4 Things to Know About the Conceptual Framework for IFRS

1. What is Generally Accepted Accounting Principles or GAAP?

When an entity prepares financial statements it refers to a number of places for guidance on the correct method to prepare and present these statements.

There are a wide range of different concepts, principles and detailed rules to use, some of which are contained in legislation, some are in financial reporting standards others are simply common practices.

All of these principles, concepts, rules and laws are collectively known as Generally Accepted Accounting Principles, or GAAP. These vary from country to country, for instance Irish GAAP is different to US GAAP.

Many countries have adopted International Financial Reporting Standards for their basis of producing accounts; these are also known as International Accounting Standards.

When we refer to International GAAP we are referring to both the IASB’s conceptual framework and all the individual International Financial Reporting Standards, interpretations and guidelines which, when combined, are used for the basis of preparing financial statements.

2. What is a Conceptual Framework?

A conceptual framework is a set of agreed theoretical principles that form the basis for the preparation of financial statements.

It’s not an accounting standard itself, but provides the ideas behind the creation of accounting standards which helps users and preparers understand the thought process that went into their creation.

It also helps to ensure the development of future accounting standards is done on a consistent basis as the principles should be consistently applied and not conflict with each other.

3. What was the Old IASB Framework (1989)?

In 1989, the International Accounting Standards Board adopted the “Framework for the Preparation and presentation of Financial Statements” which is a written conceptual framework setting out the concepts and principles governing the preparation of financial statements.

The 1989 Framework was divided into the following sections:

  • The objective of financial statements (which has now been replaced)
  • Underlying assumptions of financial statements
  • Qualitative characteristics of financial statements (which has also been replaced)
  • The elements of financial statements
  • Recognition of the elements of financial statements
  • Measurement of the elements of financial statements
  • Concepts of capital and capital maintenance.

The IASB has been working closely with US accounting standard setter, the Financial Accounting Standards Board, on a convergence project to integrate International Financial Reporting Standards with US GAAP.

To do this a new conceptual framework, common to both IFRS and US GAAP was required. This is being developed on a chapter by chapter basis, with each chapter starting as an exposure draft for comment, before being finalised.

So far, two of the new chapters have been finalised which replace the old sections of the 1989 Framework. The remainder of the new Conceptual Framework is made up of the remaining sections from the old 1989 Framework.

4. What are the Conceptual Framework Chapters (2010)?

So now, the new IASB Conceptual Framework is made up of the following chapters:

  • Chapter 1 – The objective of general-purpose financial statements
  • Chapter 2 – The reporting entity (which is current drafted, but yet to be adopted)
  • Chapter 3 – Qualitative characteristics of financial information
  • Chapter 4 – is made up of the remaining text of the 1989 Framework, which includes;
    • The underlying assumptions of financial statements
    • The elements of financial statements
    • Recognition of the elements of financial statements
    • Measurement of the elements of financial statements
    • Concepts of capital and capital maintenance.

In your studies you’ll be referring to the new IASB Conceptual Framework, but don’t worry too much about the difference between the two as they don’t fundamentally change the impact of the IFRSs.