16

CPA Financial Reporting
Gerber, M.C., Gerber, A.J. and van der Merwe, A., 2015. The conceptual framework for
financial reporting as a domain ontology. In Twenty-first Americas Conference on
Information Systems, Puerto Rico (pp. 1-18).
Giné, X. and Karlan, D.S., 2014. Group versus individual liability: Short and long term
evidence from Philippine microcredit lending groups. Journal of development
Economics, 107, pp.65-83.
Grantthornton.com.au. (2019). [online] Available at:
https://www.grantthornton.com.au/globalassets/1.-member-firms/australian-website/
technical-publications/ifrs/gtal_2018_ifrs-news---a-conceptual-framework-for-financial-
reporting.pdf [Accessed 10 Feb. 2019].
He, Z. and Krishnamurthy, A., 2013. Intermediary asset pricing. American Economic
Review, 103(2), pp.732-70.
Iasplus.com. (2019). IASB publishes revised Conceptual Framework. [online] Available at:
https://www.iasplus.com/en/news/2018/03/cf [Accessed 10 Feb. 2019].
Lindgren, I. and Jansson, G., 2013. Electronic services in the public sector: A conceptual
framework. Government Information Quarterly, 30(2), pp.163-172.
Marcelino-Sádaba, S., González-Jaen, L.F. and Pérez-Ezcurdia, A., 2015. Using project
management as a way to sustainability. From a comprehensive review to a framework
definition. Journal of cleaner production, 99, pp.1-16.
Murphy, T. and O’Connell, V., 2013. Discourses surrounding the evolution of the
IASB/FASB Conceptual Framework: What they reveal about the “living law” of
accounting. Accounting, Organizations and Society, 38(1), pp.72-91.
Ross, S.A., 2013. The arbitrage theory of capital asset pricing. In HANDBOOK OF THE
FUNDAMENTALS OF FINANCIAL DECISION MAKING: Part I (pp. 11-30).
17

CPA Financial Reporting
Shiller, R.J., 2014. Speculative asset prices. American Economic Review, 104(6), pp.1486-
1517.
Valentijn, P.P., Schepman, S.M., Opheij, W. and Bruijnzeels, M.A., 2013. Understanding
integrated care: a comprehensive conceptual framework based on the integrative functions of
primary care. International journal of integrated care, 13.
Vladeck, D.C., 2014. Machines without principals: liability rules and artificial
intelligence. Wash. L. Rev., 89, p.117.
18