An examination of the Framework for IFRS

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The Framework to IFRS sets out the concepts that underline the preparation and presentation of financial statements for external users. The basic purpose of the IFRS framework is to (i) assist the standard-setting body with the development and review of existing and new accounting standard; (ii) assist the preparers of financial statement in applying IFRS; (iii) assist the auditor to assess whether the financial statement are prepared in line with IFRS; (iv) assist the users of financial statements to interpret the financial statement prepared in conformity of IFRS; (v) as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation.

The qualitative characteristics are the attributes that make the information provided in financial statement useful to users. There are four principle qualitative characteristics: (i) relevant; (ii) reliability; (iii) comparability; (iv) understandability.


 To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.

The predictive and confirmatory roles of information are interrelated. For example, information about the current level and structure of asset holdings has value to users when they endeavour to predict the ability of the entity to take advantage of opportunities and its ability to react to adverse situations. The same information plays a confirmatory role in respect of past predictions about, for example, the way in which the entity would be structured or the outcome of planned operations.

Information about financial position and past performance is frequently used as the basis for predicting future financial position and performance and other matters in which users are directly interested, such as dividend and wage payments, security price movements and the ability of the entity to meet its commitments as they fall due. To have predictive value, information need not be in the form of an explicit forecast. The ability to make predictions from financial statements is enhanced, however, by the manner in which information on past transactions and events is displayed. For example, the predictive value of the income statement is enhanced if unusual, abnormal and infrequent items of income or expense are separately disclosed

To have an agreed international conceptual framework in global is important. Nowadays, there have two types of framework in global which are IASB's principles-based international accounting standard and FASB's rules-based accounting standard. Although these frameworks are accepted by different individuals, there also need search which standard is more acceptable for global users.

Principles-based accounting standards may take the form of general principle, reply on interpretation and judgment by financial statement preparers before they can be implemented. The IASB's major purpose is to develop the international financial reporting standards. International Financial Reporting Standards (IFRS) is principles-based Standards, Interpretation and the Framework applied by International Accounting Standard Board (ISAB) at 1989. IFRS are used in many parts of the world including European Union, Hong Kong, Australia, Malaysia and others.

IFRS are intended to be applied by profit-oriented entities to their financial statements in order to provide information financial position, operating performance and cash flow that is useful to decision makers such as shareholders, creditors, employees and the general public. A complete set of financial statements are including balance sheet, income statement, statement of change in equity and cash flow statement. The accounting policies and notes to the financial statements are considered an integral part of the presentation. IFRS underlying accounting practices are draft in the IASB's "Framework for the preparation and presentation of financial statements."

Under a principles-based approach, one starts with laying out the key objectives of good reporting in the subject area and then provides guidance explaining the objective and relating it to some common examples. While rules are sometimes unavoidable, the intent is not to try to provide specific guidance or rules for every possible situation. Rather, if in doubt, the reader is directed back to the principles.

Characteristic of high quality principles-based accounting standard are including 6 elements:

Faithful presentation of economic reality

Responsible to users' needs for clarity and transparency

Consistency with clear Conceptual Framework

Based on appropriately-defined scope that addresses a board area of accounting

Written in clear, concise and plain language

Allow for the use of reasonable judgment

Rules-based standards may take the form of a series of rules, limiting the flexibility and use of judgment allowed in their implementation. Financial Accounting Standard Board (FASB) is rules-based accounting standard which is the accounting standards board of the United States. The FASB's major purpose is to develop the GAAP (Generally Accepted Accounting Principles) and establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and the users of financial transaction. To achieve this goal, FASB has five goals:

Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency.

Keep standards current to reflect changes in methods of doing business and in the economy.

Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting.

Promote international convergence of accounting standards concurrent with improving the quality of financial reporting.

Improve common understanding of the nature and purposes of information in financial reports. (Wikipedia, 2011)

Rules-based accounting standards make compliance difficult because they are more detailed and complex than principles-based standards. Many accountants favor the prospect of using rules-based standards, because in the absence of rules they could be brought to court if their judgments of the financial statements were incorrect. When there are strict rules that need to be followed, the possibility of lawsuits is diminished. Having a set of rules can increase accuracy and reduce the ambiguity that can trigger aggressive reporting decisions by management. The complexity of rules, however, can cause unnecessary complexity in the preparation of financial statements.