IFRS Conceptual Framework: Complete Guide for 2026

IFRS Conceptual Framework for Financial Reporting: What Every Finance Professional Must Know

If you have ever wondered why certain things are classified as assets while others are not, or why some information appears in the notes rather than on the face of the balance sheet, the answer lies in the Conceptual Framework for Financial Reporting.

This document is the foundation of everything IFRS. It sets out the principles that guide the preparation of financial statements, what information they should contain, and why that information matters to users.

After 25+ years of teaching IFRS and helping professionals pass the ACCA Diploma in IFRS, I can tell you that students who deeply understand the Conceptual Framework outperform those who only memorise individual standards. This article breaks down the Framework chapter by chapter, in plain language, with exam and career insights throughout.

Watch a video explaining the conceptual framework

What Is the Conceptual Framework?

The IFRS Conceptual Framework is a document issued by the International Accounting Standards Board (IASB) that sets out:

• The objective of financial reporting
• The qualitative characteristics of useful financial information
• Definitions of assets, liabilities, equity, income and expenses
• Recognition and derecognition criteria
• Measurement bases
• Presentation and disclosure concepts
• Concepts of capital and capital maintenance

The current version was issued in March 2018 and replaced earlier versions from 1989 and 2010.

Why the Conceptual Framework Matters

For Standard-Setters

The IASB uses the Framework when developing new standards or revising existing ones. It ensures that standards are conceptually consistent and that similar transactions are treated consistently.

For Preparers

When no specific standard applies to a transaction, or when a standard allows a choice of accounting policy, preparers use the Framework to develop an appropriate policy.

For Users

The Framework helps investors, analysts and other users understand why financial statements are prepared in a particular way and what the numbers mean.

For Students and Candidates

Understanding the Framework helps you answer exam questions that require judgement, not just rule recall. It is especially important for IFRS interview questions where you need to explain "why" as well as "what."

Chapter-by-Chapter Breakdown

Chapter 1 – Objective of General-Purpose Financial Reporting

The primary objective is to provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Key points:

• Users need information to assess the entity's prospects for future net cash inflows.
• Information is needed about the entity's economic resources (assets), claims against the entity (liabilities and equity), and changes in those resources and claims.
• Financial statements also provide information to assess management's stewardship of the entity's resources.

Exam tip: When asked about the objective of financial reporting, always mention "decision-usefulness" and "resource allocation decisions by capital providers."

Chapter 2 – Qualitative Characteristics of Useful Financial Information

The Framework identifies two categories of qualitative characteristics:

Fundamental Characteristics

1. Relevance
   • Information is relevant if it can affect users' decisions.
   • Relevant information has predictive value (helps users predict future outcomes) and/or confirmatory value (confirms or changes past assessments).
   • Materiality is an entity-specific aspect of relevance.
2. Faithful Representation
   • Information faithfully represents what it purports to represent.
   • Faithful representation requires information to be complete, neutral and free from error.

Enhancing Characteristics

1. Comparability – Users can identify similarities and differences between items.
2. Verifiability – Different knowledgeable observers could reach consensus that the information is faithfully represented.
3. Timeliness – Information is available to users in time to influence their decisions.
4. Understandability – Information is classified, characterised and presented clearly.

Exam tip: Fundamental characteristics must be present; enhancing characteristics improve usefulness but cannot make non-relevant or unfaithful information useful.

For a deeper understanding of IFRS principles, see my article on objectives of IFRS.

Chapter 3 – Financial Statements and the Reporting Entity

This chapter covers:

• Objective of financial statements – To provide information about an entity's assets, liabilities, equity, income and expenses that is useful for assessing prospects for future cash flows and management's stewardship.
• Reporting period – Financial statements are prepared for a specified period and provide comparative information.
• Reporting entity – An entity that is required or chooses to prepare financial statements. It can be a single entity or a group comprising a parent and its subsidiaries.
• Consolidated vs unconsolidated financial statements – The Framework acknowledges both perspectives and their different information value.

Chapter 4 – Elements of Financial Statements

The Framework defines five elements:

Key change in 2018: The definitions of assets and liabilities were updated. Assets are now defined in terms of "rights" rather than "future economic benefits," and liabilities are defined in terms of "obligations" rather than "outflows."

Exam tip: Be precise with definitions. Examiners often test whether candidates can correctly identify whether something meets the definition of an asset or liability.

Chapter 5 – Recognition and Derecognition

Recognition

An item is recognised in the financial statements when:

• It meets the definition of an element (asset, liability, equity, income or expense), AND
• Recognition provides relevant information about the element, AND
• Recognition provides a faithful representation of the element.

The Framework moved away from the old "probability" threshold. Recognition now depends on whether it provides useful information, considering:

• Existence uncertainty – Is there uncertainty about whether the element exists?
• Low probability of inflow/outflow – Even low-probability items may be recognised if it provides relevant information.
• Measurement uncertainty – Can the item be measured reliably enough?

Derecognition

Derecognition is the removal of a previously recognised asset or liability from the financial statements. It normally occurs when the item no longer meets the definition of an asset or liability.

Chapter 6 – Measurement

Measurement means assigning a monetary amount to an element. The Framework identifies two categories:

Historical Cost Measures

• Historical cost – The amount paid to acquire an asset or received for a liability at the transaction date.
• Provides information about the transaction price at inception.

Current Value Measures

• Fair value – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
• Value in use (assets) / Fulfilment value (liabilities) – Entity-specific measures based on expected cash flows.
• Current cost – The cost of an equivalent asset or liability at the measurement date.

Which measurement basis to use?

The Framework does not prescribe a single basis. The choice depends on which measurement provides the most relevant information and faithfully represents the item, given its nature and how it contributes to future cash flows.

For the practical application of measurement concepts, see my IFRS 9 interview questions , which cover the classification and measurement of financial instruments.

Chapter 7 – Presentation and Disclosure

This chapter addresses how information is communicated in financial statements:

• Classification – Grouping similar items and separating dissimilar items.
• Aggregation – Summarising information, balanced against the need for detail.
• Offsetting – Generally not allowed unless it reflects the substance of the transaction.

The chapter emphasises that presentation and disclosure should result in information that is relevant and faithfully represents what it purports to represent.

Note: IFRS 18 "Presentation and Disclosure in Financial Statements" (effective 2027) will replace IAS 1 and bring significant changes to how financial statements are presented. The IFRS standards list on Eduyush tracks these developments.

Chapter 8 – Concepts of Capital and Capital Maintenance

This chapter is less frequently tested but important for understanding profit measurement:

Financial Capital Maintenance

• Profit is earned only if the monetary amount of net assets at the end of the period exceeds the amount at the beginning (after excluding contributions from and distributions to owners).
• Most entities use this concept.

Physical Capital Maintenance

• Profit is earned only if the physical productive capacity at the end of the period exceeds that at the beginning.
• Relevant in hyperinflationary economies or for entities focused on maintaining productive capacity.

How the Conceptual Framework Relates to Accounting Standards

The Framework is not an accounting standard. It does not override any specific IFRS.

However, it serves as:

• The foundation on which standards are built
• A fallback when no standard applies
• A guide for interpreting ambiguous wording in standards

If a standard conflicts with the Framework, the standard takes precedence – but the IASB explains the reason for the departure in the Basis for Conclusions.

For a detailed comparison, see my article on the difference between conceptual frameworks and accounting standards.

Conceptual Framework in DipIFR Exams

The Conceptual Framework appears in DipIFR in several ways:

1. Direct questions – Section A sometimes includes a question on Framework principles.
2. Application questions – You may be asked to apply Framework concepts to determine the correct treatment for an unusual transaction.
3. Justification questions – When explaining why a particular treatment is correct, Framework principles strengthen your answer.

Common Exam Scenarios

• Does an item meet the definition of an asset or liability?
• Should an item be recognised, and why?
• Which measurement basis is most appropriate?
• How should information be presented or disclosed?

My article on how to pass ACCA DipIFR first attempt includes specific tips on using Framework concepts in your answers.

Practical Application Examples

Example 1 – Crypto Assets

A company holds Bitcoin. No specific IFRS standard covers crypto assets. How do you account for it?

Using the Framework:

1. Does it meet the definition of an asset? Yes – it is a present economic resource (a right) controlled by the entity as a result of a past event (purchase).
2. Recognition? Yes – it provides relevant and faithfully represented information.
3. Measurement? Consider IAS 38 (intangible asset) or IAS 2 (inventory) by analogy, depending on the business model.

Example 2 – Contingent Liability

A company is sued but believes it will probably win the case. Should it recognise a liability?

Using the Framework:

1. Definition – Is there a present obligation? Potentially yes, depending on the legal analysis.
2. Recognition – Does recognition provide useful information? If the probability of outflow is low, recognition may not provide relevant information. Disclosure may be more appropriate.

Benefits of Understanding the Conceptual Framework

1. Better exam performance – You can answer "why" questions, not just "what" questions.
2. Stronger interview answers – You demonstrate conceptual depth, not just rule memorisation.
3. More confident practice – When you face an unusual transaction, you have a principled approach.
4. Easier learning – New standards make more sense when you understand the underlying concepts.

For a broader view of IFRS advantages, see my article on benefits of IFRS.

Limitations of the Conceptual Framework

The Framework is not perfect:

• Judgement required – Applying principles requires professional judgement, which can lead to inconsistency.
• Not all standards align perfectly – Some older standards were written before the 2018 Framework and may not fully align.
• Complexity – For students new to IFRS, the Framework can feel abstract until connected to specific standards.

To provide a balanced view, my article on the disadvantages of IFRS discusses the challenges of working with a principles-based system.

Final Thoughts

The Conceptual Framework for Financial Reporting is the foundation on which all IFRS standards are built. It explains why financial statements exist, what makes information useful and how elements should be defined, recognised, measured and presented.

If you invest time in understanding the Framework deeply, you will:

• Score higher in DipIFR and SBR exams
• Stand out in job interviews
• Handle unusual transactions with confidence
• Learn new standards faster as they are issued

Do not treat the Framework as "optional reading." Treat it as the key that unlocks everything else in IFRS.

About the Author

*This article was written by Vicky Sarin, CA, Founder & CEO of Eduyush.com, with over 25 years of post-qualification experience in financial reporting, audit and global accounting education. Vicky