Conceptual Framework for Financial Reporting

Understandability
Classifying, characterising and presenting information clearly and concisely
makes it understandable.
Some phenomena are inherently complex and cannot be made easy to
understand. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to
understand. However, those reports would be incomplete and therefore
possibly misleading.
Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the information
diligently. At times, even well-informed and diligent users may need to seek
the aid of an adviser to understand information about complex economic
phenomena.
Applying the enhancing qualitative characteristics
Enhancing qualitative characteristics should be maximised to the extent
possible. However, the enhancing qualitative characteristics, either
individually or as a group, cannot make information useful if that
information is irrelevant or does not provide a faithful representation of what
it purports to represent.
Applying the enhancing qualitative characteristics is an iterative process that
does not follow a prescribed order. Sometimes, one enhancing qualitative
characteristic may have to be diminished to maximise another qualitative
characteristic. For example, a temporary reduction in comparability as a result
of prospectively applying a new Standard may be worthwhile to improve
relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for non-comparability.
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Conceptual Framework
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© IFRS Foundation

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The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by
financial reporting. Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of reporting that
information. There are several types of costs and benefits to consider.
Providers of financial information expend most of the effort involved in
collecting, processing, verifying and disseminating financial information, but
users ultimately bear those costs in the form of reduced returns. Users of
financial information also incur costs of analysing and interpreting the
information provided. If needed information is not provided, users incur
additional costs to obtain that information elsewhere or to estimate it.
Reporting financial information that is relevant and faithfully represents what
it purports to represent helps users to make decisions with more confidence.
This results in more efficient functioning of capital markets and a lower cost
of capital for the economy as a whole. An individual investor, lender or other
creditor also receives benefits by making more informed decisions. However,
it is not possible for general purpose financial reports to provide all the
information that every user finds relevant.
In applying the cost constraint, the Board assesses whether the benefits of
reporting particular information are likely to justify the costs incurred to
provide and use that information. When applying the cost constraint in
developing a proposed Standard, the Board seeks information from providers
of financial information, users, auditors, academics and others about the
expected nature and quantity of the benefits and costs of that Standard. In
most situations, assessments are based on a combination of quantitative and
qualitative information.
Because of the inherent subjectivity, different individuals’ assessments of the
costs and benefits of reporting particular items of financial information will
vary. Therefore, the Board seeks to consider costs and benefits in relation to
financial reporting generally, and not just in relation to individual reporting
entities. That does not mean that assessments of costs and benefits always
justify the same reporting requirements for all entities. Differences may be
appropriate because of different sizes of entities, different ways of raising
capital (publicly or privately), different users’ needs or other factors.
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Conceptual Framework
© IFRS Foundation
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