The IASB Conceptual Framework: Objective, Users and Qualitative Characteristics

Every standard in this course rests on a set of ideas about what financial reports are for and what makes them useful. Those ideas are written down in the Conceptual Framework for Financial Reporting of the International Accounting Standards Board (IASB), which supports International Financial Reporting Standards (IFRS).

This topic covers what a conceptual framework is and why it is needed, the objective of general purpose financial reporting, the users of the reports and what each user needs, and the qualitative characteristics that make financial information useful.

This is one of the most heavily examined topics in the course. In the diets reviewed for this page it appears four times: as a 10-mark question on five qualitative characteristics in November Diet, 2021 and again in May Diet, 2023, as a 10-mark discussion of the qualitative characteristics in May Diet, 2022, and as a 10-mark question on the information needs of different users in May Diet, 2023.

Read the reporting frameworks of specialised, not-for-profit and public sector entities first. The next topic covers the elements of financial statements, recognition, measurement and capital maintenance.

What a conceptual framework is and why it is needed

The preparation of financial statements rests on many concepts, principles and detailed rules. Some are in law, some are in standards, and many of the most basic ones appear in neither but are accepted practice. All the concepts, principles, conventions, laws, rules and regulations used to prepare and present financial statements make up Generally Accepted Accounting Principles (GAAP).

GAAP differs from country to country because each has its own legal system and business practice, so the United States, the United Kingdom and Nigeria each have their own GAAP. Many countries now use IFRS, and “IFRS” or “IAS” (International Accounting Standards) is often used for the whole body of rules.

A conceptual framework is a system of concepts and principles, consistent with one another, that underpins the preparation of financial statements. The International Accounting Standards Committee issued the first one in 1989 as the Framework for the Preparation and Presentation of Financial Statements, and the IASB adopted it.

The IASB then worked with the standard setter in the United States, the Financial Accounting Standards Board (FASB), on a framework common to both. The project proceeded chapter by chapter, and the complete Conceptual Framework for Financial Reporting was published in March 2018. The changes from the earlier version had little effect on IFRS in practice. The 2018 document has eight chapters:

1. The objective of general purpose financial reporting.
2. Qualitative characteristics of useful financial information.
3. Financial statements and the reporting entity.
4. The elements of financial statements.
5. Recognition and derecognition.
6. Measurement.
7. Presentation and disclosure.
8. Concepts of capital and capital maintenance.

Why a framework helps

Where a formal framework exists, accounting practice and standards are built on it. Where it does not, standards tend to be developed one problem at a time, and they become inconsistent with each other or with the law. Without a framework, important issues can go unaddressed: until the IASB wrote its Framework there was no proper definition of an asset, a liability, income or an expense.

Business is also complex enough that no set of standards can cover every transaction. When an entity enters an unusual transaction that no standard covers, it can refer to the framework and apply its principles. A framework also strengthens the credibility of financial reporting and of the accounting profession.

The alternative: detailed rules

The alternative to a framework is a system of detailed rules. Rule-based standards are open to abuse. Creative accounting is the use of techniques that give a biased, usually favourable, impression of performance while still following the standards. In the 1980s a number of apparently healthy companies collapsed after their statements had misled investors, which was one of the reasons standard setters developed frameworks.

Principles are harder to evade than rules. Rule-based systems also leave standard setters more exposed to pressure from vested interests, such as large companies or a business sector, and a framework is a safeguard against that.

Some preparers and regulators still favour rules. Principles require management to use judgement and risk being wrong, while a rule only has to be followed, which matters where management may face legal action over an investor’s losses. A framework can also produce standards that are theoretical and complex, and a system of extremely detailed rules can be just as hard to apply.

The IASB Conceptual Framework

Financial reports rest on estimates, judgements and models, not on exact depictions. The Conceptual Framework sets out the concepts behind those estimates, judgements and models. It deals with the objective of financial reporting, the qualitative characteristics of useful information, the definition, recognition and measurement of the elements of financial statements, and the concepts of capital and capital maintenance. Its purposes are to:

• assist the IASB to develop IFRS that rest on consistent concepts;
• assist preparers to develop consistent accounting policies when no standard applies to a transaction or event, or when a standard allows a choice of policy; and
• assist all parties to understand and interpret IFRS.

The Framework is not an IFRS, and nothing in it overrides a specific IFRS. In the rare case of conflict, the requirements of the IFRS prevail.

Users and their information needs

Many existing and potential investors, lenders and other creditors cannot require an entity to give them information directly. They rely on general purpose financial reports for much of what they need. These are the primary users, and the reports are directed to them. Three points limit what the reports can do.

• General purpose reports cannot give users all the information they need. Users must look at other sources too.
• The reports do not show the value of the entity. They give information that helps users estimate value.
• Individual primary users have different needs. IFRS aims to meet the needs of the largest number of them.

Other parties may find the reports useful, but they are not the main audience. Regulators and members of the public other than investors and creditors are in this group. Management is interested in the information but does not rely on general purpose reports, because it can get whatever internal information it wants. In an exam answer, the full range of users and their needs is worth a mark each.

The objective of general purpose financial reporting

The objective is the foundation of the Framework, and the other parts follow from it. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other credit.

To make those decisions, users need to assess the prospects for the entity’s future net cash inflows. For that they need information about the resources of the entity, the claims against it, and how efficiently and effectively management has discharged its responsibilities to use those resources. That last item, stewardship, also helps those who vote on or influence management.

What the information covers

• Economic resources and claims. This shows the entity’s financial strengths and weaknesses, its liquidity and solvency and its need for more finance. The order and terms of claims help users predict how future cash flows will be shared among claimants.
• Financial performance on the accrual basis. Accrual accounting records the effects of transactions in the period in which they occur, even when the cash moves in another period. It is a better basis for judging past and future performance than cash receipts and payments alone. Performance information shows the return generated from resources, the capacity to generate cash from operations without raising new finance, the effect of changes in prices and interest rates, and the variability of returns. Past performance helps predict future returns.
• Cash flows. They show how the entity obtains and spends cash, its borrowing and repayments, its dividends and other distributions, and other factors affecting liquidity and solvency.
• Other changes in resources and claims. Share issues and similar events explain why resources and claims changed beyond performance.

The financial statements meet the objective through the statement of financial position, the statement of profit or loss and other comprehensive income, the statement of cash flows and the statement of changes in equity, together with supporting notes.

The statement of financial position recognises assets, liabilities and equity, the performance statements recognise income and expenses, and the other statements and notes present and disclose recognised and unrecognised items, cash flows, contributions from and distributions to holders of equity claims, and the methods, assumptions and judgements used in estimating the amounts.

Reporting period, going concern and the reporting entity

Financial statements cover a specified reporting period. They give information about assets, liabilities and equity existing at the end of, or during, the period, and about income and expenses for the period. They take the perspective of the reporting entity as a whole.

They are normally prepared on the going concern assumption: that the entity will continue in operation for the foreseeable future and does not intend or need to enter liquidation or stop trading. If that is not so, the statements may need a different basis, and the basis used must be described.

A reporting entity is one that prepares financial statements. It can be a single entity, a portion of an entity or more than one entity, such as a group. It need not be a legal entity. Where its boundary is hard to fix, the boundary is set by the information needs of the primary users.

The qualitative characteristics

Information has to have certain characteristics to be useful in decisions. The Framework describes two fundamental characteristics and four enhancing ones. Useful information must be relevant and must faithfully represent what it purports to represent. Its usefulness is enhanced if it is comparable, verifiable, timely and understandable. The enhancing characteristics cannot make irrelevant or unfaithful information useful.

Relevance

Information is relevant if it can influence the decisions of users. It does so when it has predictive value, confirmatory value or both. Information has predictive value if it helps users forecast what may happen. It has confirmatory value if it helps users confirm or correct earlier assessments and predictions. Relevance is affected by materiality.

Information is material if omitting it or misstating it could influence decisions that users make on the basis of information about a specific reporting entity. Materiality depends on the nature or size, or both, of the item in the context of the individual entity’s report. The IASB therefore cannot set one numerical threshold for materiality or decide in advance what will be material.

Faithful representation

Financial reports depict economic phenomena, such as resources, claims and the effects of transactions, in words and numbers. To be useful they must show relevant phenomena and also represent faithfully what they purport to represent. A perfectly faithful representation has three characteristics.

• Complete. It includes all the information a user needs to understand the phenomenon, including the necessary descriptions and explanations.
• Neutral. It is free from bias in selecting or presenting the information. Neutrality is supported by prudence, which is caution when judging under uncertainty. Prudence does not allow deliberate understatement of assets or income, or overstatement of liabilities or expenses.
• Free from error. There are no errors or omissions in describing the phenomenon, and the process used to produce the information was chosen and applied without error. This does not mean perfect accuracy. An estimate must be described clearly as an estimate.

Faithful representation requires that transactions be accounted for according to their substance and economic reality, and not merely their legal form.

The enhancing characteristics

• Comparability lets users identify and understand similarities and differences among items. Information is more useful if it can be compared with similar information about other entities and about the same entity in another period. Consistency is the use of the same methods for the same items from period to period in an entity, or in one period across entities. It is related to comparability and helps achieve it, but it is not the same thing.
• Verifiability helps assure users that information faithfully represents what it purports to represent. Different knowledgeable and independent observers could reach consensus that a particular depiction is faithful. Quantified information does not have to be a single estimate to be verifiable. A range of possible amounts with their probabilities can also be verified.
• Timeliness means having information available to decision makers in time to influence their decisions.
• Understandability comes from classifying, characterising and presenting information clearly and concisely. Reports are written for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently.

The cost constraint

Providing information costs preparers money and costs users effort to use it. Reporting is worthwhile only if the benefits of the information justify those costs. This cost constraint limits the information required.

The ideas in more depth

Choosing between the characteristics

The characteristics are applied in sequence. First identify the economic phenomenon that could be useful to users. Then identify the information about it that is most relevant, and check that it can be faithfully represented. Then apply the enhancing characteristics as far as the cost constraint allows. If the most relevant information cannot be faithfully represented, the next most relevant information is considered.

Why materiality is not a fixed percentage

A ₦5 million error is large for a small company with profit of ₦20 million and trivial for a bank with profit of ₦20 billion. A small item can still be material because of its nature, for instance an undisclosed loan to a director. For that reason no standard fixes a single quantitative threshold.

Sources and references

• Conceptual Framework for Financial Reporting, issued by the IASB in March 2018: Chapters 1 to 3, and the Introduction on purpose and status.
• IFRS Foundation Constitution, for the status of the Framework within IFRS.

These points are stated as at 5 November 2026.

Worked examples

1. (a) Consistency, and so comparability, is missing. Users cannot compare one year with the next.
2. (b) Timeliness is missing. Information that arrives after decisions have been made cannot influence them.
3. (c) Faithful representation is missing because the depiction is not complete.
4. (d) Understandability is missing. The information is not classified and presented clearly and concisely.

1. Plan the marks. The question has two jobs per characteristic: identify it and explain it. Ten marks and five characteristics give 2 marks each, so one mark for naming it and one for the explanation.
2. Choose five. Relevance, faithful representation, comparability, verifiability, timeliness. Understandability is a sixth and can be kept in reserve.
3. Write each in two lines. Relevance: information that can influence users’ decisions through predictive or confirmatory value, and is affected by materiality. Faithful representation: information that is complete, neutral and free from error and shows substance over legal form. Comparability: lets users compare entities and periods; consistency helps. Verifiability: independent observers could agree the depiction is faithful. Timeliness: available in time to influence decisions.
4. Keep to the number asked. Five well-made characteristics earn 10 marks. A sixth adds nothing.

How to answer in the exam

• Identify and explain. Name the characteristic and give a one or two sentence explanation. Check the marks per characteristic from the total: 10 marks for five gives 2 each.
• Discuss. Separate the two fundamental from the four enhancing characteristics, as the Framework does, and add the cost constraint for a stronger answer.
• Identify and discuss users. Name each user and state what they need, as in the table above. Five or more users, each with a reason, are worth the marks.
• Purpose of the Framework. Three purposes, one line each: help the IASB, help preparers where no standard applies, help everyone interpret IFRS. Add that it is not an IFRS.

Common mistakes in the exam

• Listing comparability or timeliness as fundamental. Only relevance and faithful representation are fundamental.
• Treating neutrality, completeness and freedom from error as separate characteristics. They are parts of faithful representation.
• Treating materiality as a separate characteristic. It is an aspect of relevance.
• Saying consistency and comparability are the same. Consistency helps to achieve comparability.
• Saying the Framework overrides a standard. A standard prevails if they conflict.
• Listing only investors as users. Identify the range, and say which are primary users.

Quick revision

• Framework: completed March 2018; eight chapters; not an IFRS; the IFRS prevails in a conflict.
• Purposes: help the IASB, help preparers, help everyone interpret IFRS.
• Primary users: existing and potential investors, lenders and other creditors.
• Objective: useful information for decisions about providing resources; resources, claims and stewardship; accrual basis.
• Fundamental: relevance (predictive, confirmatory, materiality) and faithful representation (complete, neutral, free from error).
• Enhancing: comparability, verifiability, timeliness, understandability. Cost constraint applies.
• Going concern assumed; the reporting entity need not be a legal entity.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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