What is the Conceptual Framework for?
It has three jobs. It helps the IASB develop standards on a consistent basis. It helps companies develop accounting policies when no standard applies to a transaction, which IAS 8 requires them to do with reference to the Framework. And it helps everyone else, from auditors to students, understand and interpret the standards.
The current version was issued in March 2018. It is not a standard: where a standard and the Framework disagree, the standard wins.
How is it organised?
| Chapter | What it covers |
|---|---|
| 1. Objective | Financial reporting provides information useful to investors, lenders and other creditors in making decisions about providing resources to the entity |
| 2. Qualitative characteristics | What makes information useful |
| 3. Financial statements and the reporting entity | What financial statements are and whose they are |
| 4. Elements | Definitions of assets, liabilities, equity, income and expenses |
| 5. Recognition and derecognition | When an item goes on, and comes off, the statements |
| 6. Measurement | Historical cost and current value bases |
| 7. Presentation and disclosure | How information is grouped and communicated |
| 8. Capital and capital maintenance | How profit is defined relative to capital |
What makes information useful?
Two fundamental characteristics. Information must be relevant, meaning capable of making a difference to decisions, which includes being material. And it must be a faithful representation: complete, neutral and free from error. Four enhancing characteristics make useful information more useful: comparability, verifiability, timeliness and understandability. Cost is the constraint: the benefits of the information should justify the cost of providing it.
How are assets and liabilities defined?
| Element | Definition, in plain English |
|---|---|
| Asset | 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. |
| Liability | A present obligation of the entity to transfer an economic resource as a result of past events. |
| Equity | What is left of the assets after deducting all liabilities. |
| Income | Increases in assets or decreases in liabilities that increase equity, other than contributions from owners. |
| Expenses | Decreases in assets or increases in liabilities that decrease equity, other than distributions to owners. |
Notice that income and expenses are defined through assets and liabilities. That is why so many standards start by asking whether an asset or a liability exists.
Applying the definitions: three examples
| Situation | Question | Answer under the Framework |
|---|---|---|
| A company pays CU 12,000 for a year's insurance on 1 October | Is the unexpired part an asset at 31 December? | Yes. The right to nine more months of cover is a present resource the company controls. CU 9,000 is an asset; CU 3,000 is an expense. |
| A company has a policy, published on its website, of cleaning up land it damages, though the law does not require it | Is there a liability after it damages a site? | Yes, if it has no practical ability to avoid the clean-up. Its published practice creates a present obligation; IAS 37 calls this a constructive obligation. |
| A company's staff are highly skilled and loyal | Is the workforce an asset? | No. The company does not control the employees' skills, because staff can leave. The benefit of a skilled team appears indirectly, through results. |
When is an item recognised?
An item is recognised when it meets the definition of an element and recognising it gives users relevant information and a faithful representation. Uncertainty about whether an asset or liability exists, or a very low probability of benefits, may mean recognition is not useful; in those cases disclosure may be enough.
Which measurement bases exist?
Historical cost, updated for consumption and impairment, and current value, which includes fair value, value in use for assets and fulfilment value for liabilities, and current cost. The Framework explains the trade-offs; the individual standards decide which basis applies.
Where to go next
See the Framework at work in revenue, where income follows the transfer of goods and services: IFRS 15 explained. Then practise the entries in debits and credits for each standard. To place the Framework among the standards, read what is IFRS.
Need help applying the standards?
Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.
Questions people ask
Is the Conceptual Framework a standard?
No. It sets out concepts and never overrides a standard, but companies use it when no standard applies.
What are the fundamental qualitative characteristics?
Relevance and faithful representation.
How does the Conceptual Framework define an asset?
A present economic resource controlled by the entity as a result of past events.
When was the Conceptual Framework last revised?
In March 2018.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IFRS Foundation: Who uses IFRS Accounting Standards?
- IFRS Foundation: Conceptual Framework for Financial Reporting
Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.
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This guide is general information. It is not tax or legal advice for your situation.