CHAPTER 1 Introduction to accounting and business decision making 17• The procedure for due process involves the following steps: identify a technical issue; develop
a project proposal; research the issue; consult with stakeholders and prepare an exposure
draft; send the exposure draft for comment to interested parties; issue an exposure draft for
further comment; and finalise the accounting standard, interpretation or conceptual framework
document.
• The professional bodies provide feedback on exposure drafts and forward any comments to the
AASB. They also inform their members of any developments in accounting standards through
newsletters and by conducting continuing professional education (CPE) sessions.1.8 Role of the Conceptual Framework
LEARNING OBJECTIVE 1.8 Evaluate the role of the Conceptual Framework and illustrate the qualitative
characteristics of financial statements.
The AASB’s original conceptual framework contained Statements of Accounting Concepts (SACs) to
assist in the preparation and presentation of financial statements. It also assisted the standard setters
in developing future accounting standards and helped users in interpreting information in the financial
statements. With the adoption of IFRS in 2005, it was necessary to adopt the IASB’s Framework for the
Preparation and Presentation of Financial Statements (Framework). The IASB and the FASB (Finan-
cial Accounting Standards Board) undertook a joint project on the conceptual framework. The purpose
of the joint project was to ‘develop an improved common conceptual framework that provides a sound
foundation for developing future accounting standards’. In 2010, the IASB issued a revised document
titled Conceptual Framework for Financial Reporting (Conceptual Framework). This document super-
sedes the Framework and is yet to be fully adopted in Australia. However, this text will focus on the new
Conceptual Framework.
The Conceptual Framework applies to entities that are required to prepare general purpose financial
statements. (Note that these are called general purpose financial reports in the Conceptual Framework.)
As noted earlier in the chapter, general purpose financial statements are financial statements intended to
meet the information needs common to users who are unable to command the preparation of statements
tailored to suit their information needs. General purpose financial statements are in contrast to special
purpose financial statements, which are prepared to suit a specific purpose and do not cater for the
generalised needs common to most users. The components of the Conceptual Framework are as follows.
The objective of financial reporting
According to paragraph OB2 of the Conceptual Framework:
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.Qualitative characteristics of financial reports
The two fundamental qualitative characteristics of financial reports are relevance and faithful rep-
resentation. The four enhancing qualitative characteristics are comparability, verifiability, timeliness
and understandability.
Fundamental qualitative characteristics
Relevance
The characteristic of relevance implies that the information should have predictive and confirmatory
value for users in making and evaluating economic decisions.