Framework For The Preparation and Presentation of Financial Statements

Technical Summary
This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.
For the requirements reference must be made to the Framework.
Framework for the Preparation and

Presentation of Financial Statements
The IASB Framework was approved by the IASC Board in April 1989 for publication
in July 1989, and adopted by the IASB in April 2001.
This Framework sets out the concepts that underlie the preparation and presentation
of financial statements for external users.
The Framework deals with:

(a) the objective of financial statements;
(b) the qualitative characteristics that determine the usefulness of information in
financial statements;
(c) the definition, recognition and measurement of the elements from which
financial statements are constructed; and
(d) concepts of capital and capital maintenance.
The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an entity that is useful to a
wide range of users in making economic decisions. Financial statements prepared for
this purpose meet the common needs of most users. However, financial statements do
not provide all the information that users may need to make economic decisions since
they largely portray the financial effects of past events and do not necessarily provide
non-financial information.
In order to meet their objectives, financial statements are prepared on the accrual basis
of accounting.
The financial statements are normally prepared on the assumption that an entity is a
going concern and will continue in operation for the foreseeable future.
Qualitative characteristics are the attributes that make the information provided in
financial statements useful to users. The four principal qualitative characteristics are
understandability, relevance, reliability and comparability. In practice a balancing, or
trade-off, between qualitative characteristics is often necessary.
The elements directly related to the measurement of financial position are assets,
liabilities and equity. These are defined as follows:
(a) An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
(b) A liability is 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.
(c) Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
The elements of income and expenses are defined as follows:

(a) Income is 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.
(b) Expenses are 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.
An item that meets the definition of an element should be recognised if:

(a) it is probable that any future economic benefit associated with the item will
flow to or from the entity; and
(b) the item has a cost or value that can be measured with reliability.
Measurement is the process of determining the monetary amounts at which the

elements of the financial statements are to be recognised and carried in the balance
sheet and income statement. This involves the selection of the particular basis of
measurement.
The concept of capital maintenance is concerned with how an entity defines the
capital that it seeks to maintain. It provides the linkage between the concepts of
capital and the concepts of profit because it provides the point of reference by which
profit is measured; it is a prerequisite for distinguishing between an entity’s return on
capital and its return of capital; only inflows of assets in excess of amounts needed to
maintain capital may be regarded as profit and therefore as a return on capital. Hence,
profit is the residual amount that remains after expenses (including capital
maintenance adjustments, where appropriate) have been deducted from income. If
expenses exceed income the residual amount is a loss.
The Board of IASC recognises that in a limited number of cases there may be a
conflict between the Framework and an International Accounting Standard. In those
cases where there is a conflict, the requirements of the International Accounting
Standard prevail over those of the Framework. As, however, the Board of IASC will
be guided by the Framework in the development of future Standards and in its review
of existing Standards, the number of cases of conflict between the Framework and
International Accounting Standards will diminish through time.

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Technical Summary

Framework for the Preparation and

The Framework deals with:

The objective of financial statements is to provide information about the financial

The elements of income and expenses are defined as follows:

An item that meets the definition of an element should be recognised if:

Measurement is the process of determining the monetary amounts at which the

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