The Conceptual Framework for Financial Reporting 2020
The Conceptual Framework for Financial Reporting
The IASB's rulebook for when there is no rule. This is the revised Framework issued in March 2018 and effective for periods beginning on or after 1 January 2020 — the version your DipIFR exam tests. We've written it the way you'll actually use it in the exam hall: definitions, decision steps, and worked examples.
What the Framework is (and what it isn't)
The Conceptual Framework is a single document that sets out the objective of, and the concepts for, general purpose financial reporting. Think of it as the constitution behind the standards: it tells the IASB how to build IFRS, helps preparers write sensible accounting policies where no standard exists, and helps everyone interpret the standards consistently.
The Framework is not an accounting standard. If a specific IFRS or IAS covers your transaction, you follow the standard — even in the rare case where it appears to conflict with the Framework. The Framework fills the gaps; it doesn't override the rules.
When you actually apply it
You reach for the Framework when there is no IFRS that specifically applies to a transaction. Under IAS 8, management develops an accounting policy that gives relevant, reliable information — and the Framework's definitions and concepts are the foundation you build it on. In the exam this appears as "there is no specific standard — how should this be accounted for?", your cue to run the same three-step lens every time:
Definition
Is it an element? Asset, liability, equity, income or expense.
Recognition
Does recording it give relevant, faithfully represented information?
Measurement
At what amount? Historical cost, or a current value.
Every worked example below runs this lens. Learn it once and you can attack any unfamiliar transaction the examiner throws at you.
Chapter 1 · The objective of general purpose financial reporting
The objective is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in deciding whether to provide resources to the entity — buying, selling or holding shares and debt, or providing loans and credit.
These primary users can't demand information directly, so they rely on general purpose financial reports. Note who is not a primary user: management (they get information internally) and regulators/the public (reports aren't primarily directed at them).
The 2018 revision gives stewardship explicit prominence: users need information to assess how efficiently and effectively management has used the entity's resources, not only to predict future cash flows. If a question asks "why does this information matter to users?", stewardship is a scoring point.
Chapter 2 · Qualitative characteristics of useful information
Information is only useful if it has the two fundamental characteristics. The four enhancing characteristics then make useful information more useful — but they can't rescue information that isn't relevant or faithfully represented in the first place.
The two fundamental characteristics
1 · Relevance
Information that can influence users' decisions. It has predictive value, confirmatory value, or both.
Materiality is an entity-specific aspect of relevance: information is material if omitting or misstating it could influence users' decisions.
2 · Faithful representation
Information that represents the substance of what it purports to. To be perfectly faithful it should be complete, neutral and free from error.
Neutrality is supported by prudence — caution under uncertainty (don't overstate assets/income or understate liabilities/expenses).
The four enhancing characteristics
Comparability
Users can identify similarities and differences — between periods and between entities. Consistency helps achieve it.
Verifiability
Independent, knowledgeable observers could reach consensus that a depiction is faithful (directly or indirectly).
Timeliness
Information reaches users in time to influence their decisions. Older information is generally less useful.
Understandability
Classified, characterised and presented clearly. Users are assumed to have reasonable business knowledge.
All of this is subject to the cost constraint: the benefit of providing information must justify the cost of producing it.
Plenty of material online still teaches the 1989/2010 Framework. If your notes say any of the following, they're out of date:
- "Reliability" as a quality of information → replaced by faithful representation (complete, neutral, free from error).
- Prudence "removed" → it was reintroduced in 2018 as support for neutrality ("cautious prudence").
- A recognition test of "probable + reliably measurable" → replaced by relevance + faithful representation (see Chapter 5).
Use the current vocabulary in your answers — examiners reward the precise wording.
An entity "sells" an asset but signs a side agreement that lets it keep enjoying the asset's benefits (a financing arrangement using the asset as collateral). Legal form says sale; economic substance says secured borrowing. Faithful representation means you report the substance — no sale, and a liability is recognised. The 2018 Framework explicitly reinstated substance over form as part of faithful representation.
Chapter 3 · Financial statements & the reporting entity NEW
This chapter was added in 2018. Two things to know for the exam:
- Going concern remains the underlying assumption — statements are prepared assuming the entity will continue operating for the foreseeable future, with no intention or need to liquidate or materially curtail operations. If that assumption fails, a different (break-up) basis is used and disclosed.
- The reporting entity is an entity that must, or chooses to, prepare financial statements. It isn't necessarily a legal entity — it can be a single entity, or a parent plus its subsidiaries (a group), giving consolidated financial statements.
A bank loan is conditional on financial covenants; a breach lets the bank call in the loan. The entity has breached, can't refinance, and would be liquidated. Statements should not be prepared on a going concern basis — assets can no longer be valued on the assumption the business continues.
Chapter 4 · The elements of financial statements
Five elements. The 2018 definitions of asset and liability changed — these two are the highest-yield definitions in the whole syllabus, so learn the exact wording.
A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
A present obligation of the entity to transfer an economic resource as a result of past events. The entity must have no practical ability to avoid the transfer.
Under the old definition, an asset was expected to give rise to a flow of economic benefits, and that flow had to be probable. In 2018 the asset is the economic resource itself (a right), and the flow of benefits need not be certain, or even likely — the resource only needs the potential to produce benefits. Probability moved out of the definition and is now handled at recognition instead. Same logic for liabilities and the "no practical ability to avoid" test.
The other three elements are unchanged in substance:
| Element | Definition |
|---|---|
| Equity | The residual interest in the assets of the entity after deducting all its liabilities. |
| Income | Increases in assets, or decreases in liabilities, that result in increases in equity — other than contributions from equity holders. |
| Expenses | Decreases in assets, or increases in liabilities, that result in decreases in equity — other than distributions to equity holders. |
Company A holds listed shares as trustee for Company B. B makes all decisions and takes all the gains/losses; A just earns a fee. Does A recognise the shares? No. Control means the power to obtain the benefits — and those benefits flow to B. Possession isn't control.
Chapter 5 · Recognition & derecognition REVISED
Recognition is step 2 of the lens — the process of including an item in the statement of financial position or the statement(s) of financial performance. The old two-part test ("probable inflow/outflow" + "reliable measurement") is gone.
Recognise an asset or liability (and any related income, expense or change in equity) only if doing so provides users with both:
- Relevant information about the item — affected by, e.g., low probability of a flow of benefits or existence uncertainty.
- A faithful representation of the item — affected by, e.g., measurement uncertainty or an accounting mismatch.
…always weighed against the cost constraint.
Derecognition — new guidance in 2018 — is the removal of an asset or liability, normally when the entity loses control of the asset, or no longer has a present obligation for the liability. The aim is to faithfully represent both the items retained and the change from the transaction.
A drinks company's brand is world-famous, could be sold, and clearly has value — so it meets the definition of an asset. Does the company recognise it? No. IAS 38 prohibits recognising internally-generated brands because the cost can't be reliably distinguished from the cost of developing the business as a whole. A neat illustration that meeting the definition ≠ being recognised.
Chapter 6 · Measurement
Measurement is step 3 of the lens — choosing the monetary amount at which an element is shown. The 2018 Framework sorts every basis into two big buckets:
Historical cost
Based on the price of the transaction that created the item — updated for consumption, impairment and interest, but not for later price changes.
Current value
There's no single "right" basis. The choice depends on how it contributes to relevance and faithful representation, given the item's characteristics and how it produces cash flows. In practice most statements use a mixed measurement model — inventory at lower of cost and NRV, some financial assets at fair value, pension liabilities at present value.
A company buys Bitcoin. No IFRS deals directly with cryptocurrency, so you run all three steps:
- Definition — Is it an asset? Yes: a present economic resource (a right) controlled by the entity as a result of a past event (the purchase).
- Recognition — Does recording it give relevant, faithfully represented information? Yes.
- Measurement — No dedicated standard, so apply the closest one by analogy: usually IAS 38 (intangible asset), or IAS 2 (inventory) if held for sale in the ordinary course of business.
This is the lens working end-to-end — exactly what "there is no specific standard" questions are testing.
Chapter 7 · Presentation & disclosure NEW
Also new in 2018. Effective communication is a goal in its own right. The key exam-relevant idea is the split between the two performance statements:
- Income and expenses are normally included in the statement of profit or loss — the primary source of information about performance.
- In limited cases the Framework allows income/expenses in other comprehensive income (OCI) where doing so gives more relevant information / a more faithful representation.
- In principle, amounts in OCI are recycled (reclassified) to profit or loss in a later period when that enhances relevance — unless there's no clear basis for identifying when that should happen.
Chapter 8 · Concepts of capital & capital maintenance
Largely carried forward from the old Framework. Two concepts of capital, and profit is only earned once capital has been maintained:
Financial capital maintenance
Profit is earned only if net assets at period-end exceed net assets at the start (excluding owner transactions). Measured in nominal money or constant purchasing power. Adopted by most entities.
Physical capital maintenance
Profit is earned only if the entity's physical productive capacity at period-end exceeds that at the start. Requires the current cost measurement basis.
The difference between them is how they treat price changes (holding gains): under financial capital maintenance in nominal terms, price increases on assets held are conceptually profits; under physical capital maintenance, they're treated as capital maintenance adjustments within equity.
How to score the Framework in the DipIFR exam
The Framework rarely turns up as a standalone question — it's the reasoning tool examiners expect you to apply when a scenario has no obvious standard, or when they ask you to justify a treatment. Three reliable ways to earn marks:
- Run the three-step lens out loud. Definition → recognition → measurement. Even when the conclusion is short, showing the structure earns method marks.
- Quote the current definitions precisely. "Present economic resource controlled… as a result of past events" beats a vague paraphrase. Precision here is cheap marks.
- Name the characteristic you're relying on. "This gives a faithful representation because it reflects the substance, not the legal form" tells the marker exactly which concept you're applying.
An entity is sued but believes it will probably win. Recognise a liability?
- Definition — Is there a present obligation to transfer a resource? Possibly, depending on the legal analysis.
- Recognition — Does recognition give relevant, faithfully represented information? If the probability of outflow is low, recognising a liability may not be relevant — disclosure of a contingent liability under IAS 37 may be the faithful answer instead.
Notice how the Framework and IAS 37 work together — that linkage is exactly what earns marks.
For more worked scenarios and the full lecture-style walkthrough, see our companion note: Conceptual Framework — summary & lecture. Pair it with our DipIFR pass-rate guide and eligibility guide.
Preparing for the DipIFR exam?
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Frequently asked questions
Is the Conceptual Framework an accounting standard?
No. The Framework sets out concepts, not requirements. Where a specific IFRS or IAS applies, you follow the standard — even if it appears to conflict with the Framework. You use the Framework mainly when no standard covers a transaction and you need to develop an accounting policy.
Which version of the Framework does DipIFR examine?
The revised Framework issued in March 2018, effective for annual periods beginning on or after 1 January 2020. Older material that lists "reliability" as a quality of information, or uses a "probable + reliably measurable" recognition test, reflects the superseded 1989/2010 version.
What are the qualitative characteristics of useful financial information?
Two fundamental characteristics — relevance and faithful representation — and four enhancing characteristics — comparability, verifiability, timeliness and understandability. The Framework also makes explicit reference to prudence and substance over form, both within faithful representation, and applies a cost constraint over everything.
How did the 2018 asset and liability definitions change?
An asset is now a present economic resource (a right with the potential to produce economic benefits) controlled by the entity as a result of past events — the flow of benefits no longer needs to be probable. A liability is a present obligation to transfer an economic resource as a result of past events, where the entity has no practical ability to avoid the transfer. Probability moved out of the definitions and into the recognition decision.
What are the measurement bases in the Framework?
Two categories: historical cost, and current value. Current value includes fair value (an exit price), value in use / fulfilment value (entity-specific present values), and current cost (an entry price). The choice depends on which basis best delivers relevant information and a faithful representation.
How is the Framework tested in the DipIFR exam?
Usually as a reasoning tool rather than a standalone question: apply the definition → recognition → measurement lens to a scenario with no obvious standard, quote the current definitions precisely, and name the qualitative characteristic you're relying on. Method and precision earn the marks.
Written for the revised Conceptual Framework (IASB, March 2018), effective for periods beginning on or after 1 January 2020. Reviewed for the current DipIFR syllabus.
