## **Learning Outcomes**

By studying this article, you will understand the purpose of the conceptual framework and its impact on international financial reporting. You will be able to explain the qualitative characteristics of useful financial information, distinguish between different measurement bases used in financial statements, and apply the concept of materiality in recognition, measurement, and disclosure decisions. This knowledge is essential for scenario-based questions on the ACCA SBR exam.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand how the conceptual framework informs the preparation and presentation of financial statements under IFRS. Focus your revision on the following syllabus areas:

- The objective, scope, and authority of the Conceptual Framework
- Fundamental and enhancing qualitative characteristics of useful financial information
- Key measurement bases: historical cost, fair value, value in use, and current cost
- Principles and application of materiality in recognition and disclosure
- The interaction between the Conceptual Framework and accounting standards

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which qualitative characteristic is most closely linked to the requirement for financial information to be unbiased and not favour one outcome over another?  
   a) Relevance  
   b) Faithful representation  
   c) Comparability  
   d) Timeliness

2. An entity owns a property used for rental. Under IFRS, what factors should the entity consider when choosing a measurement basis for this asset?  
   a) The asset’s physical location  
   b) How the asset will generate future cash flows  
   c) Only historical transactions  
   d) Tax laws in the jurisdiction

3. True or false? A disclosure is material only if its omission would change the reported profit or loss by more than 10%.

4. Name the two fundamental qualitative characteristics of useful financial information.

5. Briefly state one reason why an item may meet the definition of an element (asset/liability) but not be recognised in the financial statements.

## **Introduction**

The Conceptual Framework for Financial Reporting issued by the IASB sets out the objective and concepts for general purpose financial statements. Its principles guide the development of accounting standards and help preparers and users interpret and apply IFRS Standards. Understanding the framework is critical for applying judgment when an accounting treatment is not addressed directly in an IFRS, and for identifying the reasoning behind accounting requirements.

At the core of the framework are the qualitative characteristics of useful information—what makes information decision-useful for investors, lenders, and other primary users. Selecting an appropriate measurement basis is a critical part of presenting a faithful financial position, while making materiality judgments ensures reports focus only on what drives useful economic decisions.

> **Key Term: Conceptual Framework**  
> A unified set of concepts providing the IASB with a basis for developing and revising IFRS Standards and for preparers to apply consistent judgment.

## The Objective of Financial Reporting

The purpose of general purpose financial reporting is to provide information about the reporting entity’s assets, liabilities, equity, income, and expenses. This enables investors, lenders, and creditors to assess an entity’s prospects for future cash flows and management’s stewardship of economic resources.

Reporting must be done on a going concern basis unless liquidation is planned or forced.

> **Key Term: going concern**  
> The assumption that an entity will continue its operations for the foreseeable future, not intending to liquidate or cease trading.

## Qualitative Characteristics of Useful Financial Information

The framework categorises qualitative characteristics into two groups: fundamental and enhancing.

### Fundamental Qualitative Characteristics

**Relevance**  
Information is relevant if it can influence users’ decisions by helping them evaluate past, present, or future events, or confirming/correcting their past evaluations. This includes information with predictive or confirmatory value.

If information is relevant, the next consideration is whether it is material.

> **Key Term: relevance**  
> The capacity of information to make a difference to economic decisions by users.

**Faithful Representation**  
Useful information must depict the economic phenomena it purports to represent—completeness, neutrality, and freedom from error are all required. If an estimate is necessary, its basis and limitations must be transparent.

> **Key Term: faithful representation**  
> Depiction of economic phenomena that is complete, neutral, and free from error.

### Enhancing Qualitative Characteristics

- **Comparability**: Users should be able to compare financial statements over time and between entities.
- **Verifiability**: Knowledgeable, independent observers could reach a consensus that a particular depiction is faithfully represented.
- **Timeliness**: Information should be available in time to influence decisions.
- **Understandability**: Information should be classified, characterised, and presented clearly and concisely.

> **Key Term: comparability**  
> The quality that allows users to identify similarities and differences between two sets of economic phenomena.
>
> **Key Term: verifiability**  
> The degree to which different observers can reach consensus that an information depiction is faithfully represented.

## Materiality

Materiality acts as an entity-specific aspect of relevance. Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions of primary users.

Judgments on materiality consider both quantitative (size) and qualitative (nature) factors. An item of small value can still be material if its nature (e.g., related party transactions) could affect decisions.

> **Key Term: materiality**  
> The threshold at which information becomes relevant to users’ decisions, requiring separate recognition or disclosure.

## Measurement Bases in Accounting

When numbers are included in financial statements, they must represent real economic positions. The Conceptual Framework identifies several measurement bases:

- **Historical Cost**: Amount paid at acquisition or incurred at initial recognition.
- **Current Value Measures**:
  - **Fair Value**: Price at which an asset could be sold, or a liability paid, in an orderly transaction between market participants.
  - **Value in Use**: Present value of cash flows expected from use of an asset and its eventual disposal.
  - **Current Cost**: Amount required to acquire the equivalent asset or settle an equivalent liability at measurement date.

The basis chosen must provide relevant and faithfully represented information, considering how the asset or liability contributes to future cash flows.

> **Key Term: measurement base**  
> The valuation method used to quantify an element in the financial statements.

### Selecting a Measurement Basis

The primary considerations are:

- The characteristics of the asset or liability (e.g., is it unique, traded, subject to active market data?).
- How the asset or liability is expected to generate or require cash flows.
- Whether the measurement uncertainty associated with the basis would reduce the usefulness of the information.

### **Worked Example 1.1**

A company owns investment property. It can choose between the historical cost and fair value models. If the entity intends to sell the asset in the near future and market prices are readily available, which model most likely provides more relevant information to users?

> **Answer:**  
> The fair value model is generally more relevant, as it reflects current market conditions influencing future cash flows. It provides up-to-date, useful information for decision-makers about the expected proceeds on sale.

### When Recognition May Not Occur

Not every item that meets the definition of an asset or liability is always recognised. Recognition is only appropriate if it results in relevant and faithfully represented information. For example, if the value of an internally generated brand cannot be measured reliably, its recognition may not be appropriate under IFRS.

### **Worked Example 1.2**

A company spends significant amounts building its reputation and customer base through advertising. Can this "brand" always be recognised as an asset?

> **Answer:**  
> No. Usually, internally generated brands are not recognised because their costs cannot be separated from other business expenses and their value cannot be measured reliably. Recognition would not result in faithful representation.

### **Exam Warning**

In SBR exam answers, do not confuse relevance with faithful representation. Both are required for information to be useful—show that you understand the difference and apply both terms accurately.

## Materiality in Practice

Materiality affects:

- Whether an item is recognised or aggregated with others
- The detail of its presentation and disclosure
- Decisions to provide additional entity-specific information above minimum IFRS requirements

For example, a small expense may be inmaterial and grouped in a general line item, unless its nature is sensitive (such as a director's loan).

### **Worked Example 1.3**

Company Q adopts a policy of expensing items of equipment costing below \$2,000 directly to profit or loss, instead of recognising them as property, plant and equipment. Total annual spend under this policy is \$25,000, and revenue is \$10 million. Is this policy likely to breach the materiality concept?

> **Answer:**  
> Provided the aggregate value is immaterial in the context of the financial statements, the policy is acceptable. If the omitted total were material due to size or nature, separate recognition would be required.

## Summary

The Conceptual Framework provides a consistent structure for financial reporting, focusing on creating useful financial information by balancing relevance and faithful representation. Measurement bases must be selected with these characteristics in mind, and the concept of materiality ensures that only significant information is highlighted for users, aiding their economic decisions.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the objective of financial reporting as per the Conceptual Framework
- Distinguish between fundamental and enhancing qualitative characteristics
- Define and discuss materiality, including quantitative and qualitative aspects
- Identify and describe the main measurement bases: historical cost, fair value, value in use, current cost
- Apply decision-making about recognition and measurement based on usefulness and uncertainty
- Explain how materiality impacts recognition, measurement, and disclosure decisions

## **Key Terms and Concepts**

- Conceptual Framework
- going concern
- relevance
- faithful representation
- comparability
- verifiability
- materiality
- measurement base

Conceptual framework and materiality - Measurement bases and qualitative characteristics