CPA AFR: Conceptual/Theoretical Framework of Accounting



Table of Contents

Definition– it‘s a coherent system of interrelated objectives and fundamentals that can lead to

consistent standards and that prescribes the nature accounting


  • For standard setting
  • For better understanding and confidence of financial reporting
  • Enhance comparability among companies
  • Any new practical problem solved easily

Interaction of Financial accounting with its Environment/ importance of financial reporting

  1. Accounting helps decision makers evaluate opportunities by providing measurements such as net income, total assets etc
  2. It define the tax payment given by the statutory condition
  3. Establishes the attractiveness of a company as a takeover target
  4. Evaluate the effectiveness of individual managers
  5. Determine whether bond & other contract provisions are satisfied
  6. Acts as a regulator for decision making
  7. Helps lenders to measure the risk of their loans
  8. Influence the effectiveness of a company to its workers
  9. Suggests bargain strategies for union organizers
  10. Affects willingness of supplies to enter into long-term contracts
  11. Attracts the attention of the government unit because of unusual profit performance
  12. Affects customer‘ willingness to purchase company products

Factors that influence accounting information compilation and reporting procedures 1). Accounting principles & standards

  • The legal system of the country Regulatory structure g. public untidy regulatory commission
  • Company dilemma in a competitive environment not the release its information for few years reducing the competitive advantage
  • The demand for information by the
  • The cost and benefits of alternative reporting
  • The importance of the quality of information supplied
  • The development of new financial instruments – g. computerization

Accounting conceptual framework

It is a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consisted standards and that prescribes the nature, functions and limits of financial accounting and financial statements.

Also, conceptual framework can be defined as a statement of Generally Accepted Accounting Principles, which form the frame of reference for financial reporting.

From the above definition, we can deduce that:

  1. Conceptual framework forms a basis for development of new accounting standards and the evaluation of those standards that are already in existence
  2. It forms the theoretical basis for determining which events should be accounted for and how they should be communicated to the users

Scope of the IFRS Framework

The IFRS Framework addresses:

  • the objective of financial reporting
  • the qualitative characteristics of useful financial information
  • the reporting entity
  • the definition, recognition and measurement of the elements from which financial statements are constructed
  • concepts of capital and capital maintenance

The Objective of general purpose financial reporting

The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments and providing or settling loans or other forms of credit. [F OB2]

The primary users need information about the resources of the entity not only to assess an entity’s prospects for future net cash inflows but also how effectively and efficiently management has discharged their responsibilities to use the entity’s existing resources (i.e., stewardship).

The IFRS Framework notes that general purpose financial reports cannot provide all the information that users may need to make economic decisions. They will need to consider pertinent information from other sources as well.

The IFRS Framework notes that other parties, including prudential and market regulators, may find general purpose financial reports useful. However, the Board considered that the objectives of general purpose financial reporting and the objectives of financial regulation may not be consistent. Hence, regulators are not considered a primary user and general purpose financial reports are not primarily directed to regulators or other parties. [F OB10 and F BC1.20-BC 1.23]

Information about a reporting entity’s economic resources, claims, and changes in resources and claims

Economic resources and claims

Information about the nature and amounts of a reporting entity’s economic resources and claims assists users to assess that entity’s financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability to obtain financing. Information about the claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the reporting entity. [F OB13]

A reporting entity’s economic resources and claims are reported in the statement of financial position. [See IAS 1.54-80A]

Changes in economic resources and claims

Changes in a reporting entity’s economic resources and claims result from that entity’s performance and from other events or transactions such as issuing debt or equity instruments. Users need to be able to distinguish between both of these changes.

Financial performance reflected by accrual accounting

Information about a reporting entity’s financial performance during a period, representing changes in economic resources and claims other than those obtained directly from investors and creditors, is useful in assessing the entity’s past and future ability to generate net cash inflows. Such information may also indicate the extent to which general economic events have changed the entity’s ability to generate future cash inflows. [F OB18-OB19] The changes in an entity’s economic resources and claims are presented in the statement of comprehensive income. [See IAS 1.81-105]

Financial performance reflected by past cash flows

Information about a reporting entity’s cash flows during the reporting period also assists users to assess the entity’s ability to generate future net cash inflows. This information indicates how the entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends to shareholders, etc.

The changes in the entity’s cash flows are presented in the statement of cash flows. [See IAS 7] Changes in economic resources and claims not resulting from financial performance

Information about changes in an entity’s economic resources and claims resulting from events and transactions other than financial performance, such as the issue of equity instruments or distributions of cash or other assets to shareholders is necessary to complete the picture of the total change in the entity’s economic resources and claims. [F OB21]

The changes in an entity’s economic resources and claims not resulting from financial performance is presented in the statement of changes in equity. [See IAS 1.106-110]

Advantages of conceptual framework

  1. A conceptual framework provides a written constitution for the professional standard committee to set standards in a coherent manner
  2. Provides a framework of reference for those who prepare financial statements
  3. The preparation of financial statements requires knowledge of specific accounting techniques and the exercise of A conceptual framework may be useful in distinguishing between areas of judgments and areas where rules should be followed.
  4. The existence of a conceptual framework might win the confidence of the users of financial statements by increasing their understanding go how and why they have been produced
  5. Developments of certain standards have been subject to considerable political interference from interested parties
  6. Without a conceptual framework some standards could concentrate too much into income statement or too much into balance sheet

Disadvantages of conceptual framework

  1. It is uncertain whether a single conceptual framework can be devised to meet the needs of all the users of accounting information
  2. The time and resources needed to develop an agreed conceptual framework would perhaps make it impossible for the Professional Standard Committee (PSC) to continue with its present program
  3. Accounting conventions that underlie financial reporting cannot be proved to be correct; they depend on Without consensus there cannot be an agreed conceptual framework and it may not be possible to achieve consensus on wide issues.
  4. Whilst it may be argued that it would be desirable for the PSC to develop the standards in accordance with an agreed conceptual framework, in reality it may not The development of accounting standards may be influenced by factors other than the conceptual framework e.g. existing practice and political pressures.

Steps in the development of the structure of the typical conceptual framework

  1. Identify user groups and discuss their needs; determine primary users for whom financial statements are prepared
  2. List desirable qualitative characteristics of information provided in the financial statements
  3. Define elements (i.e. assets, gains, equity, expenses, revenue, liabilities, loses, investments by owners, distributions to owner, and comprehensive income) to be included in the financial
  4. Specify recognition criteria to determine when elements should be recognized in the financial statements
  5. Specify measurements basis for elements recognized in the financial statements

Issues dealt with by framework

The conceptual framework of accounting deals with a number of issues which includes:

  1. Objectives of financialstatements
  2. The qualitative characteristics that determine usefulness of information in financialstatements
  3. Definition, recognition and measurements of the elements from which the financial statements are constructed
  4. Concept of capital and capital maintenance
  5. Users of the financial information

Qualitative characteristics of useful financial information

The qualitative characteristics of useful financial reporting identify the types of information are likely to be most useful to users in making decisions about the reporting entity on the basis of information in its financial report. The qualitative characteristics apply equally to financial information in general purpose financial reports as well as to financial information provided in other ways. [F QC1, QC3]

Financial information is useful when it is relevant and represents faithfully what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. [F QC4]

Fundamental qualitative characteristics

Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information. [F QC5]

  1. Relevance-Relevant financial information is capable of making a difference in the decisions made by Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated. [F QC6-QC10]
  2. Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report. [F QC11]
  3. Faithful representation-General purpose financial reports represent economic phenomena in words and numbers, To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. This fundamental characteristic seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error. [F QC12] Information must be both relevant and faithfully represented if it is to be [F QC17]

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. [F QC19]

  1. Comparability-Information about a reporting entity is more useful if it can be compared with a similar information about other entities and with similar information about the same entity for another period or another date. Comparability enables users to identify and understand similarities in, and differences among, items. [F QC20-QC21]
  2. Verifiability-Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. [F QC26]
  3. Timeliness-Timeliness means that information is available to decision-makers in time to be capable of influencing their [F QC29]
  4. Understandability-Classifying, characterising and presenting information clearly and concisely makes it While some phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial reports incomplete and potentially misleading. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information with diligence. [F QC30-QC32]

Applying the enhancing qualitative characteristics

Enhancing qualitative characteristics should be maximised to the extent necessary. However, enhancing qualitative characteristics (either individually or collectively) render information useful if that information is irrelevant or not represented faithfully. [F QC33]

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by general purpose financial reporting. Reporting such information imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities. The IASB will consider whether different sizes of entities and other factors justify different reporting requirements in certain situations. [F QC35-QC39]

Measurements of the elements of financial statements

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.

Measurement bases include:

  • Historical cost: Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business
  • Current cost: assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently
  • Realisable (settlement) value: assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business
  • Present value: assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

The historical cost base is the most common measurement basis adopted by enterprises when preparing their financial statements. This is usually combined with other measurement bases. For example, inventories are usually carried at lower of cost and net realizable value, marketable securities and pension liabilities are carried at their present value.

Direct measurement- occurs if a number assigned to an object is an actual measurement of the desired property.

This measurement may not be accurate.

Indirect measurement – One that must be made by roundabout means for measuring the desired attributes. This may include average price of commodities.

NB/ Direct measurement are usually preferable to indirect one. Assessment & prediction measures

Assessment measures are concerned with particular attributes of objects. They can be direct or indirect.

Prediction measures Are concerned with factors that may be indicative of conditions of a future point in time e.g. income of a present period be used as a predictor of dividends for the following year.

Types of measurement

  1. Nominal scale – A simple classification system g classifying students according to provinces they came from.
    1. Coast
  2. Ordinal scale

Where numerals are assigned in ordinary ratings that indicate an order of preference of 1, 2, 3 good, very good

In accounting, ordinal measurement is used to determine liquidity in the balance sheet. Internal scale

– Here the change in the attributes measures between assigned numbers e.g. 1-5-9. Ratio scale

-Assigns equal value of intervals between assigned numbers.

¼ – ½ – ¾


Concepts of capital and capital maintenance

 Concepts of capital

  • Financial concept of capital: under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the assets or equity of the enterprise. Usually adopted by many enterprises
  • Physical concept of capital: under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the enterprise based on, for example, units of output per day


Concepts of capital maintenance and determination of profit

The concept of capital maintenance is concerned with how an enterprise defines the capital it seeks to maintain.

  • Financial capital maintenance: a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period
  • Physical capital maintenance: a profit is earned only if the physical productive capacity (or operating capability) of the enterprise (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period

The concepts of capital maintenance define profit as the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a net loss.

The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept however does not require the use of a particular basis of measurement.

Capital Expenditure– Application of business funds to acquire long term benefits for the business e.g additional typewriter.

Revenue Expenditure- Expenditures incurred in one accounting period to be used in that accounting period e.g rent.

Accounting standards


The law by its very nature is not dynamic. It will usually fall behind new ideas and developments and will not always cover the technical aspects of financial reporting. In addition to the legal stipulations, accounting practice is heavily influenced by the pronouncements issued by professional accounting bodies in the form of Accounting Standards.  Companies not only need to meet the requirements of the law but must also comply with the requirements contained in these statements of Accounting Standards operating in their countries. In Kenya, these standards were issued by the institute of Certified Public Accountants of Kenya (ICPAK) which is also a member of the International Accounting Standards Committee.

With effect from 1st January 1999 Kenya adopted International Accounting Standards issued by International Accounting Standards Committee.


Accounting Standards are methods of or approaches to preparing accounts, which have been chosen and established by the bodies overseeing the accounting profession. They are essentially working rules established to guide accounting practice. Accounting Standards usually consist of three parts.

  • A description of the problem to be tackled
  • A reasonable discussion of ways of solving the problem
  • The prescribed solution

The purpose of the standards:

  • To reduce the number of acceptable alternative treatments of accounting issues and facilitate comparison of financial statements
  • Financial statements can hardly be said to be useful if they are produced on numerous acceptable bases
  • There is great need for uniformity
  • In an attempt to reduce the range of choice of accepted accounting approaches to improve the users confidence in the accounting figures and make accounting reports more understandable it was deemed necessary to introduce accounting standards
  • The prime objective of accounting standards is to improve the quality and uniformity of reporting and introduce definitive approach to the concept of what is ‗‘true and fair‘‘

Advantages and disadvantages of accounting standards

  1. They provide the accounting profession with useful working rules.
  2. They force improvement in the quality of the work of accountants.
  3. They strengthen the accounts resistance against pressure from directors to use an accounting policy, which may be inappropriate in the circumstances.
  4. They ensure that users of financial statements get more complete and clearer information on a consistent basis from period to period.
  5. They assist in the comparison users may make between the financial statements of one organization and another.
  6. They direct financial statements towards establishing the economic trust of the organization performance.
  7. They provide a focal point for debate and discussion about accounting practice
  8. They are a less rigid alternative to enforcing conformity by means of legislation


  1. Accounting Standards are bureaucratic and lead to The quality of the work of accountant is restricted since firms and industries differ and change also environment within which they operate.
  2. The official acceptance of an accounting standard reduces the account‘s power to resist the use of accounting Standards applications of inappropriate standards when the directors wish to follow it.
  3. Accounting Standards reduce the scope for professional judgment of accountants. Accountants are thus reduced to technicians rather than being professional.
  4. Most users of financial reports are made to believe that financial statements produced using accounting standards are This is misleading.
  5. Standards have been derived through social or political pressures, which may reduce the freedom or lead to the manipulation of the profession.
  6. Standards inhibit the development of critical thought (why think when the standards are there?).
  7. The more standards there are the more costly the financial statements are to produce.

Arguments for and against the regulation of the accounting profession

The question that has been extensively debated is whether or not the accounting profession should be regulated. This has been argued on the basis that companies have certain incentives that force them to report to interested parties without necessarily making them to do so through regulation. Thus, the need to unregulated accounting profession. The arguments for and against an unregulated the accounting profession are discussed below.

Arguments for unregulated Accounting Profession

  1. Agency

The theory argues that since management is engaged in agency contracts with the owners of the company, they must ensure that information is supplied to the shareholders regularly and management since the shareholders would like to monitor management and such monitoring costs like audit fees may have a direct bearing on the compensation paid to management, is compelled to report regularly so as to enhance their image and compensation. Thus firms will disclose all information voluntarily.

  1. Competitive Capital market

Firms have to raise capital funds from a competitive environment in the capital markets. This will compel them to disclose voluntarily so as to attract such funds from investors. It is generally accepted that firms that report regularly in the capital markets have an enhanced image and could Easily attract funds from investors. Thus firms have an incentive to give regular financial reports otherwise they cannot secure capital at a lower cost. Thus regulating accounting will be imposing rules in a self-regulating profession.

  1. Private contracting opportunities

It has been argued that users who need information may enter into a contract with private organizations that can supply them with such information. This will ensure users get detailed and specific information suiting their requirements instead of the general-purpose information provided by financial report as regulated by the legislation. Such all-purpose data may be irrelevant to the users‘ need. Under such circumstances there is no need to regulate accounting profession.

Arguments against unregulated Accounting Reporting

Arguments in support of accounting regulation are usually based on the doctrine of ‗market failure‘. Market failure refers to a situation where the market is unable to efficiently allocate resources because of imperfection that exist in that market or because the way the market is structured is poor.

Market failure occurs when the market is unable to provide information to those who are in need of it.

Because of the existence of market failure in providing accounting information, it has been argued that the accounting profession should be regulated so as to serve its users effectively and efficiently.

Specific Reasons why market failure occurs include the following:

  1. The monopoly in the supply of such information in the accounting

The reporting entity is the enterprise that is in control of the supply of internal information about the entity; this introduces certain imperfections in the supply of such information. There will be restriction in the supply of absolute information about the accounting entity and the information may not be available to those who need it.

Even if suppliers of such accounting information were to charge prices fears have been expressed that such prices will be prohibitive for most users. Further doubts have been expressed on whether firms can supply all the necessary information, both positive and negative, especially where such firms operate in a competitive environment. This will be common in countries like Kenya where the capital markets are not well developed.

There is therefore an urgent need to make financial reporting mandatory through a regulatory framework.

  1. Failure of Financial Reporting and Auditing.

Financial reporting standards have failed to correct instances of public fraud through fraudulent reporting and this has been so because of laxity in regulating accounting practices. The existence of a variety of methods of doing one thing and too much flexibility in accounting practice, have enabled the management of firms to manipulate accounts to suit their needs.

  1. Auditing itself has been inadequate and not geared towards detection of fraud because auditors hardly ever carry out 100% examination of records and There is therefore a serious need to control accounting practice through stringent standardization guidelines. This calls for a regulated accounting profession.
  2. Public good characteristics of Accounting

Accounting information has the characteristics of a public good. The moment accounts are released to one person; the information contained therein cannot be restricted from getting to other persons. This implies that purchasing accounting information through private contracting will be virtually impossible because its supply cannot be restricted and thus they cannot make money out of it and will be difficult to decide on the price to charge.

Problems created by the regulations of the accounting profession

In practice, regulation of any field leads to a misallocation of resources because production is not geared towards the market forces of demand and supply. Regulating the accounting profession has led to the following problems:

  1. Standard Overload

Overstatement of demand for standards, there led to over-production of standards. Many people who contribute during the standards setting may not be active demanders of information to be supplied by such standards and very often, the standard setting committee takes into account the views of such people leading to the misallocation or resources.

This was the case in the United States of America prompting the Security Exchange Commission to ext small companies from complying with certain standard requirements.

  1. Politicization of Standard Setting

Regulating is a political process intended to protect the conflicting interests of various user groups. This leads to dilution of accounting standards, as they are compromised by being based on bargaining instead of technical suitability.

  1. Social

The standard setting process requires social legitimacy in order to be effective. The regulating bodies should consist of persons presenting various user groups of financial reports.

  1. Economic

Regulations sometimes, overburden companies with unnecessary regulations which might have negative economic consequences. This is especially so when companies devise ways and means of avoiding certain regulations for one reason or another.

For instance, when FASB No 13 on accounting for leases was used in America requiring companies to capitalize certain leases and reflect in the balance sheet as both asset and liabilities, companies tended to restructure their leases so as to improve their debt structure. This means incurring unnecessary legal costs due to regulation.

Adoption of international accounting standards and internal standards on auditing (international standards)

International Accounting Standards (IAS)

These are guidelines & working notes and procedures formulated by the international accounting standard board (IASB) to guide accounting practice.

They describe the methods of accounting deemed mandatory for application to all financial statements other than those prepared for internal rules.


Back in the early 80s, ICPAK made a decision to develop its own standards in both accounting and auditing (Kenyan Standards). This decision was primarily driven by the young Institutes desire to be associated with truly national standards which addressed the unique circumstances prevailing in Kenya at the time. Those standards borrowed heavily from existing international Standards on auditing and addressed those components which were considered to be most common in financial reporting in Kenya.

Since that time, the accounting profession has undergone tremendous change, as have the economies that the profession serves. New alliances and affiliations have taken root and globalization continues unabated. It is against this background that council has decided to adopt International Standards and to phase out Kenyan Standards.

Why adopt International Standards?

Council believes that there are compelling reasons why the change to International Standards is necessary:

  1. International trends.The last few years have seen dramatic developments and changes on the International Standards setting scene. Along with this has come a rapid adoption of international Standards in a number of countries which previously had their own national standards
  2. Regional Considerations-Kenya is a member of both IFAC and ECSAFA, organizations which strongly support adoption, rather than adoption, of Internationalstandards
  3. Local Pressure-Regulators particularly the Central Bank of Kenya and the capital markets Authority) have continuously turned to International Standards rather than Kenyan Standards as an indicator of what the best practice should be
  4. Resource Limitations-Over the last few years, some major changes have been made to the International Standards as part of the ―comparability‖ exercise. These changes have affected virtually all the Kenyan Standards in force. Following these changes, the existing Kenyan Standards are hopelessly out of date.
  5. Past Experience-Every Kenyan Standard issued so far is intended to comply with IAS and says so in a paragraph labeled ―Compliance with International Standards‖.

Implication on Local Reporting

Council does not anticipate much of a problem in the larger entities in Kenya adopting International Standards- most of this is already in compliance. However, the adoption of International Standards would have an impact on smaller national businesses, but so would a wholesale revision of Kenya Standards.

The question therefore, is how quickly reporting entities operating in Kenya can conform fully to the requirements of International Standards. Council believes that a reasonable transition period is necessary to give reporting entities a chance to conform in a systematic manner

Advantages of adopting International Standards

By adopting International Standards, ICPAK will reap certain benefits:

  • Kenya will be recognized as a leading International player in cross-border reporting in theregion
  • The institute will remain on top of events taking place in the accounting and auditing fields, particularly where International players or regulators are concerned.
  • The scale and voluntary human resources are available to the institute will be relived of Standard development responsibilities and will therefore be available to devote their energy to helping members interpret International Standards and to communicating their implications to technical bullettins
  • These are the common basis for the preparation and reporting of financial information usually referred to as ―”the generally accepted accounting standards”
  • Accounting standards are also referred to as principles assumption, postulates andconcepts

Board /Organizations that have responsibilities for setting accounting standards

  1. Financial Accounting Foundation (FAF)
  2. Financial Accounting Standard Board (FASB)
  3. Government Accounting Standard Board (GASB)
  4. Financial Accounting Advisory Council (FAAC)
  5. Government Accounting Advisory Council (GAAC)
  6. International accounting standards board (IASB)

The major difference in Financial Accounting Standard Board and the others are:- 1). Membership Number

  • Financial Independence
  • Reporting autonomy
  • Board representation
  • Increased staff & advisory support

Since 1973, the Financial Accounting Standards Board (FASB) has been responsible for establishing the accounting standard that constitute generally accepted accounting procedures

The FASB currently follows a due process procedure in developing accounting standards. This process uses an open format that provides an opportunity for interested parties to express their views.

The standard process uses the following steps:-

  1. Select and prioritize issues of the Boards Agenda
  2. Appoints a representation task force to identity & define the problems & alternatives related to each and conduct a research & analysis about it
  3. Prepare a discussion memorandum on the issue to interest parties
  4. Invite public comment of the memorandum
  5. Schedule public hearing following the discussion memorandum, Analyze the comments given
  6. Determine whether to issue a standard, if yes prepare an exposure draft of the standard & distribute to all interested parties
  7. Analyze the comments about the explosive draft from the public
  8. Public hearing
  9. Approve / disapprove the exposure as revised by a vote for at least seven Board If approved, it becomes a new standard.

Professional Code of Ethics

The ethical guidelines given by ICPAK to its members may be summed up as follows:

  1. Integrity – An accountant/auditor should be honest and sincere in his/her approach to a professional work e.g. by declaring any conflicts of interest that may affect his work.
  2. Confidentiality – An accountant should not disclose the affairs of his client without the permission of theclient
  3. Competence – An accountant should execute his duties with due professional care, diligence and skill as is expected of a person of his profession
  4. Objectivity – An accountant should communicate his/her findings in a fair and impartial manner
  5. Advertising and Publicity – A firm of practicing accountants should not advertise their services openly in order to obtain clients
  6. Changes in professional appointment – Upon a hand-over, the incoming accountant/auditor should seek the client‘s permission in order to communicate with the outgoingaccountant
  7. Independence – the accountant should be free from the influence of the client‘s management
  8. Client’s money – the accountant should keep client‘s client‘s money separately from that of his/herfirm
  9. Clients – the accountant should not pay a commission or bribe to obtain clients
  10. The accountant should not allow his name to be used in connection with financial statements not prepared or audited by him or his firm



The International Financial Reporting Interpretations Committee (IFRIC) is a committee of the International Accounting Standards Board (IASB) that assists the IASB in improving financial reporting through timely identification, discussion and resolution of financial reporting issues within the framework of International Financial Reporting Standards (IFRSs). The IFRIC was established in March 2002 by the Trustees of the International Accounting Standards Committee (IASC) Foundation, when it replaced the previous interpretations committee, the Standing Interpretations Committee.

This [draft] Handbook was published in draft for public comment in May 2006. It is based on the existing framework of the due process laid out in the Constitution of the IASC Foundation and the Preface to International Financial Reporting Interpretations issued by the IASB. It reflects the public consultation conducted in 2005 and 2006.

With the increasing acceptance of IFRS in the global economy and its possible adoption in the U.S., CPAs are keenly interested in developing a broader understanding of international standards. A major goal of both the International Accounting Standards Board (IASB) and the SEC is for IFRS to be consistently and appropriately interpreted and applied. However, for many in the U.S. it is unclear how consistent interpretation and application can be achieved in the principles-based environment of IFRS.

The reality is that the IASB has a well-established process for developing official interpretations of IFRS. This article introduces the International Financial Reporting Interpretations Committee (IFRIC) and discusses its organization, process and role in the authoritative interpretation of IFRS. The article also explains how IFRIC differs from FASB‘s Emerging Issues Task Force (EITF).


IFRIC is the interpretative body of the IASB, the entity that develops, maintains and issues IFRS. IFRIC is designed to help the IASB improve financial reporting through timely identification, discussion and resolution of financial reporting issues within the framework of IFRS. Following a process detailed in the Due Process Handbook for the IFRIC, the committee develops authoritative interpretations of existing IFRS. IFRIC refers its interpretations to the IASB for discussion and approval, and once they are approved by the IASB, the IFRIC interpretations (IFRICs) become part of IFRS. To be in compliance with IFRS, an entity must comply with all aspects of IFRS, including IFRICs.

In the IFRS hierarchy contained in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, interpretations have the same weight as all other IFRS approved by the IASB. IFRS are supported and based upon the Conceptual Framework for IFRS, the second level in the IFRS hierarchy (IAS 8, paragraph 11). Finally, the third level of the IFRS hierarchy includes pronouncements of other accounting standard setters that use a similar conceptual framework, other accounting literature and accepted industry practices—to the extent they do not conflict with IFRS or the Conceptual

Framework of IFRS (IAS 8, paragraph 12).


It may be tempting to compare IFRIC to FASB‘s EITF(The Emerging Issues Task Force). Indeed, there are similarities. Both are standard-setting bodies with 10 to 15 members drawn from a variety of constituencies, including preparers, users and auditors; they have a similar due process where a supermajority vote is required for approval; and each needs its parent body to approve all official pronouncements (FASB must approve all EITFs; the IASB must approve all IFRICs). Once approved by their respective boards, IFRIC and EITF pronouncements become official authoritative accounting guidance.

However, the EITF‘s mission is much broader than IFRIC‘s. Both IFRIC and the EITF exist to assist the boards in improving financial reporting through the timely identification, discussion and resolution of financial accounting issues within the framework of existing authoritative literature. Both IFRIC and the EITF were designed to promulgate interpretation guidance within the framework of existing authoritative literature to reduce diversity in practice on a timely basis. However, the EITF is also charged with addressing narrow implementation, application or other emerging issues that can be analyzed within existing GAAP.

As a result, the EITF issues a large number of pronouncements addressing narrow interpretation, implementation and application questions. IFRIC, by contrast, deals only with interpretation questions and, therefore, issues far fewer pronouncements.


According to the Due Process Handbook of the IFRIC (paragraph 5), ―IFRIC reviews newly identified

financial reporting issues not specifically addressed in IFRSs or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate treatment. IFRIC is not charged with creating rules, application guidance or implementation guidance, nor does it act as an urgent issues group.

It is not IFRIC‘s role to create new IFRS, but rather, to interpret existing IFRS. IFRIC provides interpretative guidance by applying a principles-based approach founded on the IFRS Conceptual Framework and as established in relevant IFRS. IFRIC cannot issue an interpretation that changes or conflicts with IFRS or the Framework. If, as a result of its deliberations, IFRIC concludes that the requirements of an IFRS differ from the Framework, or that a particular IFRS is deficient or inadequate in a specific area, or that the question IFRIC is addressing should be more fully addressed by the Board, IFRIC will refer the issue to the IASB for resolution. IFRIC may choose to provide guidance recommendation to the IASB, but it is not responsible for the development of new IFRS guidance.


IFRIC‘s 14 voting members are ―selected for their ability to maintain an awareness of current issues as they arise and the ability to resolve them.‖ In other words, IFRIC members are expected to have considerable accounting expertise, and they normally include accountants in industry and public practice and users of financial statements with a reasonably broad geographical representation.

Members are not paid and are appointed for fixed renewable terms of three years. Nonvoting members include the IFRIC chair, who is generally an IASB member, and official observers from organizations such as the International Organization of Securities Commissions (IOSCO) and the European Commission. The directors of technical and implementation activities of the IASB, various senior IASB staff and various IASB members also attend and participate in IFRIC meetings.

IFRIC is supported by a full-time staff based in London. Similar to the arrangements at FASB, the IASB and IFRIC staffs are often sponsored by various accounting firms and large multinational companies, and they serve at the IASB for fixed terms, returning to their sponsoring firms at the close of the term.


Any individual or organization, including IFRIC members, IASB staff members or official IFRIC observers, may recommend agenda items for consideration by IFRIC. In recent years, IFRIC has received requests for interpretation on a variety of topics, including financial instruments, revenue recognition, employee benefits, share-based payments, business combinations, consolidations, intangible assets and income taxes.

In determining which questions might be appropriate for IFRIC to consider, the committee applies specified agenda criteria, as follows:

  • Widespread and practical relevance of issue
  • Significant divergence in practice (existing or emerging).
  • Improved financial reporting
  • Efficient, cost-effective resolution
  • Probable to reach consensus on a timely basis
  • No current IASB project will be completed before IFRIC could respond

After applying the agenda criteria to a specific issue, IFRIC may make one of four possible decisions:

  • Not to add the issue to the IFRIC agenda, but explain in an agenda decision published in IFRIC Update why the issue was not added to its agenda
  • Develop an IFRIC interpretation.
  • Recommend that the IASB change an IFRS.
  • Recommend that the IASB include the item in a current IASB Project


Though IFRIC expends a considerable amount of time and resources on agenda decisions, the

determination of the agenda is only one aspect of IFRIC‘s due process. IFRIC due process generally parallels that used by the IASB and FASB. Each step is deliberate, and public comment is solicited and encouraged at each step. Currently, IFRIC due process consists of seven stages (see sidebar, ―IFRIC‘s Due Process,‖ below).

Further, the structure of IFRIC interpretations is standardized to facilitate ease of use. Each has five distinct components: a summary of the issue, the most appropriate accounting method (IFRIC consensus), the effective date, any transitional provisions and the basis for conclusions.

IFRIC’s Due Process

The IFRIC due process has seven stages:

  1. Identification of IFRIC considers all issues submitted to it for consideration.
  2. Setting the IFRIC meets publicly and discusses whether to add the issue to its agenda using the six criteria mentioned in the text. IFRIC exposes its tentative agenda decision for public comment for at least a 30-day period before considering the comments received and making its final decision. A simple majority is needed to add an item to the agenda. If the issue is not added to its agenda, IFRIC publicly states its reasons in a final published and archived agenda decision.
  3. IFRIC meetings and voting. IFRIC has public meetings. IFRIC members each have one vote. Members may attend either in person or via Proxy voting is not permitted.
  4. Development of a Draft Interpretation (DI). The IFRIC staff prepares agenda papers that describe the accounting issue, alternative accounting treatments, and recommendations on the appropriate accounting This may include examining relevant IASB pronouncements, national GAAPs, and practice. After IFRIC discussion, the staff prepares a DI. A DI is approved if no more than four IFRIC members object to the consensus.
  5. The IASB’s role in the issuance of a DI. The DI is circulated to the Board members after IFRIC reaches its If fewer than four IASB members object, then a DI is released. If four or more IASB members object, it is added to the agenda of the next IASB meeting.
  6. Comment period and A DI is exposed for public comment for at least 60 days. Interested parties are invited to send written comment letters. IFRIC typically receives 30 to 55 letters per DI, with a range from 21 to 96. The staff analyzes all comments received and highlights the most pertinent issues. Comment letters are reviewed and discussed by IFRIC and taken into account when drafting the Final Interpretation. If significant changes are deemed necessary, IFRIC considers whether to re-expose a revised DI.
  7. The IASB’s role in an Interpretation. The Interpretation receives final approval from IFRIC if no more than four members object. The Interpretation is then sent to the IASB for approval. The IASB issues a Final Interpretation if at least nine IASB members concur


In reaching a consensus, IFRIC also considers the need for international convergence of accounting standards. The IASB staff maintains liaison with national standard setters, including FASB and other national interpretative groups to identify interpretative issues that IFRIC might need to consider.

National standard setters in jurisdictions that have adopted IFRS generally submit issues to IFRIC for consideration rather than developing their own interpretations.

For example, in July 2007 IFRIC noted that IAS 18, Revenue, specifies the accounting for agency relationships but acknowledged that no detailed guidance is given in IFRS on identifying agency relationships. IFRIC noted that the EITF in the U.S. had addressed the question of identifying agency relationships in EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. IFRIC considered the EITF guidance and ultimately determined that such guidance might be helpful to preparers as application guidance. Since IFRIC does not issue application guidance, it ultimately decided to refer the question to the IASB with the recommendation that the Board might wish to include guidance in identifying agency relationships in the Appendix to IAS 18. The IASB decided to address this issue and recently issued implementation guidance as part of the Annual Improvements Project for 2009.

IFRIC Interpretations Currently in Effect

As of May 2009, IFRS consists of eight IFRS, 17 IFRICs, all or part of 29 IASs (which were originally issued by the International Accounting Standards Committee (IASC) and later adopted by the IASB), and 11 SICs (which were originally issued by the IASC‘s Standing Interpretations Committee). The Preface to IFRS (paragraph 14) states that all individual standards ―should be read in the context of the objective stated in that standard and this Preface.

Standard Title
IFRIC 1 Changes in Decommissioning, Restoration and Similar Liabilities
IFRIC 2 Members‘ Shares in Co-operative Entities and Similar Instruments
IFRIC 4 Determining Whether an Arrangement Contains a Lease
IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental

Rehabilitation Funds

IFRIC 6 Liabilities Arising from Participating in a Specific Market—Waste Electrical and Electronic


IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary


IFRIC 8 Scope of IFRS 2 (withdrawn effective Jan. 1, 2010)
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 IFRS 2: Group and Treasury Share Transactions (withdrawn effective Jan. 1, 2010)
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their


IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 16 Hedges of a Net Investment in a Foreign Operation
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRIC 18 Transfers of Assets from Customers



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