• income and expenses for the reporting period. [CF 3.4].
To help users of financial statements to identify and assess changes and trends, financial
statements also provide comparative information for at least one preceding reporting
period. [CF 3.5].
Information about possible future transactions and other possible future events
(forward-looking information) is included in financial statements if it:
• relates to the entity’s assets or liabilities (including unrecognised assets or liabilities)
or equity that existed at the end of the reporting period, or during the reporting
period, or to income or expenses for the reporting period; and
• is useful to users of financial statements.
For example, if an asset or liability is measured by estimating future cash flows,
information about those estimated future cash flows may help users of financial
statements to understand the reported measures. Financial statements do not
typically provide other types of forward-looking information, for example,
explanatory material about management’s expectations and strategies for the
reporting entity. [CF 3.6].
Financial statements include information about transactions and other events that have
occurred after the end of the reporting period if providing that information is necessary
to meet the objective of financial statements (see 4 above). [CF 3.7].
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6.1.3
Perspective adopted in financial statements
Financial statements provide information about transactions and other events viewed from
the perspective of the reporting entity as a whole, not from the perspective of any particular
group of the entity’s existing or potential investors, lenders or other creditors. [CF 3.8].
6.1.4
Going concern assumption
Financial statements are normally prepared on the assumption that the reporting entity
is a going concern and will continue in operation for the foreseeable future. Hence, it is
assumed that the entity has neither the intention nor the need to enter liquidation or to
cease trading. If such an intention or need exists, the financial statements may have to
be prepared on a different basis. If so, the financial statements describe the basis used.
[CF 3.9].
6.2
The reporting entity
A reporting entity is an entity that is required, or chooses, to prepare financial
statements. A reporting entity can be a single entity or a portion of an entity or can
comprise more than one entity. A reporting entity is not necessarily a legal entity.
[CF 3.10].
Sometimes one entity (parent) has control over another entity (subsidiary). If a reporting
entity comprises both the parent and its subsidiaries, the reporting entity’s financial
statements are referred to as ‘consolidated financial statements’. If a reporting entity is
the parent alone, the reporting entity’s financial statements are referred to as
‘unconsolidated financial statements’ (see 6.2.1 below). [CF 3.11].
If a reporting entity comprises two or more entities that are not all linked by a parent-
subsidiary relationship, the reporting entity’s financial statements are referred to as
‘combined financial statements’. [CF 3.12].
Determining the appropriate boundary of a reporting entity can be difficult if the
reporting entity:
• is not a legal entity; and
• does not comprise only legal entities linked by a parent-subsidiary relationship.
[CF 3.13].
In such cases, determining the boundary of the reporting entity is driven by the
information needs of the primary users of the reporting entity’s financial statements.
Those users need relevant information that faithfully represents what it purports to
represent. Faithful representation requires that:
• the boundary of the reporting entity does not contain an arbitrary or incomplete
set of economic activities;
• including that set of economic activities within the boundary of the reporting entity
results in neutral information; and
• a description is provided of how the boundary of the reporting entity was
determined and of what constitutes the reporting entity. [CF 3.14].
Without being explicit, this discussion in the Framework seems to confirm that
combined financial statements can be said to comply with IFRS (subject, of course, to
The IASB’s Conceptual Framework
59
the matters in the bullets above and to compliance generally with IFRS for the
‘combined’ reporting entity).
The Basis for Conclusions, however, suggests a certain hesitancy by the Board. It
articulates that the IASB is of the opinion that combined financial statements ‘can provide
useful information to users of financial statements in some circumstances’ and for this
reason the Framework ‘acknowledges the concept of combined financial statements.’
This view is somewhat attenuated by the Board stating that the Framework ‘does not
discuss when or how entities could prepare combined financial statements’ and that
‘such discussion would be best developed if the Board decides in the future to develop
a Standard on this topic’. [CF BC3.21].
The Framework remains silent on a similar matter regarding what is frequently called
‘carve-out’ accounting. This is where a reporting entity is determined to be part of a
legal entity. In our view, similar considerations should apply to financial statements
prepared on this basis.
6.2.1
Consolidated and unconsolidated financial statements
Consolidated financial statements provide information about the assets, liabilities,
equity, income and expenses of both the parent and its subsidiaries as a single reporting
entity. That information is useful for existing and potential investors, lenders and other
creditors of the parent in their assessment of the prospects for future net cash inflows
to the parent. This is because net cash inflows to the parent include distributions to the
parent from its subsidiaries, and those distributions depend on net cash inflows to the
subsidiaries. [CF 3.15].
Consolidated financial statements are not designed to provide separate information
about the assets, liabilities, equity, income and expenses of any particular subsidiary. A
subsidiary’s own financial statements are designed to provide that information. [CF 3.16].
Unconsolidated financial statements are designed to provide information about the
parent’s assets, liabilities, equity, income and expenses, and not about those of its
subsidiaries. That information can be useful to existing and potential investors, lenders
and other creditors of the parent because:
• a claim against the parent typically does not give the holder of that claim a claim
against subsidiaries; and
• in some jurisdictions, the amounts that can be legally distributed to holders of
equity claims against the parent depend on the distributable reserves of the parent.
Another way to provide information about some or all assets, liabilities, equity, income
and expenses of the parent alone is in consolidated financial statements, in the notes.
[CF 3.17].
Information provided
in unconsolidated financial statements is typically not sufficient to
meet the information needs of existing and potential investors, lenders and other creditors
of the parent. Accordingly, when consolidated financial statements are required,
unconsolidated financial statements cannot serve as a substitute for consolidated financial
statements. Nevertheless, a parent may be required, or choose, to prepare unconsolidated
financial statements in addition to consolidated financial statements. [CF 3.18].
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CHAPTER 4: THE ELEMENTS OF FINANCIAL STATEMENTS
As discussed at 4 above, it is the central tenet of the Framework that users of financial
information require information concerning the economic resources of and claims
against an entity; and changes in those resources and claims.
These are described in the Framework as being linked to the ‘elements’ of financial
statements which are: assets, liabilities, equity, income and expense.
They are analysed as follows. [CF 4.1-4.4, 4.26, 4.63, 4.68, 4.69].
Economic resources are rights which have the potential to produce economic benefits.
Assets are present economic resources controlled by an entity as a result of past events
(discussed at 7.2 below);
Claims against an entity comprise:
• Liabilities, which are present obligations to transfer economic resources as a result
of past events (discussed at 7.3 below);
• Equity is the residual interest in the assets in an entity after deducting all its
liabilities (discussed at 7.4 below).
Changes in economic resources and claims comprise:
• Income and expenses (discussed at 7.5 below); and
• Other changes:
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 holders of equity claims.
Other changes are:
• exchanges of assets or liabilities that do not result in increases or decreases in
equity; and
• contributions from and distributions to holders of equity claims.
The recognition and derecognition of elements is discussed at 8 below. Measurement
of the elements is discussed at 9 below and presentation at 10 below.
It is apparent that the approach to the elements of financial statements reflects what
is sometimes described as a ‘balance sheet approach’ to recording financial
performance, whereby financial performance for a period is essentially derived as part
of the overall movement in the entity’s financial position during that period. What this
means is that all non-owner changes in equity comprise ‘performance’ in its broadest
sense. A difficulty for the Board in developing the Framework is that there is in
financial reporting a well-established idea of profit (and hence, a profit and loss
account) which contains only a subset of all such performance. The provisions of the
Framework in this regard are discussed at 10.2.3 below.
The IASB’s Conceptual Framework
61
7.1
Matters concerning both assets and liabilities
The Framework discusses three concepts which will apply both to assets and liabilities
and are relevant for accounting purposes. These are: unit of account, executory
contracts and the substance of arrangements. These are discussed in turn below.
7.1.1
Unit of account
The unit of account is the right or the group of rights, the obligation or the group of
obligations, or the group of rights and obligations, to which recognition criteria and
measurement concepts are applied. [CF 4.48].
A unit of account is selected for an asset or liability when considering how recognition
criteria and measurement concepts will apply to that asset or liability and to the related
income and expenses. In some circumstances, it may be appropriate to select one unit
of account for recognition and a different unit of account for measurement. For
example, contracts may sometimes be recognised individually but measured as part of
a portfolio of contracts. For presentation and disclosure, assets, liabilities, income and
expenses may need to be aggregated or separated into components. [CF 4.49].
If an entity transfers part of an asset or part of a liability, the unit of account may change
at that time, so that the transferred component and the retained component become
separate units of account (derecognition is discussed at 8.3 below). [CF 4.50].
A unit of account is selected to provide useful information, which implies that:
• the information provided about the asset or liability and about any related income
and expenses must be relevant. Treating a group of rights and obligations as a single
unit of account may provide more relevant information than treating each right or
obligation as a separate unit of account if, for example, those rights and obligations:
• cannot be or are unlikely to be the subject of separate transactions;
• cannot or are unlikely to expire in different patterns;
• have similar economic characteristics and risks and hence are likely to have
similar implications for the prospects for future net cash inflows to the entity
or net cash outflows from the entity; or
• are used together in the business activities conducted by an entity to produce
cash flows and are measured by reference to estimates of their
interdependent future cash flows.
• the information provided about the asset or liability and about any related income
and expenses must faithfully represent the substance of the transaction or other
event from which they have arisen. Therefore, it may be necessary to treat rights
or obligations arising from different sources as a single unit of account, or to
separate the rights or obligations arising from a single source. Equally, to provide a
faithful representation of unrelated rights and obligations, it may be necessary to
recognise and measure them separately. [CF 4.51].
Also relevant here is the discussion in the Framework of the substance of rights
and obligations – see 7.1.3 below.
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Just as cost constrains other financial reporting decisions, it also constrains the selection
of a unit of account. Hence, in selecting a unit of account, it is important to consider
whether the benefits of the information provided to users of financial statements by
selecting that unit of account are likely to justify the costs of providing and using that
information. In general, the costs associated with recognising and measuring assets,
liabilities, income and expenses increase as the size of the unit of account decreases.
Hence, in general, rights or obligations arising from the same source are separated only
if the resulting information is more useful and the benefits outweigh the costs. [CF 4.52].
Sometimes, both rights and obligations arise from the same source. For example, some
contracts establish both rights and obligations for each of the parties. If those rights and
obligations are interdependent and cannot be separ
ated, they constitute a single
inseparable asset or liability and hence form a single unit of account. For example, this
is the case with executory contracts (see 7.1.2 below). Conversely, if rights are separable
from obligations, it may sometimes be appropriate to group the rights separately from
the obligations, resulting in the identification of one or more separate assets and
liabilities. In other cases, it may be more appropriate to group separable rights and
obligations in a single unit of account treating them as a single asset or a single liability.
[CF 4.53].
Treating a set of rights and obligations as a single unit of account differs from offsetting
assets and liabilities (see 10.2.1.A below). [CF 4.54].
Possible units of account include:
• an individual right or individual obligation;
• all rights, all obligations, or all rights and all obligations, arising from a single source,
for example, a contract;
• a subgroup of those rights or obligations, or both, for example, a subgroup of rights
over an item of property, plant and equipment for which the useful life and pattern
of consumption differ from those of the other rights over that item;
• a group of rights or obligations, or both, arising from a portfolio of similar items;
• a group of rights or obligations, or both, arising from a portfolio of dissimilar items
(for example, a portfolio of assets and liabilities to be disposed of in a single
transaction); and
• a risk exposure within a portfolio of items; if a portfolio of items is subject to a
common risk, some aspects of the accounting for that portfolio could focus on the
aggregate exposure to that risk within the portfolio. [CF 4.55].
7.1.2 Executory
contracts
An executory contract is a contract, or a portion of a contract, that is equally
unperformed. That is, either: neither party has fulfilled any of its obligations, or both
parties have partially fulfilled their obligations to an equal extent. [CF 4.56].
An executory contract establishes a combined right and obligation to exchange
economic resources. The right and obligation are interdependent and cannot be
separated. Hence, the combined right and obligation constitute a single asset or liability.
The entity has an asset if the terms of the exchange are currently favourable; it has a
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 14
