Conceptual framework
What the exam tests
The 2018 Conceptual Framework: objective, qualitative characteristics, elements, recognition, measurement, derecognition, and how it is used to fill gaps and interpret standards.
Core rules
- Objective: financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources.
- Fundamental characteristics: relevance (predictive value, confirmatory value, materiality) and faithful representation (complete, neutral, free from error). Enhancing: comparability, verifiability, timeliness, understandability. Cost constrains.
- Asset: present economic resource controlled as a result of past events. Liability: present obligation to transfer an economic resource as a result of past events. Equity is the residual.
- Recognition requires relevance and faithful representation; the framework does not use a probability threshold as a recognition criterion, although standards do.
- Measurement: historical cost or current value (fair value, value in use/fulfilment value, current cost). Derecognition occurs when the asset or liability no longer meets the definition.
Worked example
An entity receives 1,000 in advance for goods. Cash is an asset. The obligation to deliver is a liability because it is a present obligation to transfer an economic resource. Revenue is not recognised: no performance obligation has been satisfied, so income does not arise. When goods are delivered, the liability is extinguished and revenue is recognised.
Traps
- Treating “probable” as a framework recognition criterion.
- Equating prudence with deliberate understatement.
- Assuming fair value is the only permitted measurement basis.
- Ignoring the cost constraint when judging disclosure.