Improved conceptual framework for financial reporting (chapter 1 and 2) - P2

Conceptual framework is improved mainly to achieve convergence with US's framework as IASB and US FASB decided to focus on improving their existing framework rather than a comprehensive reconsideration of all concepts. Also, IFRS developed in future will be more consistent with this improved conceptual framework. Chapter 1 and 2 are actually completed and are examinable in P2.

Chapter 1: The objective of financial reporting
The fundamental objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors (including suppliers, employees and customers) in making decisions in their capacity as capital providers. General purpose financial reports are used both for future investment decisions and for assessing the stewardship of resources (management has a stewardship responsibility to protect the economic resources from unfavourable effects of economic factors and use the resources in an efficient manner) already committed to the entity. Management's performance in discharging stewardship responsibilities can affect entity's ability to generate net cash inflows, therefore potential capital providers are also interested in it.

Chapter 2: Qualitative characteristics and constraints of decision-useful financial reporting information
Reliability is no longer a qualitative characteristic of financial statement. Two fundamental qualitative characteristics are identified:
1. Relevance - information is relevant if it is capable of making a difference in the decisions made by capital providers. Such information has predictive value (can be used to form expectations about the future), confirmatory value (can be used to confirm past expectations) or both. Increasing use of fair value is an example of increasing relevance in favour of reliability.
2. Faithful representation - information should be faithfully represented and such information should be complete (include all necessary information about economic phenomenon), neutral (free from bias) and free from material error.

Enhancing qualitative characteristics are also identified to complement fundamental qualitative characteristics, these include:
1. Comparability - information enables users to identify similarities in and differences between two sets of economic phenomena. Such information should also enable comparison with another entity.
2. Verifiability - information helps users to assure that information faithfully represents the economic phenomena that it appears to represent. Verifiability implies that different knowledgeable and independent observers could reach general consensus that information is faithfully represented.
3. Timeliness - information is available to decision-makers in time to be capable of influencing their decisions.
4. Understandability - information enables users to comprehend its meaning. Understandability is enhanced when information is classified, characterised and presented clearly and concisely. It is assumed that users have a reasonable knowledge of business and economic activities and review and analyse information with diligence.

Fundamental qualitative characteristics differentiate useful information from information that is not useful or misleading. Enhancing qualitative characteristics differentiate more useful information from less useful information.

There are two constraints that limit the information provided in useful financial reports:
1. Materiality - information is material if its omission or misstatement affects the decisions made by the users on the basis of entity's financial information. It is not possible to specify a uniform quantitative threshold for determining whether information is material.
2. Cost - reporting some information imposes costs and those costs should be justified by the benefits of reporting that information. IASB assesses costs and benefits in relation to financial reporting generally, not solely in relation to individual reporting entities.