IFRS

1. A CONCEPTUAL AND
REGULATORY FRAMEWORK

2. QUALITATIVE CHARACTERISTICS
QUALITATIVE CHARACTERISTICS ARE THE ATTRIBUTES THAT MAKE INFORMATION PROVIDED
IN FINANCIAL STATEMENTS USEFUL TO OTHERS.
THE FRAMEWORK SPLITS QUALITATIVE CHARACTERISTICS INTO TWO CATEGORIES:
• I) FUNDAMENTAL QUALITATIVE CHARACTERISTICS
– RELEVANCE
– FAITHFUL REPRESENTATION
• II) ENHANCING QUALITATIVE CHARACTERISTICS
– COMPARABILITY
– VERIFIABILITY
– TIMELINESS
– UNDERSTANDABILITY

3. FUNDAMENTAL QUALITATIVE
CHARACTERISTICS

4. RELEVANCE
INFORMATION IS
RELEVANT IF:
• IT HAS THE ABILITY TO
INFLUENCE THE
ECONOMIC DECISIONS
OF USERS, AND
• IS PROVIDED IN TIME
TO INFLUENCE THOSE
DECISIONS.
MATERIALITY HAS A
DIRECT IMPACT ON THE
RELEVANCE OF
MATERIALITY IS AN ENTITY-SPECIFIC ASPECT
OF RELEVANCE AND DEPENDS ON THE SIZE OF
THE ITEM OR ERROR JUDGED IN THE
PARTICULAR CIRCUMSTANCES OF ITS OMISSION
OR MISSTATEMENT. MATERIALITY IS A
THRESHOLD QUALITY.
A THRESHOLD QUALITY IS:
• ONE THAT NEEDS TO BE STUDIED BEFORE
CONSIDERING THE OTHER QUALITIES OF
THAT INFORMATION
• A CUT-OFF POINT – I.E. IF ANY INFORMATION
DOES NOT PASS THE TEST OF MATERIALITY,

5. FAITHFUL REPRESENTATION
TO BE A PERFECTLY FAITHFUL REPRESENTATION, FINANCIAL INFORMATION WOULD POSSESS
THE FOLLOWING CHARACTERISTICS:
• COMPLETENESS – TO BE UNDERSTANDABLE INFORMATION MUST CONTAIN ALL THE
NECESSARY DESCRIPTIONS AND EXPLANATIONS.
• NEUTRALITY – INFORMATION MUST BE NEUTRAL, I.E. FREE FROM BIAS. FINANCIAL
STATEMENTS ARE NOT NEUTRAL IF, BY THE SELECTION OR PRESENTATION OF INFORMATION,
THEY DELIBERATELY INFLUENCE THE MAKING OF A DECISION OR JUDGEMENT IN ORDER TO
ACHIEVE A PREDETERMINED RESULT OR OUTCOME.
• FREE FROM ERROR – INFORMATION MUST BE FREE FROM ERROR WITHIN THE BOUNDS OF
MATERIALITY. A MATERIAL ERROR OR OMISSION CAN CAUSE THE FINANCIAL STATEMENTS
TO BE FALSE OR MISLEADING, AND THUS UNRELIABLE AND DEFICIENT IN TERMS OF THEIR
RELEVANCE.

6. ENHANCING QUALITATIVE CHARACTERISTICS

7. COMPARABILITY
USERS MUST BE ABLE TO:
• COMPARE THE FINANCIAL STATEMENTS OF AN ENTITY OVER TIME TO
IDENTIFY TRENDS IN ITS FINANCIAL POSITION AND PERFORMANCE
• COMPARE THE FINANCIAL STATEMENTS OF DIFFERENT ENTITIES TO EVALUATE
THEIR RELATIVE FINANCIAL PERFORMANCE AND FINANCIAL POSITION.
FOR THIS TO BE THE CASE THERE MUST BE:
• CONSISTENCY AND
• DISCLOSURE.

8. VERIFIABILITY
“VERIFICATION CAN BE DIRECT OR INDIRECT. DIRECT VERIFICATION
MEANS VERIFYING AN AMOUNT OR OTHER REPRESENTATION
THROUGH DIRECT OBSERVATION, FOR EXAMPLE, BY COUNTING
CASH. INDIRECT VERIFICATION MEANS CHECKING THE INPUTS TO A
MODEL, FORMULA OR OTHER TECHNIQUE AND RECALCULATING
THE OUTPUTS USING THE SAME METHODOLOGY‘
E.G. RECALCULATING INVENTORY AMOUNTS USING THE SAME
COST FLOW ASSUMPTION SUCH AS FIRST-IN, FIRST-OUT METHOD

9. TIMELINESS
'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 IS’

10. UNDERSTANDABILITY
UNDERSTANDABILITY DEPENDS ON:
• THE WAY IN WHICH INFORMATION IS PRESENTED
• THE CAPABILITIES OF USERS.
IT IS ASSUMED THAT USERS:
• ‘HAVE A REASONABLE KNOWLEDGE OF BUSINESS AND
ECONOMIC ACTIVITIES’
• ‘REVIEW AND ANALYSE THE INFORMATION DILIGENTLY

11. ELEMENTS OF THE FINANCIAL STATEMENTS

12. ASSETS
AN ASSET IS A PRESENT ECONOMIC RESOURCE CONTROLLED BY THE ENTITY AS A
RESULT OF PAST EVENTS' (FRAMEWORK, PARA 4.3)
TO EXPLAIN FURTHER THE PARTS OF THE DEFINITION OF AN ASSET:
• CONTROLLED BY THE ENTITY – CONTROL IS THE ABILITY TO OBTAIN THE
ECONOMIC BENEFITS AND TO RESTRICT THE ACCESS OF OTHERS (E.G. BY AN
ENTITY BEING THE SOLE USER OF ITS PLANT AND MACHINERY, OR BY SELLING
SURPLUS PLANT AND MACHINERY).
• PAST EVENTS – THE EVENT MUST BE ‘PAST’ BEFORE AN ASSET CAN ARISE. FOR
EXAMPLE, EQUIPMENT WILL ONLY BECOME AN ASSET WHEN THERE IS THE
RIGHT TO DEMAND DELIVERY OR ACCESS TO THE ASSET’S POTENTIAL.

13. LIABILITIES
‘A LIABILITY IS A PRESENT OBLIGATION OF THE ENTITY TO TRANSFER AN
ECONOMIC RESOURCE AS A RESULT OF PAST EVENTS.’ (FRAMEWORK, PARA 4.26)
TO EXPLAIN FURTHER THE PARTS OF THE DEFINITION OF A LIABILITY:
• OBLIGATION – THIS MAY BE LEGAL OR CONSTRUCTIVE. A CONSTRUCTIVE
OBLIGATION IS AN OBLIGATION WHICH IS THE RESULT OF EXPECTED PRACTICE
RATHER THAN REQUIRED BY LAW OR A LEGAL CONTRACT. AN EXAMPLE OF A
CONSTRUCTIVE OBLIGATION MAY BE AN ENVIRONMENTAL PROVISION CREATED
BY AN ENTITY WHICH HAS A PUBLISHED POLICY OF CLEARING UP DAMAGE
DONE TO THE ENVIRONMENT, REGARDLESS OF WHETHER ANY LEGISLATION
EXISTS ENFORCING THIS.

14. EQUITY
'EQUITY IS THE RESIDUAL INTEREST IN THE ASSETS OF THE ENTITY
AFTER DEDUCTING ALL ITS LIABILITIES' (FRAMEWORK, PARA 4.6)
THE DEFINITION DESCRIBES THE RESIDUAL NATURE OF EQUITY
INTEREST. OWNERS’ WEALTH CAN BE INCREASED WHETHER OR NOT
A DISTRIBUTION IS MADE. THE SHARING MAY BE IN DIFFERENT
PROPORTIONS. EQUITY INTEREST IS USUALLY ANALYSED IN
FINANCIAL STATEMENTS TO DISTINGUISH INTEREST ARISING FROM
OWNERS’ CONTRIBUTIONS FROM THAT RESULTING FROM OTHER
EVENTS. THE LATTER IS SPLIT INTO DIFFERENT RESERVES WHICH

15. 'Income is
• increases in assets or decreases in
liabilities, that result in increases in equity,
other than those relating to contributions
from holders of equity claims
'Expenses are
• decreases in assets or increases in
liabilities, that result in decreases in equity,
other than those relating to distributions to

16. RECOGNITION OF THE ELEMENTS
ITEMS ARE ONLY RECOGNISED IN THE FINANCIAL STATEMENTS IF THEY MEET
THE DEFINITION OF ONE OF THE ELEMENTS. HOWEVER, NOT ALL ITEMS
MEETING THESE DEFINITIONS ARE RECOGNISED.
ELEMENTS ARE RECOGNISED IF RECOGNITION PROVIDES USERS WITH USEFUL
FINANCIAL INFORMATION. IN OTHER WORDS RECOGNITION MUST PROVIDE:
• RELEVANT INFORMATION
• A FAITHFUL REPRESENTATION OF THE ASSET OR LIABILITY, AND RESULTING
INCOME, EXPENSES OR EQUITY MOVEMENTS.

17. FINANCIAL POSITION APPROACH TO
RECOGNITION
IT CAN BE SEEN THEREFORE THAT:
• INCOME IS AN INCREASE IN AN ASSET OR DECREASE IN A LIABILITY
• EXPENSES ARE AN INCREASE IN A LIABILITY OR DECREASE IN AN
ASSET.
AS INCOME AND EXPENSES ARE THEREFORE RECOGNISED ON THE
BASIS OF CHANGES IN ASSETS AND LIABILITIES THIS IS KNOWN AS A
FINANCIAL POSITION (OR BALANCE SHEET) APPROACH TO
RECOGNITION.

18. DERECOGNITION
DERECOGNITION IS THE REMOVAL OF SOME OR ALL OF AN ASSET OR LIABILITY FROM THE
STATEMENT OF FINANCIAL POSITION. THIS NORMALLY OCCURS WHEN THE ENTITY:
• LOSES CONTROL OF THE ASSET, OR
• HAS NO PRESENT OBLIGATION FOR THE LIABILITY.
ACCOUNTING FOR DERECOGNITION SHOULD FAITHFULLY REPRESENT THE CHANGES IN AN
ENTITY’S NET ASSETS, AS WELL AS ANY ASSETS OR LIABILITIES RETAINED. THIS IS ACHIEVED BY:
• DERECOGNISING ANY TRANSFERRED, EXPIRED OR CONSUMED COMPONENT, AND
• RECOGNISING A GAIN OR LOSS ON THE ABOVE, AND
• RECOGNISING ANY RETAINED COMPONENT.
SOMETIMES AN ENTITY MIGHT APPEAR TO HAVE TRANSFERRED AN ASSET OR LIABILITY.
HOWEVER, DERECOGNITION WOULD NOT BE APPROPRIATE IF EXPOSURE TO VARIATIONS IN THE
ELEMENT’S ECONOMIC BENEFITS IS RETAINED.

19. CONCEPTUAL FRAMEWORK: MEASUREMENT

20. MEASUREMENT BASES
THERE ARE A NUMBER OF MEASUREMENT BASES MENTIONED IN THE INTERNATIONAL
ACCOUNTING STANDARDS BOARD'S CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING.
THESE ARE:
• HISTORICAL COST– THE ACTUAL AMOUNT OF CASH PAID OR CONSIDERATION GIVEN FOR THE
ITEM
• CURRENT COST– THE CASH THAT WOULD BE PAID TO REPLACE THE ASSET AT CURRENT
VALUES, REFLECTING THE ASSET’S AGE AND CONDITION
• FAIR VALUE – THE AMOUNT THE ITEM WOULD REALIZE IN AN ORDERLY ARM'S LENGTH
DISPOSAL
• VALUE IN USE – THE DISCOUNTED VALUE OF FUTURE CASH FLOWS
MOST ITEMS ARE HELD AT HISTORICAL COST.
CURRENT COST IS NORMALLY ONLY USED AS AN ALTERNATIVE TO HISTORICAL COST
ACCOUNTING, TAKING INTO ACCOUNT INFLATION.

21. REPLACEMENT COST
REPLACEMENT COST IS THE COST TO THE ENTITY OF REPLACING THE ASSET. HOWEVER, IN A
NON-CURRENT ASSET SITUATION YOU WILL NEED TO DETERMINE THE ASSET’S NET
REPLACEMENT COST. NET REPLACEMENT COST IS THE REPLACEMENT COST OF AN ASSET LESS AN
APPROPRIATE AMOUNT OF DEPRECIATION. FOR EXAMPLE, AN ASSET WITH A HISTORICAL COST
OF $500,000 AND A LIFE OF 5 YEARS WOULD HAVE A CARRYING AMOUNT AT THE END OF YEAR
2 OF $300,000 ($500,000 LESS 2 YEARS’ DEPRECIATION AT $100,000 A YEAR). IF THE CURRENT
PURCHASE PRICE OF AN EQUIVALENT NEW ASSET AT THE END OF YEAR 2 WAS $600,000, THEN
THE VALUE USING REPLACEMENT COST WOULD BE $360,000 ($600,000 LESS 2 YEARS’
DEPRECIATION AT $120,000 A YEAR).
NET REALISABLE VALUE (ALSO KNOWN AS FAIR VALUE LESS COSTS TO SELL) IS THE ESTIMATED
SALES PROCEEDS LESS ANY COSTS INVOLVED IN SELLING THE ASSET.
ECONOMIC VALUE (VALUE IN USE) IS THE PRESENT VALUE OF THE FUTURE CASH FLOWS FROM AN
ASSET.

22. • Replacement cost: Replacement cost is the cost to the entity of
replacing the asset. However, in a non-current asset situation
you will need to determine the asset’s net replacement cost. Net
replacement cost is the replacement cost of an asset less an
appropriate amount of depreciation. For example, an asset with a
historical cost of $500,000 and a life of 5 years would have a
carrying amount at the end of year 2 of $300,000 ($500,000 less
2 years’ depreciation at $100,000 a year). If the current purchase
price of an equivalent new asset at the end of year 2 was
$600,000, then the value using replacement cost would be
$360,000 ($600,000 less 2 years’ depreciation at $120,000 a
year).
• Net realisable value (also known as fair value less costs to sell) is
the estimated sales proceeds less any costs involved in selling

23. As historical cost accounting has been
criticised for providing information that
is out of date and potentially
understates asset values, current value
accounting has arisen as an alternative.
This largely takes two forms:
• constant purchasing power (CPP), or
• current cost accounting (CCA)

24. CONSTANT PURCHASING POWER (CPP)
• FINANCIAL STATEMENTS ARE ADJUSTED TO SHOW ALL FIGURES IN TERMS OF
MONEY WITH THE SAME PURCHASING POWER.
• A GENERAL PRICE INDEX IS USED FOR THIS, APPLYING A GENERAL LEVEL OF
INFLATION.
• FIGURES IN THE STATEMENT OF PROFIT OR LOSS AND STATEMENT OF
FINANCIAL POSITION ARE ADJUSTED BY THE CPP FACTOR.
• CPP FACTOR = (INDEX AT THE REPORTING DATE/INDEX AT DATE OF INITIAL
RECOGNITION)
IN CONVERTING THE FIGURES IN THE BASIC HISTORICAL COST FINANCIAL
STATEMENTS INTO THOSE IN THE CPP STATEMENT, A DISTINCTION IS DRAWN
BETWEEN:

25. CONSTANT PURCHASING POWER (CPP)
MONETARY ITEMS ARE THOSE WHOSE
AMOUNTS ARE FIXED BY CONTRACT OR
OTHERWISE IN TERMS OF NUMBERS OF UNITS
OF CURRENCY, REGARDLESS OF CHANGES IN
GENERAL PRICE LEVELS. EXAMPLES OF
MONETARY ITEMS ARE CASH, RECEIVABLES,
PAYABLES AND LOAN CAPITAL.
HOLDERS OF MONETARY ASSETS LOSE
GENERAL PURCHASING POWER DURING A
PERIOD OF INFLATION TO THE EXTENT THAT
ANY INCOME FROM THE ASSETS DOES NOT
ADEQUATELY COMPENSATE FOR THE LOSS IN
PURCHASING POWER. THE CONVERSE APPLIES
TO THOSE HAVING MONETARY LIABILITIES.
NON-MONETARY ITEMS INCLUDE SUCH
ASSETS AS INVENTORY AND NON-CURRENT
ASSETS. RETAINING THE HISTORICAL COST
CONCEPT REQUIRES THAT HOLDERS OF
NONMONETARY ASSETS ARE ASSUMED
NEITHER TO GAIN NOR TO LOSE PURCHASING
POWER BY REASON ONLY OF CHANGES IN THE
PURCHASING POWER OF THE UNIT OF
CURRENCY.
THE OWNERS OF A COMPANY’S EQUITY
CAPITAL HAVE THE RESIDUAL CLAIM ON ITS
NET MONETARY AND NON-MONETARY
ASSETS. THE EQUITY INTEREST IS THEREFORE
NEITHER A MONETARY NOR A NON-
MONETARY ITEM

26. CURRENT COST ACCOUNTING (CCA)
THE KEY FEATURES OF CCA ARE AS FOLLOWS:
• IT IS BASED ON DEPRIVAL VALUES OR VALUE TO THE BUSINESS. DEPRIVAL
VALUE IS EQUAL TO THE LOSS SUFFERED IF DEPRIVED OF THE ASSET AND IS
USUALLY REPRESENTED BY THE REPLACEMENT COST.
• INVENTORY AND NON-CURRENT ASSETS ARE VALUED AT DEPRIVAL VALUE.
• MONETARY ASSETS (CASH, RECEIVABLES, PAYABLES, LOANS) ARE NOT
ADJUSTED.
• AN ADDITIONAL CHARGE TO THE STATEMENT OF PROFIT OR LOSS REFLECTS
THE DEPRIVAL VALUE OF INVENTORY WITHIN COST OF SALES.
• AN ADDITIONAL CHARGE IN THE STATEMENT OF PROFIT OR LOSS REFLECTS
DEPRIVAL VALUE OF NON-CURRENT ASSETS (DEPRECIATION).

27. CURRENT COST ACCOUNTING (CCA)
CURRENT COST (OR REPLACEMENT COST) ACCOUNTING IS NOT A SINGLE
SYSTEM OF ACCOUNTING – THERE ARE SEVERAL VARIANTS. WE WILL
CONCENTRATE ON GENERAL PRINCIPLES, IN PARTICULAR THOSE RELATING TO
INVENTORY AND NON-CURRENT ASSETS.
• THE CURRENT COST STATEMENT OF PROFIT OR LOSS IS CHARGED WITH THE
VALUE TO THE BUSINESS OF ASSETS CONSUMED DURING THE PERIOD. IN
PARTICULAR, THE CHARGES FOR CONSUMING INVENTORY (COST OF SALES)
AND NON-CURRENT ASSETS (DEPRECIATION) ARE BASED ON CURRENT RATHER
THAN HISTORICAL VALUES.
• THE CURRENT COST STATEMENT OF FINANCIAL POSITION REFLECTS THE
CURRENT VALUE OF INVENTORY AND NON-CURRENT ASSETS