Global Standards for the world economy

Thursday 24 September 2020

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Conceptual Framework

Exposure draft: Objectives and Qualitative Characteristics [Phase A] [May 2008]

Frequently Asked Questions

What is the objective of financial reporting? Why is it so important?


The boards propose that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.

The objective of financial reporting is the foundation of the conceptual framework. Other aspects of the framework - qualitative characteristics, elements of financial statements, recognition and measurement - will build on that foundation with the aim of ensuring that financial reporting achieves its objective.

What are the qualitative characteristics of financial reporting? Why are they so important?


The qualitative characteristics are the attributes that make financial information useful. The exposure draft identifies:

  • two fundamental qualitative characteristics � relevance and faithful representation
  • four enhancing qualitative characteristics: comparability, verifiability, timeliness and understandability.  They enhance the fundamental qualitative characteristics by distinguishing more useful information from less-useful information.
  • two pervasive constraints that limit the information provided by financial reporting: materiality and cost.

In developing standards, the boards will consider the qualitative characteristics so that information reported in financial reports is useful to capital providers, thus meeting the objective of general purpose financial reporting.

The document is an exposure draft. What has changed from the discussion paper?


The boards published a discussion paper in November 2006. That discussion paper discussed the boards� preliminary views on the objective of financial reporting and the qualitative characteristics of financial reporting. The boards received 179 comment letters from all parts of the globe. Two of the main issues raised were the following:

  • Some respondents argued that the objective of financial reporting should be broadened to encompass stewardship decisions made by capital providers.
  • Some respondents asked why the boards proposed to replace the notion of reliability with the notion of faithful representation.

During 2007 and early 2008, the boards considered the issues raised and the exposure draft is a result of that process. Please refer below for more details on the boards� proposals.

How does the conceptual framework address the issue of management�s stewardship responsibility?

Several respondents to the discussion paper expressed a concern that the proposed objective was too narrowly focused on resource allocation decisions.

Although most respondents agreed that decision-usefulness was the appropriate objective, respondents argued that capital providers make other decisions that are aided by financial reporting information in addition to resource allocation decisions.

For example, shareholders must decide how to vote on whether to retain directors or replace them and how members of management should be remunerated for their services. Shareholders� decision-making process may include evaluating how management of the entity performed against management in competing entities in similar circumstances.

In developing the exposure draft, the boards clarified that the objective of general purpose financial reporting is to provide information that is useful to capital providers (eg shareholders and lenders) for:

  • decisions about whether and how to allocate their resources to a particular entity.
  • decisions about whether and how to protect or enhance their investments. These matters are sometimes viewed as relating to management�s stewardship or accountability of the entity.

Why do the boards propose to change the existing notion of reliability to the new notion of faithful representation?

In considering reliability, the boards observed that there are a variety of views of what the notion means. For example, some focus on verifiability or free from material error to the virtual exclusion of the faithful representation aspect of reliability. And to some, reliability apparently refers primarily to precision. Those considerations led the boards to consider how they could convey better what reliability means.

Accordingly, the boards propose that faithful representation encompasses all of the qualities that the previous frameworks included as aspects of reliability. Faithful representation�the depiction in financial reports of the economic phenomena they purport to represent�is essential if information is to be decision useful. To represent real world economic phenomena faithfully, accounting representations must be complete, neutral and free from error.

Why is verifiability not a component of the proposed notion of faithful representation?


Including verifiability as a component of faithful representation could result in some information being excluded from financial reporting. For example, an entity can faithfully depict a piece of information that represents management�s opinion or intentions and this information may be useful for decision-making. This information may not necessarily be directly or indirectly verifiable. Given this argument, the boards concluded that verifiability is not a component of faithful representation.

However, information that is verifiable is generally more decision useful than information that cannot be independently verified; therefore, the boards propose that verifiability should be an enhancing qualitative characteristic.