The Revised Conceptual Framework: New Ground Rules

Without a framework for preparing financial statements, accounting standards would develop in a random, haphazard way, in reaction to arising issues. In this context, the Conceptual Framework—though not itself a standard—serves as a common ideology by which the International Accounting Standards Board (IASB) interprets existing standards, develops new ones, and defines accounting positions in difficult cases. For instance, the Conceptual Framework assists national standard-setting bodies in developing national standards.

On 29 March 2018, the IASB released a revised Conceptual Framework for Financial Reporting. Effective immediately, it replaces the previous version issued in 2010.1

The main changes

The revision aims to update and clarify the existing Conceptual Framework, for example giving more guidance on the substance-over-form approach, measurement uncertainty, and other items. Additionally, some terms have been reintroduced, including stewardship and prudence (in the chapter on qualitative characteristics).

Two new chapters have also been added:

Financial statements and the reporting entity

This chapter summarises and determines the scope of financial statements, and offers a description of the reporting entity.

Presentation and disclosure

This chapter defines, conceptually, what information should be included in the financial statements and how it should be presented and disclosed.

Additionally, important developments have happened in the following areas:

Elements of financial statements

The terms asset and liability have been redefined. An asset is now specified as "a present economic resource controlled by the entity as a result of past events". An economic resource, which previously had no definition, is defined as "a right that has the potential to produce economic benefits".

For your reference, asset was previously defined as "a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity". So, in other words, the potential to produce economic benefits means that the flow of economic benefits no longer needs to be certain, or even likely (if it is not certain or likely, however, then the asset's recognition and measurement may be affected). Indeed, all that is required is one circumstance (at least) in which it would produce economic benefits.

A liability is now defined as "a present obligation of the entity to transfer an economic resource as a result of past...

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