Imagine a company that spends ₦50 million training its staff, and another that spends ₦50 million on a new machine. One shows an asset in its accounts and the other shows an expense. Why? Nobody can answer that by memorising a standard. The answer comes from the Conceptual Framework for Financial Reporting (the Framework), the foundation document of the International Accounting Standards Board (IASB).
It explains what financial statements are for, what makes information useful, and what an asset, a liability, equity, income and an expense actually are.
This topic covers the first half of the Framework: the objective of financial reporting, who uses the statements, the qualitative characteristics of useful information, the reporting entity and the going concern assumption, and the five elements. The next topic covers recognition, measurement, presentation and capital maintenance. The previous topics cover regulation and ethics.
The Framework helps you answer scenario questions in the Strategic Business Reporting paper, as November 2025 Question 5(a) showed.
In 30 seconds
The objective of general purpose financial reporting is to give existing and potential investors, lenders and other creditors information that helps them decide whether to provide resources to the entity. Useful information is relevant and a faithful representation (complete, neutral and free from error). It is made more useful by being comparable, verifiable, timely and understandable, and its cost must be worth the benefit.
Statements are prepared on the going concern basis for a reporting entity. The five elements are: an asset (a present economic resource controlled because of a past event), a liability (a present obligation to transfer an economic resource because of a past event), equity (assets minus liabilities), income and expenses (increases and decreases in equity, other than owners’ contributions and distributions).
Key terms in plain English
| Term | What it means |
|---|---|
| General purpose financial statements | Statements prepared for many users who cannot ask the company for tailor-made reports, such as shareholders and banks |
| Economic resource | A right that can bring money or other benefit, such as the right to use a machine or collect a debt |
| Control | The present ability to decide how a resource is used and to get the benefits from it |
| Present obligation | A duty the entity has now, which it cannot practically avoid |
| Equity | What is left for the owners after all debts are paid |
| Materiality | Information is material if leaving it out or misstating it could change users’ decisions |
| Going concern | The assumption that the business will keep operating for the foreseeable future |
Syllabus check
The Framework is examinable at this level and is listed with Chapter 1 of the syllabus. This topic covers learning outcomes (a) to (d) of the Conceptual Framework chapter:
- (a) the purpose and importance of general purpose financial statements;
- (b) the components of the Framework;
- (c) the fundamental and enhancing qualitative characteristics;
- (d) the definitions of assets, liabilities, equity, income and expenses.
Outcomes (e) and (f), on recognition, derecognition and measurement, are in the next topic. Syllabus Area B, item 1(a), also asks how measurement and recognition affect reported performance, which the two topics together support.
CAMA 2020 and the Framework
The Companies and Allied Matters Act 2020 (CAMA 2020) asks for statements that give a true and fair view. The Framework explains what makes information fairly presented.
| Section | What it says | Framework link |
|---|---|---|
| s. 374(1) | Every company keeps accounting records that explain its transactions | Records give the evidence that makes information verifiable |
| s. 377 | The directors prepare the annual financial statements | Directors are accountable (stewardship) for the resources entrusted to them |
| s. 378 | The statements follow the prescribed form and International Financial Reporting Standards and give a true and fair view. If the format does not give a true and fair view, the directors add information or depart and explain | Faithful representation is the Framework’s way of describing what a true and fair view needs |
| s. 385 | The directors’ report covers performance, governance and risk | Information outside the statements can also be useful |
The objective of financial reporting and its users
The purpose of general purpose financial reporting is to give existing and potential investors, lenders and other creditors information about the entity that is useful to them in deciding whether to provide it with resources, for example by buying shares or lending money, and in judging how well management has looked after those resources (stewardship). These are the primary users.
| User | What they want to know | Example |
|---|---|---|
| Investors | Profitability, growth and risk | Whether to buy or sell shares in a listed company |
| Lenders and creditors | Ability to repay | A bank deciding on a ₦50 million loan |
| Employees, regulators and the public | Job security, compliance, social responsibility | Tax and corporate regulators checking compliance |
Employees, regulators and the public use the statements too, but the statements are not designed mainly for them.
Financial statements tell users three things:
- Economic resources the entity controls, such as buildings, cash, machinery and inventory.
- Claims against those resources, such as loans, trade payables and tax owed.
- Changes in resources and claims during the period, caused by financial performance (shown best by accrual accounting) and by other events such as issuing shares.
For example, if a company reports ₦2 trillion of assets and ₦1.2 trillion of liabilities, users can judge whether it can pay its debts and still stay profitable.
Qualitative characteristics of useful information
These are the qualities that make financial information worth using.
Fundamental characteristics
Information must have both.
- Relevance. It can make a difference to a decision. It has predictive value (helps users forecast), confirmatory value (confirms or corrects earlier expectations), or both. Materiality is a company-specific part of relevance. Whether an item is material depends on its size or nature in the context of that company.
- Faithful representation. It shows the substance of what it claims to show. A faithful representation is complete (all the information a user needs), neutral (not slanted to win favour, and supported by the exercise of caution, called prudence) and free from error (no mistakes in description or process, though a perfect estimate is not required). Substance over form is part of this: report what a transaction really is, not only what the paperwork says.
Enhancing characteristics
They make useful information more useful, but they cannot make useless information useful.
| Characteristic | Meaning | Example |
|---|---|---|
| Comparability | Users can compare across periods and with other entities | Using the same policies each year and disclosing changes |
| Verifiability | Independent, knowledgeable people could agree that the information is a faithful representation | A bank confirmation supports a cash balance |
| Timeliness | Information is available in time to influence decisions | Publishing annual statements within the legal deadline |
| Understandability | Classified, characterised and presented clearly and concisely | Clear headings and plain notes |
The cost constraint
Reporting costs money. The benefits of information must justify the cost of providing and using it. This is why a standard may exempt a small entity from a disclosure.
The reporting entity and going concern
A reporting entity is an entity that must or chooses to prepare general purpose financial statements. It can be a single company, a portion of a company, or more than one entity. If it controls other entities, it prepares consolidated statements for the whole group, and may also present unconsolidated statements for the parent alone. A government body or a government business enterprise can also be a reporting entity.
The statements are normally prepared on the going concern assumption: the entity will carry on operating for the foreseeable future and has neither the intention nor the need to enter liquidation or stop trading. If that is not so, the statements are prepared on a different basis, which must be disclosed.
The five elements of financial statements
| Element | Definition (2018 Framework) | Plain meaning and example |
|---|---|---|
| Asset | A present economic resource controlled by the entity as a result of past events | Something the business owns or controls that can bring benefits, such as a delivery truck it bought |
| Liability | A present obligation of the entity to transfer an economic resource as a result of past events | A duty to pay or deliver, such as a bank loan |
| Equity | The residual interest in the assets after deducting all liabilities | Assets minus liabilities. Shares and retained profits are examples |
| Income | Increases in assets, or decreases in liabilities, that increase equity, other than contributions from holders of equity claims | Sales of goods, service fees, and gains such as a profit on selling equipment |
| Expenses | Decreases in assets, or increases in liabilities, that decrease equity, other than distributions to holders of equity claims | Cost of materials, wages, interest, tax, and losses such as a fall in value |
Reading the asset definition
- Economic resource. A right that has the potential to produce economic benefits. It does not need to be certain, or even likely, that benefits will flow. It is enough that in at least one circumstance the right could produce benefits.
- Control. The entity can direct how the resource is used and get the benefits. Only one party controls a resource at any time. That is why a company does not show its trained workforce as an asset: it does not control employees.
- Past event. The right arises from something that has already happened, such as a purchase.
Reading the liability definition
- Obligation. A duty or responsibility the entity has no practical ability to avoid. It can come from a contract or law, or from the entity’s own past practice or statements that create a valid expectation.
- Present. A new law does not by itself create a liability. A present obligation arises when the entity takes an action, or earns benefits, that fall within the law.
- No practical ability to avoid. If the only way out is to close the business, the obligation still exists on a going concern basis.
Equity and the accounting equation
Equity = Assets − Liabilities. If equity is positive, the entity has net assets. If it is negative, it has net liabilities, which may signal a going concern problem, though not always. Equity is made up of share capital and reserves. Reserves include retained earnings and other components of equity such as the revaluation reserve and the fair value reserve.
Income, expenses and owners
Money that owners put in is not income, and money paid to owners as dividends is not an expense. Both are transactions with equity holders and go straight through equity. Income includes revenue, from the ordinary activities of the business, and other gains, such as a profit on disposal of equipment. Expenses include the costs of ordinary activities, such as cost of sales and wages, and other losses.
The rules in more depth
Why training is usually an expense and a machine is an asset
A machine meets all three tests: the company has a right to use it, it controls it, and it came from a purchase. A trained workforce fails the control test, because employees can leave. The money spent on training has been used up, so it is an expense.
Why the Framework talks about “at least one circumstance”
Earlier versions asked whether benefits were “probable”. The 2018 Framework removed that threshold from the definitions. An item can exist as an asset or a liability even if the chance of benefit or outflow is low. Low probability affects whether recognising it gives useful information and how it is measured, which is covered in the next topic.
Faithful representation and true and fair
Nigerian law uses “true and fair view”, and the Framework uses “faithful representation”. In practice, statements that follow International Financial Reporting Standards (IFRS) and present complete, neutral and error-free information are taken to give a true and fair view.
Why prudence returned
The 2018 Framework again states that neutrality is supported by prudence, meaning caution when making judgements under uncertainty. It does not allow deliberately understating assets or income, or overstating liabilities or expenses.
Worked example: testing items against the definitions
Scenario. Sunrise Ltd has these items at the year end:
- (1) a machine bought for ₦80 million and in use
- (2) ₦5 million spent on training staff
- (3) a bank loan of ₦40 million
- (4) cash of ₦20 million
- (5) inventory of ₦30 million
- (6) trade payables of ₦25 million
During the year the owners put in ₦10 million of new shares and the company paid a ₦4 million dividend. The figures are illustrative. Decide how each item is treated and calculate equity.
- Machine. A present right to use, controlled, from a past purchase: asset, ₦80 million.
- Training. The company does not control employees and the benefit has been used up: expense, ₦5 million.
- Bank loan. A present obligation to repay, from a past event: liability, ₦40 million.
- Cash, inventory. Present economic resources controlled: assets, ₦20 million and ₦30 million.
- Trade payables. Present obligations: liability, ₦25 million.
- Equity.
Assets ₦80m + ₦20m + ₦30m = ₦130 million.
Liabilities ₦40m + ₦25m = ₦65 million.
Equity = ₦130m − ₦65m = ₦65 million. - Owners. The ₦10 million share issue is a contribution, not income. The ₦4 million dividend is a distribution, not an expense. Both change equity directly.
How to score full marks
- Define the element, then apply it. Write the definition, then say which part of the definition the item meets or fails, using words from the facts.
- Test three words for an asset: present, controlled, past event. For a liability: present, obligation, past event.
- Group the characteristics. Two fundamental (relevance, faithful representation) and four enhancing (comparability, verifiability, timeliness, understandability), with a one-line example each.
- Link the Framework to the standard. A question may ask how the Framework affects inventory valuation. Say that the Framework defines inventory as an asset, supplies recognition and measurement ideas, supports lower of cost and net realisable value through faithful representation and prudence, and fills gaps where the standard is silent.
- Quote the right version. Use the 2018 definitions, not the older ones that required “expected” benefits.
Common mistakes in the exam
- Treating the enhancing characteristics as fundamental, or the other way round.
- Writing that an asset must be “owned”. The test is control.
- Writing that a liability must be “probable”. The 2018 Framework removes the probability threshold from the definition.
- Calling dividends an expense or a share issue income.
- Confusing faithful representation with accuracy to the last naira. Estimates can be faithful.
- Forgetting going concern as the basis of preparation.
- Answering from memory of the old Framework, which used “reliability” instead of faithful representation.
Quick revision
- Objective: useful information for investors, lenders and other creditors on resources, claims and changes, and stewardship.
- Fundamental: relevance (predictive, confirmatory, materiality) and faithful representation (complete, neutral, free from error).
- Enhancing: comparability, verifiability, timeliness, understandability. Cost constraint.
- Reporting entity may be a single entity or a group. Going concern is the normal basis.
- Asset: present economic resource controlled, past event. Liability: present obligation to transfer an economic resource, past event.
- Equity = assets − liabilities. Owners’ contributions and distributions are not income or expenses.
- CAMA 2020: ss. 374(1), 377, 378, 385.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Which of the following are the two fundamental qualitative characteristics of useful financial information?
- Comparability and verifiability
- Relevance and faithful representation
- Timeliness and understandability
- Materiality and prudence
Show the answer
B. The others are enhancing characteristics or parts of the fundamental ones.
Question 2. Which of the following is an enhancing qualitative characteristic?
- Relevance
- Faithful representation
- Verifiability
- Going concern
Show the answer
C. Going concern is an assumption, not a characteristic.
Question 3. Information that is complete, neutral and free from error is:
- Relevant
- A faithful representation
- Timely
- Comparable
Show the answer
B. These are the three parts of faithful representation.
Question 4. Who are the primary users of general purpose financial statements?
- Existing and potential investors, lenders and other creditors
- Only the tax authority
- Only employees
- Only the directors
Show the answer
A. Other groups use the statements but are not the main target.
Question 5. The 2018 Conceptual Framework defines an asset as:
- Anything the entity owns
- A present economic resource controlled by the entity as a result of past events
- A future expected inflow of cash
- A debt owed to the entity only
Show the answer
B. Ownership is not required, control is.
Question 6. A liability is best described as:
- A probable future loss
- A present obligation to transfer an economic resource as a result of past events
- Any expense not yet paid
- Any amount in the notes
Show the answer
B. The 2018 definition has no probability threshold.
Question 7. Equity is:
- Total assets plus total liabilities
- The residual interest in assets after deducting all liabilities
- Cash held in the bank
- Share capital only
Show the answer
B. It includes share capital and reserves.
Question 8. A dividend paid to shareholders is:
- An expense
- A distribution to holders of equity claims, not an expense
- Income
- An asset
Show the answer
B. It goes through equity.
Question 9. Statements are normally prepared on the assumption that the entity:
- Will be liquidated soon
- Will continue operating for the foreseeable future
- Has no liabilities
- Has no competitors
Show the answer
B. This is the going concern assumption.
Question 10. Sunrise Ltd has assets of ₦500 million and liabilities of ₦320 million. Its equity is:
- ₦820 million
- ₦320 million
- ₦180 million
- ₦500 million
Show the answer
C. Equity = ₦500m − ₦320m = ₦180 million.
Written questions
Question 11 (10 marks). (a) Distinguish between the fundamental and enhancing qualitative characteristics of useful financial information. (4 marks) (b) Explain the four enhancing characteristics. (4 marks) (c) Explain the cost constraint. (2 marks)
Question 12 (20 marks). (a) State the objective of general purpose financial reporting and identify its primary users. (5 marks) (b) Define the five elements of financial statements according to the Conceptual Framework. (5 marks) (c) Explain the two fundamental qualitative characteristics, including their components. (6 marks) (d) Explain why dividends are not an expense and a share issue is not income. (4 marks)
Question 13 (10 marks). Delta Ltd has:
- (i) a machine it bought, owns and uses
- (ii) a highly skilled workforce
- (iii) a bank loan
- (iv) a new law that will require clean-up only by companies that pollute after next year, and Delta has not yet polluted
(a) Explain whether each item is an asset, a liability or neither. (6 marks) (b) Delta has assets of ₦900 million and liabilities of ₦600 million.
State its equity and explain what a negative figure would signal. (4 marks)
Model answers
Show the model answer to Question 11
(a) Difference (4 marks). Fundamental characteristics are relevance and faithful representation, and information must have both to be useful. (2) Enhancing characteristics are comparability, verifiability, timeliness and understandability. They make useful information more useful but cannot make useless information useful. (2)
(b) Enhancing characteristics (4 marks, 1 each). Comparability: users can compare across periods and entities. Verifiability: independent knowledgeable observers could agree it is a faithful representation. Timeliness: available in time to influence decisions. Understandability: clearly and concisely classified and presented.
(c) Cost constraint (2 marks). Reporting is costly, so the benefits of information must justify the cost of providing and using it. (2)
Show the model answer to Question 12
(a) Objective and users (5 marks). The objective is to give information about the entity that is useful to existing and potential investors, lenders and other creditors in deciding whether to provide resources. (2) It also helps them assess management’s stewardship. (1) Primary users are investors, lenders and other creditors. (1) Employees, regulators and the public also use the statements but are not the main target. (1)
(b) Elements (5 marks, 1 each). Asset: a present economic resource controlled by the entity as a result of past events. Liability: a present obligation to transfer an economic resource as a result of past events. Equity: the residual interest in assets after deducting liabilities. Income: increases in assets or decreases in liabilities that increase equity, other than contributions from equity holders.
Expenses: decreases in assets or increases in liabilities that decrease equity, other than distributions to equity holders.
(c) Fundamental characteristics (6 marks). Relevance: information that can make a difference to decisions. (1) It has predictive value, confirmatory value or both. (1) Materiality is an entity-specific aspect of relevance. (1) Faithful representation: information that shows the substance of what it claims to represent. (1) It is complete, neutral and free from error. (1) Neutrality is supported by prudence, and substance over form applies. (1)
(d) Owners (4 marks). Income and expenses are changes in equity from the entity’s activities. (1) A share issue is a contribution from holders of equity claims, so by definition it is excluded from income. (1.5) A dividend is a distribution to holders of equity claims, so by definition it is excluded from expenses. (1.5) Both are transactions with equity holders and go directly through equity.
Show the model answer to Question 13
(a) Classification (6 marks). The machine is an asset: a present economic resource, controlled, from a past purchase. (1.5) The workforce is not an asset: the entity does not control employees, who may leave. (1.5) The bank loan is a liability: a present obligation to transfer cash from a past event. (1.5) The new law alone does not create a liability.
A present obligation arises only when Delta takes an action, such as polluting, within the law, so no liability exists yet. (1.5)
(b) Equity (4 marks).
- Equity = ₦900m − ₦600m = ₦300 million. (2)
- A negative figure would mean net liabilities, with assets too small to settle all liabilities.
- It may signal a going concern problem, though not necessarily. (2)
Pathfinder on the Conceptual Framework
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The marking guide gives marks for defining inventory as an asset, for the recognition criteria, for the measurement ideas behind the lower of cost and net realisable value rule, for which costs are included, and for consistency and comparability. The elements and characteristics sections of this topic supply the first, fourth and fifth points, and the next topic supplies recognition and measurement.
Revise first: The five elements of financial statements
The brand name question needs the asset definition first and the intangible asset rules second. The Framework test of a present economic resource that is controlled is the starting point. No question in the two diets asks for the list of qualitative characteristics on its own, but they are used as supporting points in many answers.
Revise first: Qualitative characteristics of useful information
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: November Diet, 2025 and May Diet, 2026.
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