What are Financial Statement Concepts
Financial statement concepts form the foundation for developing and applying accounting principles in general purpose financial statements. These concepts are intended to be used for the following purposes:
- the Accounting Standards Board (AcSB) considers them when developing accounting principles; and
- preparers and practitioners consider them in exercising their professional judgment as to the application of generally accepted accounting principles (GAAP), as well as in establishing accounting policies in areas where accounting principles are developing or do not exist.
Financial statement concepts should not be used to replace or override the requirements of an accounting standard or accounting guideline.
What you need to know
The AcSB is undertaking a project to improve Financial Statement Concepts, which are currently in Section 1000, Financial Statement Concepts, and Section 1001, Financial Statement for Not-for-Profit Organizations, in Parts II and III of the CPA Canada Handbook – Accounting (the Handbook), respectively. This project aims to:
- clarify the purpose and intended use of financial statement concepts; and
- develop updated financial statement concepts for Parts II and III of the Handbook in areas where the Board thinks that the improvements will assist preparers and practitioners when applying GAAP and the Board when setting standards.
The focus of this project will be to identify areas for improvement in financial statement concepts to ensure that they continue to be fit for purpose for Canadian entities. The outcome of this project is not expected to make the application of authoritative standards in Parts II and III of the Handbook more complex and will not result in immediate changes to existing standards. This project is also not expected to change practice for preparers and practitioners who are applying financial statement concepts as intended. It will, however, reinforce their intended purpose and use.
Benefits of the Project
Key benefits for preparers and practitioners are as follows:
- Highlighting the purpose and intended use of financial statement concepts is expected to improve consistency of application of standards in Parts II and III of the Handbook. This will include reinforcing that financial statement concepts should not be used to replace or override the requirements of an accounting standard or accounting guideline.
- Updating financial statement concepts will provide better guidance in emerging areas where accounting standards do not yet exist.
Key benefits for the AcSB are as follows:
- Updating financial statement elements will assist in standard setting. For example, more refined definitions of “assets” and “liabilities” will help standard setters determine what items should be recognized in the financial statements.
- Including additional guidance in areas such as measurement, presentation, and disclosure will assist standard setters to determine the appropriate basis of measurement, presentation, and disclosure requirements to be included in new or revised standards.
Background and Approach
Current financial statement concepts were developed before the changeover to IFRS® Accounting Standards in 2011 and were aligned with the International Accounting Standards Board’s (IASB) original Conceptual Framework. Some changes were made to Section 1001 in consideration of differences between private enterprises and not-for-profit organizations (NFPOs).
The IASB subsequently undertook a project to update its Conceptual Framework for Financial Reporting, which was finalized in 2018. The IASB’s “IFRS Conceptual Framework Project Summary” can be found here.
The AcSB will consider topics from the IASB’s revised Conceptual Framework when developing proposals to update financial statement concepts in Parts II and III of the Handbook. Each topic will be reviewed to determine if it is fit for purpose for Canadian entities. This will include identifying any areas that may need to be simplified for accounting standards for private enterprises and accounting standards for NFPOs. Also, the Board will evaluate each topic on a cost/benefit basis and consider the differing information needs of users of financial statements prepared under IFRS Accounting Standards and the users of financial statements prepared under Parts II and III of the Handbook.
Stay up to date
Stay tuned for the further updates via the project page.