1.3 The IASB Conceptual Framework & Qualitative Characteristics

The IASB Conceptual Framework

The Conceptual Framework for Financial Reporting (2018) is a foundational document issued by the IASB. It is important to note that the Conceptual Framework is not an IFRS Standard itself and does not override any specific IFRS Standard.

Instead, its purpose is to:

• Assist the IASB in developing IFRS Standards based on consistent concepts.
• Assist preparers in developing consistent accounting policies when no Standard applies to a particular transaction.
• Assist all parties in understanding and interpreting the Standards.

A central part of the Conceptual Framework is the identification of the qualitative characteristics of useful financial information. These characteristics identify the types of information that are likely to be most useful to users. They are divided into fundamental and enhancing characteristics.

Fundamental Qualitative Characteristics

For financial information to be useful, it must possess two fundamental qualitative characteristics: Relevance and Faithful Representation.

1. Relevance

Relevant financial information is capable of making a difference in the decisions made by users. Information is capable of making a difference if it has:

• Predictive Value: It can be used as an input to processes employed by users to predict future outcomes.
• Confirmatory Value: It provides feedback about (confirms or changes) previous evaluations.

Materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity's financial report. Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions that the primary users make on the basis of those reports.

2. Faithful Representation

Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it purports to represent. A perfectly faithful representation would have three characteristics:

• Complete: It includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations.
• Neutral: It is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasized, de-emphasized, or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users.
• Free from Error: There are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. Note that this does not mean perfectly accurate in all respects (e.g., estimates cannot be perfectly accurate, but the process of estimating can be free from error).

Enhancing Qualitative Characteristics

Enhancing qualitative characteristics improve the usefulness of information that is already relevant and faithfully represented. However, they cannot make information useful if that information is irrelevant or not faithfully represented.

1. Comparability: Enables users to identify and understand similarities in, and differences among, items. Information about a reporting entity is more useful if it can be compared with similar information about other entities (inter-company) and with similar information about the same entity for another period or another date (intra-company). Consistency (using the same methods) helps achieve comparability.
2. Verifiability: Helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
3. Timeliness: Means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it becomes.
4. Understandability: Classifying, characterizing, and presenting information clearly and concisely makes it understandable. While complex phenomena cannot always be made simple, omitting them would make reports incomplete and misleading. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities.

The Cost Constraint

Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information.

The IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information. When preparers face a choice of accounting policies, they must also consider the cost-benefit trade-off.