Conceptual Framework |

Limitations to financial reporting

Two clear limitations to the information provided by a general purpose financial report are materiality and cost.

  1. Materiality. Information is material if its omission or misstatement could influence the decisions that users make on the basis of an entity’s financial information. Because materiality depends on the nature and amount of the item judged in the particular circumstances of its omission or misstatement, it is not possible to specify a uniform quantitative threshold at which a particular type of information becomes material. When considering whether financial information is a faithful representation of what it purports to represent, it is important to take into account materiality because material omissions or misstatements will result in information that is incomplete, biased, or not

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In compliance with International Financial Reporting Standards

Any entity asserting that a set of financial statements is in compliance with IFRS complies with all applicable standards and related interpretations, and makes an explicit and unreserved statement of compliance in the notes to the financial statements. Compliance with IFRS encompasses disclosure as well as recognition and measurement requirements. [IAS 1 16]

A few examples of such a compliance statement are provided here:

Source: Unilever Annual Report and Accounts 2018

Source BP Annual report and Form 20-F 2018 In compliance with International Financial Reporting

The IASB does not carry out any inquiry or enforcement role regarding the application of its standards. However, this is often undertaken by local regulators and/or stock exchanges, which includes the SEC … Read more

Present obligation as a result of past event

Obligation: A duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise, however, from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner.

It is important to distinguish between a present obligation and a future commitment. A management decision to purchase assets in the future does not, in itself, give rise to a present obligation.

Settlement of a present obligation will involve the entity giving up resources embodying economic benefits in order to satisfy the claim of the other party. This may be done in various ways, not just by payment … Read more

Going concern assumption

Going concern is one the fundamental assumptions in accounting on the basis of which financial statements are prepared. Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.

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Measurement introduction

Monetary terms

Elements recognised in financial statements are quantified in monetary terms. This requires the selection of a measurement basis. A measurement basis is an identified feature—for example, historical cost, current value, fair value or fulfilment value—of an item being measured. Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related income and expenses.

Different measurement bases

Consideration of the qualitative characteristics of useful financial information and of the cost constraint is likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses.Measurement

Implementation of the measurement basis

A Standard may need to describe how to implement the measurement basis selected in Read more

More than one measurement basis

Sometimes, consideration of the factors described in Measurement choices for recording transaction may lead to the conclusion that more than one measurement basis is needed for an asset or liability and for related income and expenses in order to provide relevant information that faithfully represents both the entity’s financial position and its financial performance. More than one measurement basis

In most cases, the most understandable way to provide that information is:

  1. to use a single measurement basis both for the asset or liability in the statement of financial position and for related income and expenses in the statement(s) of financial performance; and More than one measurement basis
  2. to provide in the notes additional information applying a different measurement basis.

However, … Read more