Last reviewed: July 2026.
The Conceptual Framework for Financial Reporting sets out the fundamental concepts used by the IASB when developing IFRS Accounting Standards. It also helps preparers develop accounting policies when no specific Standard applies and helps users understand the logic behind financial reporting requirements.
The Framework is not an IFRS Standard
The Conceptual Framework supports consistent standard setting, but it does not override a requirement in an IFRS Accounting Standard. When a Standard applies, the entity follows that Standard. The Framework becomes especially relevant when management must develop an accounting policy for a transaction not specifically addressed.
The revised Framework was issued in 2018. It organises the concepts for objectives, qualitative characteristics, reporting entities, elements, recognition, measurement, presentation and disclosure.
Objective of general purpose financial reporting
The objective is to provide financial information useful to existing and potential investors, lenders and other creditors when making decisions about providing resources to the entity. Those decisions include buying, selling or holding instruments, lending, settling and assessing management’s stewardship of resources.
General purpose reports cannot provide every piece of information. They focus on information about economic resources, claims and changes in those resources and claims.
Qualitative characteristics
Useful information must be relevant and faithfully represented. Relevance includes materiality: information is material when omitting, misstating or obscuring it could reasonably influence decisions. Faithful representation seeks completeness, neutrality and freedom from error in the description and process used.
Comparability, verifiability, timeliness and understandability enhance useful information. These characteristics require judgement and are constrained by the cost of providing information.
Reporting entity and boundary
A reporting entity can be a single entity, a portion of an entity or more than one entity. Its boundary should be determined so the financial statements provide relevant information and faithfully represent the economic activities covered.
The boundary does not always follow legal form. Consolidated financial statements, for example, present a parent and controlled entities as one reporting entity.
Elements of financial statements
| Element | Core idea |
|---|---|
| Asset | A present economic resource controlled by the entity as a result of past events. |
| Liability | A present obligation to transfer an economic resource as a result of past events. |
| Equity | The residual interest after deducting liabilities from assets. |
| Income | Increases in assets or decreases in liabilities that increase equity, other than owner contributions. |
| Expenses | Decreases in assets or increases in liabilities that reduce equity, other than owner distributions. |
Definitions focus on rights, obligations and economic resources. Recognition is a separate question: not every item meeting a definition is necessarily recognised if doing so would not provide useful information.
Recognition and derecognition
Recognition captures an item in the statement of financial position or financial performance with a monetary amount. The decision considers relevance, faithful representation and the cost constraint. Measurement uncertainty does not automatically prevent recognition, but extreme uncertainty may affect usefulness.
Derecognition removes all or part of a recognised asset or liability, normally when control of the asset is lost or the obligation no longer exists. The accounting should faithfully represent retained rights and obligations and the resulting change.
Measurement bases
The Framework discusses historical cost and current-value measures. Current value includes fair value, value in use for assets, fulfilment value for liabilities and current cost. The best basis depends on how the asset or liability contributes to future cash flows and on the characteristics of the information produced.
Measurement choices affect profit, equity, volatility and comparability. A Standard may prescribe a particular basis to balance relevance and faithful representation for a transaction class.
Presentation, disclosure and aggregation
Financial statements communicate through classification, aggregation, presentation and notes. Similar items may be aggregated, while dissimilar material items should be presented or disclosed separately. Excess detail can obscure useful information just as omission can.
Profit or loss is the primary source of information about financial performance, although some changes may be presented in other comprehensive income when a Standard requires or permits it.
Prudence, stewardship and substance
Prudence is cautious judgement under uncertainty without systematic bias. Stewardship concerns how efficiently and effectively management has used the entity’s resources. Faithful representation also requires reporting the substance of rights and obligations when legal form alone does not capture the economic reality.
These ideas should not be used as slogans to justify a preferred answer. They operate together within the objective and qualitative characteristics.
Related accounting guides
- A conceptual framework of accounting
- Objective of financial statements
- Consistency concept in accounting
Authoritative references
Practical takeaway
Use the Framework as a connected system: begin with the reporting objective, apply relevance and faithful representation, identify assets and obligations, select recognition and measurement that produce useful information, and communicate it through clear presentation and disclosure. A specific IFRS requirement always takes priority.
Implementation note
When analysing a transaction, begin with the economic substance and identify the resource, obligation, income or expense involved. Then consider recognition, measurement, presentation and disclosure under the applicable IFRS Standard. Use the Conceptual Framework when the Standard requires judgement or when no Standard directly addresses the issue, but do not use it to override a specific requirement. Document the alternatives considered, the information needs of users and why the chosen policy provides relevant and faithfully represented information.
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