The conceptual framework for financial reporting
This report is based on financial reporting. The significant objective of the financial reporting is providing the high-quality information regarding economic entities and use decision-making for the economics. Providing high-quality information on financial reporting is significant as it can give a positive impact on the capital providers as well as on the other stakeholders for making investments and decisions on resource allocations for enhancing the entire efficiency of the market. This report aims at discussing qualitative characteristics of financial reporting. The report provides the background on the requirement for the conceptual framework as well as the purpose of the framework. It will discuss the objectives and the assumptions made in financial reporting. It will further lead a vivid insight into the qualitative characteristics of financial reporting, elements of financial statements and concept of capital and capital maintenance.
Conceptual Framework is defined as the system of objectives as well as ideas, which lead to creating asset of standards and rules. Considering the broad sense of conceptual framework, it is being defined as nature as well as the purpose of accounting. The conceptual framework considers theoretical as well as conceptual that embeds the financial reporting. It then forms the coherent as well as consistent foundation, which helps in underpinning the accounting standards development. Particularly in case of accounting, a conceptual framework is required in setting up of the function as well as a limit in the financial statements and accounting. The main reasons for the need of conceptual framework are as follows:
- Need for setting the standards of accounting
- The basis for resolving the disputes of accounting
- Fundamental principles are not repeated in the standards of accounting and for that conceptual framework is required
- It also facilitates the statutory audit. Statutory audits are required for auditing the financial statements of the organisation.
Financial reporting is having the purpose of providing utility information based on economic decision-making and the conceptual framework’s purpose is to provide the theoretical basis for determining the measured transactions (Scott, 2015). In the absence of a conceptual framework, the standards of accounting produced some serious defect. The significant purposes of the Conceptual Framework are as follows:
- Assisting in future development as well as reviewing the existing standards
- Promoting the harmonisation for regulation of accounts as well as standards by reduction of permitted alternative treatments of accounting
- Assisting in preparation of the financial statements for the IFRS application that incorporates dealing with the accounts transaction.
The objective of financial reporting
The objectives of financial reporting are as follows:
- To help the users by providing them with useful information regarding the financial reports. The information must be useful from various perspectives like, whether giving the credit to the customers, whether to lend the borrower as well as whether to invest fund within the business. This information must be comprehensible with the reasonable grounding in the business.
- To provide authentic information regarding the cash flows for which the entity is being subjected. It incorporates timing as well as uncertainty in the flow of cash. This information is considered as critical as it helps in determining the business liquidity. This information is also utilised for estimating the organisational growth.
- To disclose obligations as well as economic resources for the entity. They provide emphasis on liabilities as well as resources changes that help in predicting the future cash flows.
- To give information regarding management accountability for judging the effectiveness of management to utilise the resources as well as operating the enterprise.
- To share information with different stakeholders regarding the the management’s performance
The underlying assumptions regarding the Financial Reports are as follows:
- Business Entity: The concept regarding separate entity is the business entity for which financial statements are being prepared in a separate as well as in a distinct way.
- Going Concern Continuity: Going-concern assumptions means that entity will be remaining within the business for an indefinite amount of time. It also disregards the entity’s possibility, which may be liquefied (Hapsoroand Suryanto, 2017). This assumption should be dropped when the entity is being dropped and is threatened with liquidation as well as bankruptcy. In this type of cases, the value of liquidity must be represented.
- The monetary unit, Exchange rate and Inflation: Financial statements are being utilised as the local currencies as well as like the monetary units. Holding the organisation that has the subsidiaries in different countries may decide the exchange rate that is being utilised for converting the foreign currencies to the local currencies (Eichenbaum et al. 2017).
The qualitative characteristics
Relevance, as well as Faithful representation is considered as the fundamental qualitative characteristics for useful information regarding financial reporting.
Relevance, as well as Faithful representation is considered as the fundamental qualitative characteristics for useful information regarding financial reporting.
Relevance: It is referred as thecapability for making the difference in the decision-making process that is being made by the users as the capital providers. Relevant information regarding the financial reporting has the capability of making the differences in decisions that are being made by the users. Information regarding the financial statement has the potentiality for making the distinctions in the decisions having the predictive value as well as confirmatory value (Freeman et al. 2017). Both predictive, as well as confirmatory values regarding the information of the financial statements are quite inter-related. Materiality is considered as the relevance aspect specific to the entity and is based on nature as well as magnitudes of items to which information is related to the context of the financial reports.
Faithful Representations: It is considered the second fundamental qualitative characteristics. To represent faithfully, the economic phenomena, the annual report is required to be neutral and free from error (Leuzand Wysocki, 2016). Economic phenomena help in representing the annual report possesses economic resources, obligations as well as transactions. The researchers inferred that the computation of faithful representation is difficult and can be accessed directly from the annual report.
Comparability, Timeliness, verifiability and understandability are considered as the qualitative characteristics that help in enhancing the information’s usefulness, which is relevant as well as represented faithfully.
Comparability: It is also considered as the qualitative characteristics, which define the information quality that helps the users in enabling for identifying the similarities as well as differences in between the economic phenomena’s set. Information regarding the reporting entity is used as a comparison that can be done with similar information regarding other entities as well as with similar information regarding same entity for a period (Christensen et al. 2016). Comparability helps the users in identifying as well as comprehending similarities within the items and difference among the items. The measurement of comparability is done by utilising six items that are focused on the consistency. Among the four items are referred as the consistency in utilising the similar policies of accounting as well as procedures within a specific period frame in an organisation. The other two items are being utilised for measuring comparability within the single period across the organisation.
Verifiability: It helps for assuring the users that the information helps in representing the economic phenomena faithfully. Verifiability signifies that various knowledge, as well as independent observers, may achieve in reaching the consensus and signifies that a specific depiction is considered as the faithful representation (Flower, 2016).
Timeliness: It means that having the availability of information for the decision makers before the information loses the capacity of influencing the decisions. It also refers to the time taken in revealing the information as well as the usefulness of the decision. During the quality examination of the information within the annual reports, this factor is measured by utilising the logarithm of some days between the end of the years as well as auditor’s signature report after the calculation of the year ends (Nobes, 2014).
Understandability: Classification, characterisation as well as the presentation of the information concisely as well as clearly help in making the information comprehensible. However some of the economic phenomena are complex from the initial stage and therefore, it will not be easy in making them comprehensible. However, if such complex information is being omitted from the financial report, then the financial reports will be incomplete as well as misleading. The preparations of financial report are for the users who are possessing reasonable business knowledge as well as knowledge on the economic activities and have the potentiality in analysing information with diligence (Naranjo et al. 2017).
Elements of the financial statements
Assets, liabilities, equity, income and Expense are the financial term that is being used by an organisation for stratifying its financial records at the workplace. Different organisations are framing up the financial statement as per their type of business or the nature of the business. A financial statement has been framed by any of organisation with the aim to know their financial growth as well as financial income in the organisation. The cash flow statement is delivering by an organisation with detail calculations of about the total flow of cash in the organisation. In the organisation, at which extent the organisation is needed the flow of cash is calculating by financial department of the organisation and it is printed on an electronic sheet that is known as cash flow statement (Cañibano, 2017). These following terms like asset and liabilities are being used as the term to define creditors and the debtors of the organisations. All kinds of assets are coming to be the income of the organisation, which means from which the organisation would receive money. On the other hand, liabilities are being denoted as to whom the organisation is payable (Titman et al. 2017). Equity shareholders are being treated as the board of members of the organisation,andhence they have as much power or right to take part in the managerial decisions (Henderson et al. 2015).
Concepts of Capital and capital maintenance
Financial capital and physical capital are being defined as the type of capital funds that are being entered or invested by the owner of the business. The financial capital has been derived as all kinds of monetary form of capital that includes; cash in hand, cash at bank, shareholders of the organisation or any of mutual fund investments. On the other side, the physical capital has been derived as assets of the organisations such as machines, plant, human resource, office furniture and another kind of assists (Lins et al. 2017). Both capitals are being used by the organisation to perform their part of job or performance in the market.
The use of Fair Values in the preparation and presentation of financial statements Fair value by IFRS:
In the field of the finance, every organisation must present their financial report in a systematic manner which has been derived under the guidelines of IFRS. The term IFRS also being known as International Financial Reporting Standard, which has been framed with the aim to guide various organisations about in which format they have to present their financial statements (Bragg and Bragg, 2018). The organisational development is highly dependable over the financial statement of the organisation. Also, the stakeholders or shareholders even have the right to see the financial statements of the organisation. In favour of this statement, the organisation IRFS has set some standards for presenting the financial statement. As per the standards of IFRS, each of the organisations needed to submit their financial report or statement in such manner:
- Presentation of financial statement
- Revenue recognition
- Employee benefits
- Borrowing costs
- Income taxes
- Income taxes
- Investment in the market or over securities
- Inventories or stock
- Fixed assets
- Intangible assets
- The benefit of the retirement plan
- Combinations in the business
- Foreign exchange rates
- Operating segment and cost
- Subsequent events
- Inventory-specific accounting, such as agricultural resources and minerals
The IFRS has stated that in the market, every organisation must present their financial data as well as performance in a systematic way. By maintaining this concept or Performa, an organisation can strive well in the market also would be able to survive in the market (Bragg and Bragg, 2018).
Historical cost of accounting
In the accounting system, historical accounting system has been derived as the kind of accounting system under which the amount of the machinery and plant are recorded in the books of accounts with their original price. For example, in 1965 a machine has been entered in the books of accounts with the price of $100,000. Either in the year of 2016, the price of that machinery would be increased to $250,000; the price in the books of account will remain same at the end of the fiscal year. It is the concept of historical accounting concept (Anon, 2018).
The historical accounting concept has been derided as one of the best options for any of organisation. The historical accounting concept is easy, objective, conservative and consistency by nature that helps an organisation to keep the record constant with the change in time. The historicalaccounting concept helps the organisation to keep the record of any asset with its base price also to calculate the depreciation of that asset. The depreciation charges are deducted from the principal amount or price of the asset, and due to historical accounting concept, it makes the task easy for the auditor (Anon, 2018).
On the other hand, the historical accounting concept having the only disadvantage and that is, from past long years the data remains same in the books of accounts. There is no updates takes place in the books of accounts. It has been suggested that if an organisation is just focused over this single concept or following only this concept than it would be quite difficult for the organisation to maintain their financial statements so far (Anon, 2018).
In this detailed study, it has been found that for any of organisation the financial presentation is so much important. The reason is a financial statement of an organisation shows the exact image of the organisation in front of its stakeholders as well as shareholders. Thus, it has been discussed that according to the guidelines of IRFS, each of the organisations must submit their financial statements to the respected authorities. Apart from this, the concept of historical accounting has also been discussed in this detailed study, which has deduced that it is good for the organisation, but an organisation should not dependable over this concept for all the time.
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