AASB Framework

8/13/2019 AASB Framework

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Compiled FRAMEWORK

Framework for the

Preparation andPresentation of FinancialStatements

This compiled Framework applies to annual reporting periods beginning onor after 1 January 2009. Early application is permitted. It incorporatesrelevant amendments made up to and including 13 December 2007.

Prepared on 11 September 2009 by the staff of the Australian AccountingStandards Board.


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Obtaining Copies of the Framework

Compiled versions of the Framework, the original Framework and amendingStandards (see Compilation Details) are available on the AASB website:www.aasb.gov.au.

Printed copies of the original Framework and amending Standards areavailable for purchase by contacting:

The Customer Service Officer

Australian Accounting Standards BoardLevel 7600 Bourke StreetMelbourne VictoriaAUSTRALIA

Postal address:PO Box 204Collins Street West Victoria 8007AUSTRALIA

Phone: (03) 9617 7637Fax: (03) 9617 7608E-mail: [email protected]: www.aasb.gov.au

Other Enquiries

Phone: (03) 9617 7600Fax: (03) 9617 7608

E-mail: [email protected]

COPYRIGHT

2009 Commonwealth of Australia

This compiled AASB Framework contains International AccountingStandards Committee Foundation copyright material. Reproduction withinAustralia in unaltered form (retaining this notice) is permitted for personaland non-commercial use subject to the inclusion of an acknowledgment ofthe source. Requests and enquiries concerning reproduction and rights forcommercial purposes within Australia should be addressed to The Director ofFinance and Administration, Australian Accounting Standards Board,PO Box 204, Collins Street West, Victoria 8007.

All existing rights in this material are reserved outside Australia.Reproduction outside Australia in unaltered form (retaining this notice) ispermitted for personal and non-commercial use only. Further informationand requests for authorisation to reproduce for commercial purposes outsideAustralia should be addressed to the International Accounting StandardsCommittee Foundation at www.iasb.org.

FRAMEWORK-compiled 2 COPYRIGHT


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CONTENTS

COMPILATION DETAILS

COMPARISON WITH IASB FRAMEWORK

FRAMEWORK FOR THE PREPARATION AND PRESENTATION OFFINANCIAL STATEMENTS

Paragraphs

Application Aus1.1 Aus1.5

IntroductionPurpose and Status 1 4

Scope 5 8

Users and Their Information Needs 9 11

The Objective of Financial Statements 12 Aus14.1

Financial Position, Financial Performance and Cash Flows 15 20

Notes and Supplementary Schedules 21

Underlying Assumptions

Accrual Basis 22

Going Concern 23

Qualitative Characteristics of Financial Statements 24

Understandability 25Relevance 26 28

Materiality 29 30

Reliability 31 32

Faithful Representation 33 34

Substance Over Form 35

Neutrality 36

Prudence 37

Completeness 38

Comparability 39 42

Constraints on Relevant and Reliable Information

Timeliness 43

Balance between Benefit and Cost 44

Balance between Qualitative Characteristics 45

True and Fair View/Fair Presentation 46

The Elements of Financial Statements 47 48

Financial Position 49 52

FRAMEWORK-compiled 3 CONTENTS


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FRAMEWORK-compiled 4 CONTENTS

Assets 53 59

Liabilities 60 64

Equity 65 68

Performance 69 73

Income 74 77

Expenses 78 80

Capital Maintenance Adjustments 81

Recognition of the Elements of Financial Statements 82 84

The Probability of Future Economic Benefit 85Reliability of Measurement 86 88

Recognition of Assets 89 90

Recognition of Liabilities 91

Recognition of Income 92 93

Recognition of Expenses 94 98

Measurement of the Elements of Financial Statements 99 101

Concepts of Capital and Capital Maintenance

Concepts of Capital 102 103

Concepts of Capital Maintenance and the Determinationof Profit 104 110


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COMPILATION DETAILS

Framework for the Preparation and Presentation ofFinancial Statementsas amended

This compiled Framework applies to annual reporting periods beginning onor after 1 January 2009. It takes into account amendments up to andincluding 13 December 2007 and was prepared on 11 September 2009 by thestaff of the Australian Accounting Standards Board (AASB).

This compilation is not a separate Framework issued by the AASB. Instead,it is a representation of the Framework (July 2004) as amended byAccounting Standards, which are listed in the Table below.

Table of Pronouncements

Pronouncement Date made Application date(annual reporting periods on or after )

Application,saving ortransitionalprovisions

Framework 15 Jul 2004 (beginning)1 Jan 2005AASB 2007-8 24 Sep 2007 (beginning)1 Jan 2009 see (a) belowAASB 2007-10 13 Dec 2007 (beginning)1 Jan 2009 see (a) below

(a) Entities may elect to apply this Standard to annual reporting periods beginning on or

after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of

Financial Statements(September 2007) is also applied to such periods.

Table of Amendments

Paragraph affected How affected By [paragraph]

Aus1.1 amended AASB 2007-8 [7]Aus1.6 deleted AASB 2007-10 [10]6-7 amended AASB 2007-10 [11]21 amended AASB 2007-10 [12]23 amended AASB 2007-10 [12]

88 amended AASB 2007-10 [13]

General Terminology Amendments

References to financial report(s) that were amended to financialstatements by AASB 2007-10, paragraph 14, are not shown in the aboveTable of Amendments.

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COMPARISON WITH IASB FRAMEWORK

The AASBFrameworkand the IASBFramework

This Frameworkfor the Preparation and Presentation of FinancialStatementsincorporates the Framework for the Preparation and Presentationof Financial Statementsas issued by the International Accounting StandardsBoard (IASB). Paragraphs that have been added to this Framework(and donot appear in the text of the IASB Framework) are identified with the prefixAus, followed by the number of the relevant IASB paragraph and decimal

numbering.

FRAMEWORK-compiled 6 COMPARISON


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FRAMEWORK

The Australian Accounting Standards Board issued the Framework for thePreparation and Presentation of Financial Statementson 15 July 2004.

This compiled version of the Frameworkapplies to annual reporting periodsbeginning on or after 1 January 2009. It incorporates relevant amendmentscontained in AASB Standards made by the AASB up to and including13 December 2007 (see Compilation Details).

FRAMEWORK FOR THE PREPARATION ANDPRESENTATION OF FINANCIAL STATEMENTS

Application

Aus1.1 The concepts in this Frameworkare not set out as requirementsfor the purpose of preparing general purpose financialstatements. This is consistent with the:

(a) purpose of Statements of Accounting Concepts set out inPolicy Statement 5 The Nature and Purpose of Statementsof Accounting Concepts;

(b) non-mandatory status of Statements of AccountingConcepts under Professional Statement APS 1 Conformitywith Accounting Standards; and

(c) Australian Securities and Investments CommissionAct 2001, section 227(1).

Aus1.2 This Frameworkapplies to periods beginning on or after1 January 2005.[Note: For application dates of paragraphs changed or added by an amending

Standard, see Compilation Details.]

Aus1.3 This Frameworkshall not be applied to annual reporting periodsbeginning before 1 January 2005.

Aus1.4 When applicable, this Frameworksupersedes:

(a) Statement of Accounting Concepts SAC 3 QualitativeCharacteristics of Financial Informationas issued inAugust 1990; and

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(b) Statement of Accounting Concepts SAC 4Definition andRecognition of the Elements of Financial Statementsasissued in March 1995.

Aus1.5 SAC 3 and SAC 4 remain applicable until superseded by thisFramework.

Introduction

Purpose and Status

1 This Frameworksets out the concepts that underlie the preparation andpresentation of financial statements for external users. The purpose ofthe Frameworkis to:

(a) assist the AASB in the development of future AustralianAccounting Standards and in its review of existing AustralianAccounting Standards, including evaluating proposedInternational Accounting Standards Board pronouncements;

(b) assist the AASB in promoting harmonisation of regulations,accounting standards and procedures relating to the presentationof financial statements by providing a basis for reducing thenumber of alternative accounting treatments permitted byAustralian Accounting Standards;

(c) [deleted by the AASB];

(d) assist preparers of financial statements in applying AustralianAccounting Standards and in dealing with topics that have yet toform the subject of an Australian Accounting Standard;

(e) assist auditors in forming an opinion as to whether financialstatements conform with Australian Accounting Standards;

(f) assist users of financial statements in interpreting theinformation contained in financial statements prepared inconformity with Australian Accounting Standards; and

(g) provide those who are interested in the work of the AASB with

information about its approach to the formulation of AustralianAccounting Standards.

2 This Frameworkis not an Australian Accounting Standard and hencedoes not define standards for any particular measurement or disclosure



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issue. Nothing in this Frameworkoverrides any specific AustralianAccounting Standard.

3 The AASB recognises that in a limited number of cases there may be aconflict between the Frameworkand an Australian AccountingStandard. In those cases where there is a conflict, the requirements ofthe Australian Accounting Standard prevail over those of theFramework. As, however, the AASB will be guided by theFrameworkin the development of future Standards and in its review ofexisting Standards, the number of cases of conflict between theFrameworkand Australian Accounting Standards will diminish

through time.

4 The Frameworkwill be revised from time to time on the basis of theBoards experience of working with it.

Scope

5 The Frameworkdeals with:

(a) the objective of financial statements;

(b) the qualitative characteristics that determine the usefulness ofinformation in financial statements;

(c) the definition, recognition and measurement of the elementsfrom which financial statements are constructed; and

(d) concepts of capital and capital maintenance.

6 The Framework is concerned withgeneral purpose financial statements(hereafter referred to as financial statements) including consolidatedfinancial statements. Such financial statements are prepared andpresented at least annually and are directed toward the commoninformation needs of a wide range of users. Some of these users mayrequire, and have the power to obtain, information in addition to thatcontained in the financial statements. Many users, however, have torely on the financial statements as their major source of financialinformation and such financial statements should, therefore, beprepared and presented with their needs in view. Special purpose

financial reports, for example, prospectuses and computations preparedfor taxation purposes, are outside the scope of this Framework.Nevertheless, the Frameworkmay be applied in the preparation of suchspecial purpose reports where their requirements permit.

7 Financial statements form part of the process of financial reporting. Acomplete set of financial statements normally includes a balance sheet,



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a shorter period than lenders unless they are dependent upon thecontinuation of the entity as a major customer.

(e) Customers Customers have an interest in information about thecontinuance of an entity, especially when they have a long-terminvolvement with, or are dependent on, the entity.

(f) Governments and their agencies Governments and theiragencies are interested in the allocation of resources and,therefore, the activities of entities. They also requireinformation in order to regulate the activities of entities,

determine taxation policies and as the basis for national incomeand similar statistics.

(g) Public Entities affect members of the public in a variety ofways. For example, entities may make a substantial contributionto the local economy in many ways including the number ofpeople they employ and their patronage of local suppliers.Financial statements may assist the public by providinginformation about the trends and recent developments in theprosperity of the entity and the range of its activities.

10 While all of the information needs of these users cannot be met byfinancial statements, there are needs which are common to all users.As investors are providers of risk capital to the entity, the provision offinancial statements that meet their needs will also meet most of theneeds of other users that financial statements can satisfy.

11 The management of an entity has the primary responsibility for thepreparation and presentation of the financial statements of the entity.Management is also interested in the information contained in thefinancial statements even though it has access to additionalmanagement and financial information that helps it carry out itsplanning, decision-making and control responsibilities. Managementhas the ability to determine the form and content of such additionalinformation in order to meet its own needs. The reporting of suchinformation, however, is beyond the scope of this Framework.Nevertheless, published financial statements are based on theinformation used by management about the financial position, financialperformance and cash flows of the entity.

The Objective of Financial Statements

12 The objective of financial statements is to provide information aboutthe financial position, financial performance and cash flows of an



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entity that is useful to a wide range of users in making economicdecisions.

13 Financial statements prepared for this purpose meet the common needsof most users. However, financial statements do not provide all theinformation that users may need to make economic decisions sincethey largely portray the financial effects of past events and do notnecessarily provide non-financial information.

14 Financial statements also show the results of the stewardship ofmanagement, or the accountability of management for the resources

entrusted to it. Those users who wish to assess the stewardship oraccountability of management do so in order that they may makeeconomic decisions; these decisions may include, for example, whetherto hold or sell their investment in the entity or whether to reappoint orreplace the management.

Aus14.1 A more detailed discussion is provided in SAC 2 Objective ofGeneral Purpose Financial Reporting.

Financial Position, Financial Performance and Cash Flows

15 The economic decisions that are taken by users of financial statementsrequire an evaluation of the ability of an entity to generate cash andcash equivalents and of the timing and certainty of their generation.

This ability ultimately determines, for example, the capacity of anentity to pay its employees and suppliers, meet interest payments,repay loans and make distributions to its owners. Users are better ableto evaluate this ability to generate cash and cash equivalents if they areprovided with information that focuses on the financial position,financial performance and cash flows of an entity.

Aus15.1 In respect of not-for-profit entities, ownership groups andcontributors of donations are generally not concerned withobtaining a financial return but are usually more interested in theability of an entity to achieve its non-financial objectives, whichin turn may depend upon the entitys financial position andfinancial performance.

16 The financial position of an entity is affected by the economic

resources it controls, its financial structure, its liquidity and solvency,and its capacity to adapt to changes in the environment in which itoperates. Information about the economic resources controlled by theentity and its capacity in the past to modify these resources is useful inpredicting the ability of the entity to generate cash and cash equivalents



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in the future1. Information about financial structure is useful inpredicting future borrowing needs and how future profits and cashflows will be distributed among those with an interest in the entity; it isalso useful in predicting how successful the entity is likely to be inraising further finance. Information about liquidity and solvency isuseful in predicting the ability of the entity to meet its financialcommitments as they fall due. Liquidity refers to the availability ofcash in the near future after taking account of financial commitmentsover this period. Solvency refers to the availability of cash over thelonger term to meet financial commitments as they fall due.

17 Information about the performance of an entity, in particular itsprofitability, is required in order to assess potential changes in theeconomic resources that it is likely to control in the future.Information about variability of performance is important in thisrespect. Information about performance is useful in predicting thecapacity of the entity to generate cash flows from its existing resourcebase. It is also useful in forming judgements about the effectivenesswith which the entity might employ additional resources.

18 Information concerning cash movements of an entity is useful in orderto assess its investing, financing and operating activities during thereporting period. This information is useful in providing the user witha basis to assess the ability of the entity to generate cash and cashequivalents and the needs of the entity to utilise those cash flows

2.

19 Information about financial position is primarily provided in a balancesheet. Information about performance is primarily provided in anincome statement. Information about cash movements is provided inthe cash flow statement. Information about movements in an entitysequity during the period is provided in the statement of changes inequity.

20 The component parts of the financial statements interrelate becausethey reflect different aspects of the same transactions or other events.Although each statement provides information that is different from theothers, none is likely to serve only a single purpose or provide all theinformation necessary for particular needs of users. For example, anincome statement provides an incomplete picture of performanceunless it is used in conjunction with the balance sheet, cash flow

statement and the statement of changes in equity.

1 For not-for-profit users, also see paragraph Aus15.1.2 For not-for-profit users, also see paragraph Aus15.1.



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Notes and Supplementary Schedules

21 The financial statements also contain notes and supplementaryschedules and other information. For example, they may containadditional information that is relevant to the needs of users about theitems in the balance sheet and income statement. They may includedisclosures about the risks and uncertainties affecting the entity andany resources and obligations not recognised in the balance sheet (suchas mineral reserves). Information about geographical and industrysegments and the effect on the entity of changing prices may also beprovided in the form of supplementary information.

Underlying Assumptions

Accrual Basis

22 In order to meet their objectives, financial statements are prepared onthe accrual basis of accounting. Under this basis, the effects oftransactions and other events are recognised when they occur (and notas cash or its equivalent is received or paid) and they are recorded inthe accounting records and reported in the financial statements of theperiods to which they relate. Financial statements prepared on theaccrual basis inform users not only of past transactions involving thepayment and receipt of cash but also of obligations to pay cash in thefuture and of resources that represent cash to be received in the future.

Hence, they provide the type of information about past transactions andother events that is most useful to users in making economic decisions.

Going Concern

23 The financial statements are normally prepared on the assumption thatan entity is a going concern and will continue in operation for theforeseeable future. Hence, it is assumed that the entity has neither theintention nor the need to liquidate or curtail materially the scale of itsoperations; if such an intention or need exists, the financial statementsmay have to be prepared on a different basis and, if so, the basis used isdisclosed.

Qualitative Characteristics of Financial Statements

24 Qualitative characteristics are the attributes that make the informationprovided in financial statements useful to users. The four principalqualitative characteristics are understandability, relevance, reliabilityand comparability.



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entity irrespective of the materiality of the results achieved by the newsegment in the reporting period. In other cases, both the nature andmateriality are important, for example, the amounts of inventories heldin each of the main categories that are appropriate to the business.

30 Information is material if its omission or misstatement could influencethe economic decisions of users taken on the basis of the financialstatements. Materiality depends on the size of the item or error judgedin the particular circumstances of its omission or misstatement. Thus,materiality provides a threshold or cut-off point rather than being aprimary qualitative characteristic which information must have if it is

to be useful.

Reliability

31 To be useful, information must also be reliable. Information has thequality of reliability when it is free from material error and bias andcan be depended upon by users to represent faithfully that which iteither purports to represent or could reasonably be expected torepresent.

32 Information may be relevant but so unreliable in nature orrepresentation that its recognition may be potentially misleading. Forexample, if the validity and amount of a claim for damages under alegal action are disputed, it may be inappropriate for the entity to

recognise the full amount of the claim in the balance sheet, although itmay be appropriate to disclose the amount and circumstances of theclaim.

Faithful Representation

33 To be reliable, information must represent faithfully the transactionsand other events it either purports to represent or could reasonably beexpected to represent. Thus, for example, a balance sheet shouldrepresent faithfully the transactions and other events that result inassets, liabilities and equity of the entity at the reporting date whichmeet the recognition criteria.

34 Most financial information is subject to some risk of being less than afaithful representation of that which it purports to portray. This is not

due to bias, but rather to inherent difficulties either in identifying thetransactions and other events to be measured or in devising andapplying measurement and presentation techniques that can conveymessages that correspond with those transactions and events. Incertain cases, the measurement of the financial effects of items couldbe so uncertain that entities generally would not recognise them in thefinancial statements; for example, although most entities generate



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goodwill internally over time, it is usually difficult to identify ormeasure that goodwill reliably. In other cases, however, it may berelevant to recognise items and to disclose the risk of error surroundingtheir recognition and measurement.

Substance Over Form

35 If information is to represent faithfully the transactions and otherevents that it purports to represent, it is necessary that they areaccounted for and presented in accordance with their substance andeconomic reality and not merely their legal form. The substance of

transactions or other events is not always consistent with that which isapparent from their legal or contrived form. For example, an entitymay dispose of an asset to another party in such a way that thedocumentation purports to pass legal ownership to that party;nevertheless, agreements may exist that ensure that the entity continuesto enjoy the future economic benefits embodied in the asset. In suchcircumstances, the reporting of a sale would not represent faithfully thetransaction entered into (if indeed there was a transaction).

Neutrality

36 To be reliable, the information contained in financial statements mustbe neutral, that is, free from bias. Financial statements are not neutralif, by the selection or presentation of information, they influence themaking of a decision or judgement in order to achieve a predeterminedresult or outcome.

Prudence

37 The preparers of financial statements do, however, have to contendwith the uncertainties that inevitably surround many events andcircumstances, such as the collectability of doubtful receivables, theprobable useful life of plant and equipment and the number of warrantyclaims that may occur. Such uncertainties are recognised by thedisclosure of their nature and extent and by the exercise of prudence inthe preparation of the financial statements. Prudence is the inclusionof a degree of caution in the exercise of the judgements needed inmaking the estimates required under conditions of uncertainty, suchthat assets or income are not overstated and liabilities or expenses are

not understated. However, the exercise of prudence does not allow, forexample, the creation of hidden reserves or excessive provisions, thedeliberate understatement of assets or income, or the deliberateoverstatement of liabilities or expenses, because the financialstatements would not be neutral and, therefore, not have the quality ofreliability.



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Completeness

38 To be reliable, the information in financial statements must becomplete within the bounds of materiality and cost. An omission cancause information to be false or misleading and thus unreliable anddeficient in terms of its relevance.

Comparability

39 Users must be able to compare the financial statements of an entitythrough time in order to identify trends in its financial position andperformance. Users must also be able to compare the financialstatements of different entities in order to evaluate their relativefinancial position, financial performance and cash flows. Hence, themeasurement and display of the financial effect of like transactions andother events must be carried out in a consistent way throughout anentity and over time for that entity and in a consistent way for differententities.

40 An important implication of the qualitative characteristic ofcomparability is that users be informed of the accounting policiesemployed in the preparation of the financial statements, any changes inthose policies and the effects of such changes. Users need to be able toidentify differences between the accounting policies for liketransactions and other events used by the same entity from period to

period and by different entities. Compliance with AustralianAccounting Standards, including the disclosure of the accountingpolicies used by the entity, helps to achieve comparability.

41 The need for comparability should not be confused with mereuniformity and should not be allowed to become an impediment to theintroduction of improved accounting standards. It is not appropriatefor an entity to continue accounting in the same manner for atransaction or other event if the policy adopted is not in keeping withthe qualitative characteristics of relevance and reliability. It is alsoinappropriate for an entity to leave its accounting policies unchangedwhen more relevant and reliable alternatives exist.

42 Because users wish to compare the financial position, financialperformance and cash flows of an entity over time, it is important that

the financial statements show corresponding information for thepreceding periods.



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Constraints on Relevant and Reliable Information

Timeliness

43 If there is undue delay in the reporting of information it may lose itsrelevance. Management may need to balance the relative merits oftimely reporting and the provision of reliable information. To provideinformation on a timely basis it may often be necessary to report beforeall aspects of a transaction or other event are known, thus impairingreliability. Conversely, if reporting is delayed until all aspects areknown, the information may be highly reliable but of little use to userswho have had to make decisions in the interim. In achieving a balancebetween relevance and reliability, the overriding consideration is howbest to satisfy the economic decision-making needs of users.

Balance between Benefit and Cost

44 The balance between benefit and cost is a pervasive constraint ratherthan a qualitative characteristic. The benefits derived from informationshould exceed the cost of providing it. The evaluation of benefits andcosts is, however, substantially a judgemental process. Furthermore,the costs do not necessarily fall on those users who enjoy the benefits.Benefits may also be enjoyed by users other than those for whom theinformation is prepared; for example, the provision of furtherinformation to lenders may reduce the borrowing costs of an entity.

For these reasons, it is difficult to apply a cost-benefit test in anyparticular case. Nevertheless, standard-setters in particular, as well asthe preparers and users of financial statements, should be aware of thisconstraint.

Balance between Qualitative Characteristics

45 In practice, a balancing, or trade-off, between qualitativecharacteristics is often necessary. Generally, the aim is to achieve anappropriate balance among the characteristics in order to meet theobjective of financial statements. The relative importance of thecharacteristics in different cases is a matter of professional judgement.

True and Fair View/Fair Presentation

46 Financial statements are frequently described as showing a true andfair view of, or as presenting fairly, the financial position, financialperformance and cash flows of an entity. Although this Frameworkdoes not deal directly with such concepts, the application of theprincipal qualitative characteristics and of appropriate accountingstandards normally results in financial statements that convey what is



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generally understood as a true and fair view of, or as presenting fairlysuch information.

The Elements of Financial Statements

47 Financial statements portray the financial effects of transactions andother events by grouping them into broad classes according to theireconomic characteristics. These broad classes are termed the elementsof financial statements. The elements directly related to themeasurement of financial position in the balance sheet are assets,

liabilities and equity. The elements directly related to the measurementof performance in the income statement are income and expenses. Thecash flow statement usually reflects income statement elements andchanges in balance sheet elements; accordingly, this Frameworkidentifies no elements that are unique to this statement.

48 The presentation of these elements in the balance sheet and the incomestatement involves a process of sub-classification. For example, assetsand liabilities may be classified by their nature or function in thebusiness of the entity in order to display information in the mannermost useful to users for purposes of making economic decisions.

Financial Position

49 The elements directly related to the measurement of financial position

are assets, liabilities and equity. These are defined as follows:

(a) An asset is a resource controlled by the entity as a result of pastevents and from which future economic benefits are expected toflow to the entity.

(b) A liability is a present obligation of the entity arising from pastevents, the settlement of which is expected to result in anoutflow from the entity of resources embodying economicbenefits.

(c) Equity is the residual interest in the assets of the entity afterdeducting all its liabilities.

Aus49.1 In respect of not-for-profit entities in the public or private sector,

in pursuing their objectives, goods and services are provided thathave the capacity to satisfy human wants and needs. Assetsprovide a means for entities to achieve their objectives. Futureeconomic benefits or service potential is the essence of assets.Future economic benefits is synonymous with the notion ofservice potential, and is used in this Frameworkas a reference



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also to service potential. Future economic benefits can bedescribed as the scarce capacity to provide benefits to theentities that use them, and is common to all assets irrespective oftheir physical or other form.

50 The definitions of an asset and a liability identify their essentialfeatures but do not attempt to specify the criteria that need to be metbefore they are recognised in the balance sheet. Thus, the definitionsembrace items that are not recognised as assets or liabilities in thebalance sheet because they do not satisfy the criteria for recognitiondiscussed in paragraphs 82 to 98. In particular, the expectation that

future economic benefits will flow to or from an entity must besufficiently certain to meet the probability criterion in paragraph 83before an asset or liability is recognised.

51 In assessing whether an item meets the definition of an asset, liabilityor equity, attention needs to be given to its underlying substance andeconomic reality and not merely its legal form. Thus, for example, inthe case of finance leases, the substance and economic reality are thatthe lessee acquires the economic benefits of the use of the leased assetfor the major part of its useful life in return for entering into anobligation to pay for that right an amount approximating to the fairvalue of the asset and the related finance charge. Hence, the financelease gives rise to items that satisfy the definition of an asset and aliability and are recognised as such in the lessees balance sheet.

52 Balance sheets drawn up in accordance with current AustralianAccounting Standards may include items that do not satisfy thedefinitions of an asset or liability and are not shown as part of equity.The definitions set out in paragraph 49 will, however, underlie futurereviews of existing Australian Accounting Standards and theformulation of further Standards.

Assets

53 The future economic benefit embodied in an asset is the potential tocontribute, directly or indirectly, to the flow of cash and cashequivalents to the entity. The potential may be a productive one that ispart of the operating activities of the entity. It may also take the formof convertibility into cash or cash equivalents or a capability to reduce

cash outflows, such as when an alternative manufacturing processlowers the costs of production.

54 An entity usually employs its assets to produce goods or servicescapable of satisfying the wants or needs of customers; because thesegoods or services can satisfy these wants or needs, customers areprepared to pay for them and hence contribute to the cash flow of the



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entity. Cash itself renders a service to the entity because of itscommand over other resources.

Aus54.1 In respect of not-for-profit entities, whether in the public orprivate sector, the future economic benefits are also used toprovide goods and services in accordance with the entitiesobjectives. However, since the entities do not have thegeneration of profit as a principal objective, the provision ofgoods and services may not result in net cash inflows to theentities as the recipients of the goods and services may nottransfer cash or other benefits to the entities in exchange.

Aus54.2 In respect of not-for-profit entities, the fact that they do notcharge, or do not charge fully, their beneficiaries or customersfor the goods and services they provide does not deprive thoseoutputs of utility or value; nor does it preclude the entities frombenefiting from the assets used to provide the goods andservices. For example, assets such as monuments, museums,cathedrals and historical treasures provide needed or desiredservices to beneficiaries, typically at little or no direct cost to thebeneficiaries. These assets benefit the entities by enabling themto meet their objectives of providing needed services tobeneficiaries.

55 The future economic benefits embodied in an asset may flow to theentity in a number of ways. For example, an asset may be:

(a) used singly or in combination with other assets in the productionof goods or services to be sold by the entity;

(b) exchanged for other assets;

(c) used to settle a liability; or

(d) distributed to the owners of the entity.

56 Many assets, for example, property, plant and equipment, have aphysical form. However, physical form is not essential to the existenceof an asset; hence patents and copyrights, for example, are assets iffuture economic benefits are expected to flow from them to the entity

and if they are controlled by the entity.57 Many assets, for example, receivables and property, are associated

with legal rights, including the right of ownership. In determining theexistence of an asset, the right of ownership is not essential; thus, forexample, property held on a lease is an asset if the entity controls thebenefits which are expected to flow from the property. Although the



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capacity of an entity to control benefits is usually the result of legalrights, an item may nonetheless satisfy the definition of an asset evenwhen there is no legal control. For example, know-how obtained froma development activity may meet the definition of an asset when, bykeeping that know-how secret, an entity controls the benefits that areexpected to flow from it.

58 The assets of an entity result from past transactions or other pastevents. Entities normally obtain assets by purchasing or producingthem, but other transactions or events may generate assets. Examplesinclude property received by an entity from government as part of a

program to encourage economic growth in an area, and the discoveryof mineral deposits. Transactions or events expected to occur in thefuture do not, in themselves, give rise to assets. Hence, for example,an intention to purchase inventory does not, of itself, meet thedefinition of an asset.

59 There is a close association between incurring expenditure andgenerating assets but the two do not necessarily coincide. Hence, whenan entity incurs expenditure, this may provide evidence that futureeconomic benefits were sought but is not conclusive proof that an itemsatisfying the definition of an asset has been obtained. Similarly theabsence of a related expenditure does not preclude an item fromsatisfying the definition of an asset and thus becoming a candidate forrecognition in the balance sheet. For example, items that have beendonated to the entity may satisfy the definition of an asset.

Liabilities

60 An essential characteristic of a liability is that the entity has a presentobligation. An obligation is a duty or responsibility to act or performin a certain way. Obligations may be legally enforceable as aconsequence of a binding contract or statutory requirement. This isnormally the case, for example, with amounts payable for goods andservices received. Obligations also arise, however, from normalbusiness practice, custom and a desire to maintain good businessrelations or act in an equitable manner. If, for example, an entitydecides as a matter of policy to rectify faults in its products even whenthese become apparent after the warranty period has expired, theamounts that are expected to be expended in respect of goods already

sold are liabilities.61 A distinction needs to be drawn between a present obligation and a

future commitment. A decision by the management of an entity toacquire assets in the future does not, of itself, give rise to a presentobligation. An obligation normally arises only when the asset isdelivered or the entity enters into an irrevocable agreement to acquire



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the asset. In the latter case, the irrevocable nature of the agreementmeans that the economic consequences of failing to honour theobligation, for example, because of the existence of a substantialpenalty, leave the entity with little, if any, discretion to avoid theoutflow of resources to another party.

62 The settlement of a present obligation usually involves the entitygiving up resources embodying economic benefits in order to satisfythe claim of the other party. Settlement of a present obligation mayoccur in a number of ways, for example, by:

(a) payment of cash;

(b) transfer of other assets;

(c) provision of services;

(d) replacement of that obligation with another obligation; or

(e) conversion of the obligation to equity.

An obligation may also be extinguished by other means, such as acreditor waiving or forfeiting its rights.

63 Liabilities result from past transactions or other past events. Thus, forexample, the acquisition of goods and the use of services give rise totrade payables (unless paid for in advance or on delivery), and thereceipt of a bank loan results in an obligation to repay the loan. Anentity may also recognise future rebates based on annual purchases bycustomers as liabilities; in this case, the sale of the goods in the past isthe transaction that gives rise to the liability.

64 Some liabilities can be measured only by using a substantial degree ofestimation. Some entities describe these liabilities as provisions. Insome countries, such provisions are not regarded as liabilities becausethe concept of a liability is defined narrowly so as to include onlyamounts that can be established without the need to make estimates.The definition of a liability in paragraph 49 follows a broaderapproach. Thus, when a provision involves a present obligation andsatisfies the rest of the definition, it is a liability even if the amount has

to be estimated. Examples include provisions for payments to be madeunder existing warranties and provisions to cover pension obligations.

Equity

65 Although equity is defined in paragraph 49 as a residual, it may be sub-classified in the balance sheet. For example, in a corporate entity,



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funds contributed by shareholders, retained earnings, reservesrepresenting appropriations of retained earnings and reservesrepresenting capital maintenance adjustments may be shownseparately. Such classifications can be relevant to the decision-makingneeds of the users of financial statements when they indicate legal orother restrictions on the ability of the entity to distribute or otherwiseapply its equity. They may also reflect the fact that parties withownership interests in an entity have differing rights in relation to thereceipt of dividends or the repayment of contributed equity.

66 The creation of reserves is sometimes required by statute or other law

in order to give the entity and its creditors an added measure ofprotection from the effects of losses. Other reserves may beestablished if national tax law grants exemptions from, or reductionsin, taxation liabilities when transfers to such reserves are made. Theexistence and size of these legal, statutory and tax reserves isinformation that can be relevant to the decision-making needs of users.Transfers to such reserves are appropriations of retained earningsrather than expenses.

67 The amount at which equity is shown in the balance sheet is dependenton the measurement of assets and liabilities. Normally, the aggregateamount of equity only by coincidence corresponds with the aggregatemarket value of the shares of the entity or the sum that could be raisedby disposing of either the net assets on a piecemeal basis or the entityas a whole on a going concern basis.

68 Commercial, industrial and business activities are often undertaken bymeans of entities such as sole proprietorships, partnerships, trusts andvarious types of government business undertakings. The legal andregulatory framework for such entities is often different from thatapplying to corporate entities. For example, there may be few, if any,restrictions on the distribution to owners or other beneficiaries ofamounts included in equity. Nevertheless, the definition of equity andthe other aspects of this Frameworkthat deal with equity areappropriate for such entities.

Performance

69 Profit is frequently used as a measure of performance or as the basis

for other measures, such as return on investment or earnings per share.The elements directly related to the measurement of profit are incomeand expenses. The recognition and measurement of income andexpenses, and hence profit, depends in part on the concepts of capitaland capital maintenance used by the entity in preparing its financialstatements. These concepts are discussed in paragraphs 102 to 110.



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70 The elements of income and expenses are defined as follows.

(a) Income is increases in economic benefits during the accountingperiod in the form of inflows or enhancements of assets ordecreases of liabilities that result in increases in equity, otherthan those relating to contributions from equity participants.

(b) Expenses are decreases in economic benefits during theaccounting period in the form of outflows or depletions of assetsor incurrences of liabilities that result in decreases in equity,other than those relating to distributions to equity participants.

71 The definitions of income and expenses identify their essential featuresbut do not attempt to specify the criteria that would need to be metbefore they are recognised in the income statement. Criteria for therecognition of income and expenses are discussed in paragraphs 82to 98.

72 Income and expenses may be presented in the income statement indifferent ways so as to provide information that is relevant foreconomic decision-making. For example, it is common practice todistinguish between those items of income and expenses that arise inthe course of the ordinary activities of the entity and those that do not.This distinction is made on the basis that the source of an item isrelevant in evaluating theability of the entity to generate cash and cashequivalents in the future3. For example, incidental activities such asthe disposal of a long-term investment are unlikely to recur on aregular basis. When distinguishing between items in this way,consideration needs to be given to the nature of the entity and itsoperations. Items that arise from the ordinary activities of one entitymay be unusual in respect of another.

73 Distinguishing between items of income and expense and combiningthem in different ways also permits several measures of entityperformance to be displayed. These have differing degrees ofinclusiveness. For example, the income statement could display grossmargin, profit or loss before taxation, and profit or loss.

Income

74 The definition of income encompasses both revenue and gains.Revenue arises in the course of the ordinary activities of an entity andis referred to by a variety of different names including sales, fees,interest, dividends, royalties and rent.

3 For not-for-profit users, also see paragraph Aus15.1.



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75 Gains represent other items that meet the definition of income andmay, or may not, arise in the course of the ordinary activities of anentity. Gains represent increases in economic benefits and as such areno different in nature from revenue. Hence, they are not regarded asconstituting a separate element in this Framework.

76 Gains include, for example, those arising on the disposal of non-current assets. The definition of income also includes unrealised gains;for example, those arising on the revaluation of marketable securitiesand those resulting from increases in the carrying amount of long-termassets. When gains are recognised in the income statement, they are

usually displayed separately because knowledge of them is useful forthe purpose of making economic decisions. Gains are often reportednet of related expenses.

77 Various kinds of assets may be received or enhanced by income.Examples include cash, receivables and goods and services received inexchange for goods and services supplied. Income may also resultfrom the settlement of liabilities. For example, an entity may providegoods and services to a lender in settlement of an obligation to repayan outstanding loan.

Expenses

78 The definition of expenses encompasses losses as well as thoseexpenses that arise in the course of the ordinary activities of the entity.Expenses that arise in the course of the ordinary activities of the entityinclude, for example, cost of sales, wages and depreciation. Theyusually take the form of an outflow or depletion of assets such as cashand cash equivalents, inventory, property, plant and equipment.

79 Losses represent other items that meet the definition of expenses andmay, or may not, arise in the course of the ordinary activities of theentity. Losses represent decreases in economic benefits and as suchthey are no different in nature from other expenses. Hence, they arenot regarded as a separate element in this Framework.

80 Losses include, for example, those resulting from disasters such as fireand flood, as well as those arising on the disposal of non-current assets.The definition of expenses also includes unrealised losses, for example,

those arising from the effects of increases in the rate of exchange for aforeign currency in respect of the borrowings of an entity in thatcurrency. When losses are recognised in the income statement, theyare usually displayed separately because knowledge of them is usefulfor the purpose of making economic decisions. Losses are oftenreported net of related income.



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Capital Maintenance Adjustments

81 The revaluation or restatement of assets and liabilities gives rise toincreases or decreases in equity. While these increases or decreasesmeet the definition of income and expenses, they are not included inthe income statement under certain concepts of capital maintenance.Instead these items are included in equity as capital maintenanceadjustments or revaluation reserves. These concepts of capitalmaintenance are discussed in paragraphs 102 to 110 of thisFramework.

Recognition of the Elements of FinancialStatements

82 Recognition is the process of incorporating in the balance sheet orincome statement an item that meets the definition of an element andsatisfies the criteria for recognition set out in paragraph 83. It involvesthe depiction of the item in words and by a monetary amount and theinclusion of that amount in the balance sheet or income statementtotals. Items that satisfy the recognition criteria should be recognisedin the balance sheet or income statement. The failure to recognise suchitems is not rectified by disclosure of the accounting policies used norby notes or explanatory material.

83 An item that meets the definition of an element should be recognisedif:

(a) it is probable that any future economic benefit associated withthe item will flow to or from the entity; and

(b) the item has a cost or value that can be measured with reliability.

84 In assessing whether an item meets these criteria, and thereforequalifies for recognition in the financial statements, regard needs to begiven to the materiality considerations discussed in paragraphs 29and 30. The interrelationship between the elements means that an itemthat meets the definition and recognition criteria for a particularelement, for example, an asset, automatically requires the recognitionof another element, for example, income or a liability.

The Probability of Future Economic Benefit

85 The concept of probability is used in the recognition criteria to refer tothe degree of uncertainty that the future economic benefits associatedwith the item will flow to or from the entity. The concept is in keepingwith the uncertainty that characterises the environment in which an



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entity operates. Assessments of the degree of uncertainty attaching tothe flow of future economic benefits are made on the basis of theevidence available when the financial statements are prepared. Forexample, when it is probable that a receivable owed by an entity willbe paid, it is then justifiable, in the absence of any evidence to thecontrary, to recognise the receivable as an asset. For a large populationof receivables, however, some degree of non-payment is normallyconsidered probable; hence an expense representing the expectedreduction in economic benefits is recognised.

Reliability of Measurement

86 The second criterion for the recognition of an item is that it possesses acost or value that can be measured with reliability, as discussed inparagraphs 31 to 38 of this Framework. In many cases, cost or valuemust be estimated. The use of reasonable estimates is an essential partof the preparation of financial statements and does not undermine theirreliability. When, however, a reasonable estimate cannot be made theitem is not recognised in the balance sheet or income statement. Forexample, the expected proceeds from a lawsuit may meet thedefinitions of both an asset and income as well as the probabilitycriterion for recognition. However, if it is not possible for the claim tobe measured reliably, it should not be recognised as an asset or asincome. The existence of the claim, however, would be disclosed inthe notes, explanatory material or supplementary schedules.

87 An item that, at a particular point in time, fails to meet the recognitioncriteria in paragraph 83, may qualify for recognition at a later date as aresult of subsequent circumstances or events.

88 An item that possesses the essential characteristics of an element butfails to meet the criteria for recognition may nonetheless warrantdisclosure in the notes, explanatory material or in supplementaryschedules. This is appropriate when knowledge of the item isconsidered to be relevant to the evaluation of the financial position,financial performance and cash flows of an entity by the users offinancial statements.

Recognition of Assets

89 An asset is recognised in the balance sheet when it is probable that thefuture economic benefits will flow to the entity and the asset has a costor value that can be measured reliably.

90 An asset is not recognised in the balance sheet when expenditure hasbeen incurred for which it is considered improbable that economic



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benefits will flow to the entity beyond the current accounting period.Instead, such a transaction results in the recognition of an expense inthe income statement. This treatment does not imply either that theintention of management in incurring expenditure was other than togenerate future economic benefits for the entity or that managementwas misguided. The only implication is that the degree of certaintythat economic benefits will flow to the entity beyond the currentaccounting period is insufficient to warrant the recognition of an asset.

Recognition of Liabilities

91 A liability is recognised in the balance sheet when it is probable that anoutflow of resources embodying economic benefits will result from thesettlement of a present obligation and the amount at which thesettlement will take place can be measured reliably. In practice,obligations under contracts that are equally proportionatelyunperformed (for example, liabilities for inventory ordered but not yetreceived) are generally not recognised as liabilities in the financialstatements. However, such obligations may meet the definition ofliabilities and, provided the recognition criteria are met in the particularcircumstances, may qualify for recognition. In such circumstances,recognition of liabilities entails recognition of related assets orexpenses.

Recognition of Income

92 Income is recognised in the income statement when an increase infuture economic benefits related to an increase in an asset or a decreaseof a liability has arisen that can be measured reliably. This means, ineffect, that recognition of income occurs simultaneously with therecognition of increases in assets or decreases in liabilities (forexample, the net increase in assets arising on a sale of goods orservices or the decrease in liabilities arising from the waiver of a debtpayable).

93 The procedures normally adopted in practice for recognising income,for example, the requirement that revenue should be earned, areapplications of the recognition criteria in this Framework. Suchprocedures are generally directed at restricting the recognition asincome to those items that can be measured reliably and have a

sufficient degree of certainty.

Recognition of Expenses

94 Expenses are recognised in the income statement when a decrease infuture economic benefits related to a decrease in an asset or an increase



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of a liability has arisen that can be measured reliably. This means, ineffect, that recognition of expenses occurs simultaneously with therecognition of an increase in liabilities or a decrease in assets (forexample, the accrual of employee entitlements or the depreciation ofequipment).

95 Expenses are recognised in the income statement on the basis of adirect association between the costs incurred and the earning ofspecific items of income. This process, commonly referred to as thematching of costs with revenues, involves the simultaneous orcombined recognition of revenues and expenses that result directly and

jointly from the same transactions or other events. For example, thevarious components of expense making up the cost of goods sold arerecognised at the same time as the income derived from the sale of thegoods. However, the application of the matching concept under thisFrameworkdoes not allow the recognition of items in the balance sheetwhich do not meet the definition of assets or liabilities.

96 When economic benefits are expected to arise over several accountingperiods and the association with income can only be broadly orindirectly determined, expenses are recognised in the income statementon the basis of systematic and rational allocation procedures. This isoften necessary in recognising the expenses associated with the usingup of assets such as property, plant, equipment, goodwill, patents andtrademarks. In such cases, the expense is referred to as depreciation oramortisation. These allocation procedures are intended to recogniseexpenses in the accounting periods in which the economic benefitsassociated with these items are consumed or expire.

97 An expense is recognised immediately in the income statement whenan expenditure produces no future economic benefits or when, and tothe extent that, future economic benefits do not qualify, or cease toqualify, for recognition in the balance sheet as an asset.

98 An expense is also recognised in the income statement in those caseswhen a liability is incurred without the recognition of an asset, as whena liability under a product warranty arises.

Measurement of the Elements of FinancialStatements

99 Measurement is the process of determining the monetary amounts atwhich the elements of the financial statements are to be recognised andcarried in the balance sheet and income statement. This involves theselection of the particular basis of measurement.



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100 A number of different measurement bases are employed to differentdegrees and in varying combinations in financial statements, includingthe following.

(a) Historical cost Assets are recorded at the amount of cash orcash equivalents paid or the fair value of the consideration givento acquire them at the time of their acquisition. Liabilities arerecorded at the amount of proceeds received in exchange for theobligation, or in some circumstances (for example, incometaxes), at the amounts of cash or cash equivalents expected to bepaid to satisfy the liability in the normal course of business.

(b) Current cost Assets are carried at the amount of cash or cashequivalents that would have to be paid if the same or anequivalent asset was acquired currently. Liabilities are carried atthe undiscounted amount of cash or cash equivalents that wouldbe required to settle the obligation currently.

(c) Realisable (settlement) value Assets are carried at the amount ofcash or cash equivalents that could currently be obtained byselling the asset in an orderly disposal. Liabilities are carried attheir settlement values; that is, the undiscounted amounts of cashor cash equivalents expected to be paid to satisfy the liabilities inthe normal course of business.

(d) Present value Assets are carried at the present discounted valueof the future net cash inflows that the item is expected togenerate in the normal course of business. Liabilities are carriedat the present discounted value of the future net cash outflowsthat are expected to be required to settle the liabilities in thenormal course of business.

101 The measurement basis most commonly adopted by entities inpreparing their financial statements is historical cost. This is usuallycombined with other measurement bases. For example, inventories areusually carried at the lower of cost and net realisable value, marketablesecurities may be carried at market value and pension liabilities arecarried at their present value. Furthermore, some entities use thecurrent cost basis as a response to the inability of the historical costaccounting model to deal with the effects of changing prices of non-

monetary assets.



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Concepts of Capital and Capital Maintenance

Concepts of Capital

102 A financial concept of capital is adopted by most entities in preparingtheir financial statements. Under a financial concept of capital, such asinvested money or invested purchasing power, capital is synonymouswith the net assets or equity of the entity. Under a physical concept ofcapital, such as operating capability, capital is regarded as theproductive capacity of the entity based on, for example, units of output

per day.

103 The selection of the appropriate concept of capital by an entity shouldbe based on the needs of the users of its financial statements. Thus, afinancial concept of capital should be adopted if the users of financialstatements are primarily concerned with the maintenance of nominalinvested capital or the purchasing power of invested capital. If,however, the main concern of users is with the operating capability ofthe entity, a physical concept of capital should be used. The conceptchosen indicates the goal to be attained in determining profit, eventhough there may be some measurement difficulties in making theconcept operational.

Concepts of Capital Maintenance and the Determination ofProfit

104 The concepts of capital in paragraph 102 give rise to the followingconcepts of capital maintenance.

(a) Financial capital maintenance Under this concept, a profit isearned only if the financial (or money) amount of the net assetsat the end of the period exceeds the financial (or money) amountof net assets at the beginning of the period, after excluding anydistributions to, and contributions from, owners during theperiod. Financial capital maintenance can be measured in eithernominal monetary units or units of constant purchasing power.

(b) Physical capital maintenance Under this concept, a profit isearned only if the physical productive capacity (or operating

capability) of the entity (or the resources or funds needed toachieve that capacity) at the end of the period exceeds thephysical productive capacity at the beginning of the period, afterexcluding any distributions to, and contributions from, ownersduring the period.



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105 The concept of capital maintenance is concerned with how an entitydefines the capital that it seeks to maintain. It provides the linkagebetween the concepts of capital and the concepts of profit because itprovides the point of reference by which profit is measured. It is aprerequisite for distinguishing between an entitys return on capital andits return of capital. Only inflows of assets in excess of amountsneeded to maintain capital may be regarded as profit and therefore as areturn on capital. Hence, profit is the residual amount that remainsafter expenses (including capital maintenance adjustments, whereappropriate) have been deducted from income. If expenses exceedincome, the residual amount is a net loss.

106 The physical capital maintenance concept requires the adoption of thecurrent cost basis of measurement. The financial capital maintenanceconcept, however, does not require the use of a particular basis ofmeasurement. Selection of the basis under this concept is dependenton the type of financial capital that the entity is seeking to maintain.

107 The principal difference between the two concepts of capitalmaintenance is the treatment of the effects of changes in the prices ofassets and liabilities of the entity. In general terms, an entity hasmaintained its capital if it has as much capital at the end of the periodas it had at the beginning of the period. Any amount over and abovethat required to maintain the capital at the beginning of the period isprofit.

108 Under the concept of financial capital maintenance where capital isdefined in terms of nominal monetary units, profit represents theincrease in nominal money capital over the period. Thus, increases inthe prices of assets held over the period, conventionally referred to asholding gains, are, conceptually, profits. They may not be recognisedas such, however, until the assets are disposed of in an exchangetransaction. When the concept of financial capital maintenance isdefined in terms of constant purchasing power units, profit representsthe increase in invested purchasing power over the period. Thus, onlythat part of the increase in the prices of assets that exceeds the increasein the general level of prices is regarded as profit. The rest of theincrease is treated as a capital maintenance adjustment and, hence, aspart of equity.

109 Under the concept of physical capital maintenance when capital isdefined in terms of the physical productive capacity, profit representsthe increase in that capital over the period. All price changes affectingthe assets and liabilities of the entity are viewed as changes in themeasurement of the physical productive capacity of the entity. Hence,they are treated as capital maintenance adjustments that are part ofequity and not as profit.



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110 The selection of the measurement bases and concept of capitalmaintenance will determine the accounting model used in thepreparation of the financial statements. Different accounting modelsexhibit different degrees of relevance and reliability and, as in otherareas, management must seek a balance between relevance andreliability. This Frameworkis applicable to a range of accountingmodels and provides guidance on preparing and presenting thefinancial statements constructed under the chosen model. At thepresent time, it is not the intention of the AASB to prescribe aparticular model other than in exceptional circumstances, such as forthose entities reporting in the currency of a hyperinflationary economy.

This intention will, however, be reviewed in the light of worlddevelopments.

AASB Framework

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