The evaluation of the scope of new conceptual framework for financial reporting is the main purpose of the report. Presentation and preparation of financial report is explained in the report by comparing the 1989 IASB framework with that of new framework. Report also demonstrates the arguments that are against the use of fair values and the arguments that are in favour of the use of fair value in the presentation of financial reporting. In the financial statements preparation the fair value has been compared to the historical method valuation techniques.
Conceptual framework for financial reporting:
The primary purpose of conceptual framework issues by International Accounting standard board (IASB) is to assist the board in reviewing existing financial reporting standard and the development of future financial reporting. Concepts are set out in the conceptual framework that provides details regarding the presentation of financial statements and the manner of preparation of the financial statement for external users. Such framework intends to assist the financial statements preparers in applying the international financial reporting standard board and assisting board in promoting harmonization of regulations. The purpose of framework is to interpret information that financial information presented in the financial statements comply with the financial reporting standard (Cascino and Gassen 2015). The intention for the framework is to reduce the number of different accounting treatments that are officially recognized by IFRS. Conceptual framework also has the purpose of providing information who is interested in working for IASB with the information about the approaches of IFRS formulation. The need of conceptual framework arises from the requirement of information about the reporting entity financial position (Hoyle et al. 2015). Such information might be related to economic resources of entity and any claim against the reporting entity. Effect of economic transactions, other events, and any change in claims and economic resources of reporting entity is also depicted in the financial report. All such information provided in the financial report in accordance with the conceptual framework would provide useful information for decision-making purpose.
Objectives of financial reporting:
The external user uses the financial statement for decision making and it is the main purpose of the financial reporting. It helps users in providing useful information about cash flows including the uncertainty and timing of cash flows. Information that are critical for determining the business liquidity is provided in the financial reporting (Weygandt et al. 2015).
Financial reporting helps users such as lenders, potential investors and creditors for making decisions regarding selling, purchasing, equity and debt or settlement of other types of credit and loans. The main users seeking information about the resources of entity uses financial reporting for not only assessing the prospect of future net cash flow of entity but also efficiently and effectively managing the existing resources of entity for discharging their responsibilities (Shenkar et al. 2014).
It helps in assessing the prospects of entity in discharging the responsibilities for using the resources of entity along with prospects of entity for existing potential and existing investors and future net cash flows. Examples of some of the responsibilities to be discharged in lieu of financial reporting is protecting resources of entity from economic factors that might have unfavourable effect such as technological and price change (Wang 2014).
There are generally two underlying assumptions for preparing the financial statements based on financial reporting and this involves accrual basis and going concern. For meeting the objectives of financial reporting, statements of financial reports are prepared using the basis of accounting for accrual. The main purpose is the recognition of events and transactions are done when they occur and are recorded and reported in the financial statements. The accrual bases of accounting are applied for the preparation of the financial statement for obligations to make payment in future (Stubbs and Higgins 2014). Using accrual basis for preparing the financial statements provides the information about past transactions and are considered useful in the decision making process. Preparation of financial statements is done on the assumption that entity is regarded as going concern so that their operation will be continued for the near future (Nobes 2014). Therefore, it is assumed that reporting entity neither intend to curtail the materiality of scale of operations and nor it has the need to liquidate. If the entity have such intention, preparation of financial statements are conducted in a different manner and disclosing the basis used for preparation.
The attributes of Qualitative characteristics are helpful in providing useful information to the financial statements users. The fundamental characteristics are the representation of financial statement in a faithful and relevant manner. The fundamental characteristics includes verifiability, comparability, understand ability and timeliness.
Relevance- In order for information presented in the financial report to be useful to investors for decision-making purpose, they must be relevant. Information are said to be relevant when it has the quality of influencing the users economic decision by assisting them to evaluate present, past or future events. Future financial position of entity is predicted by the information generated from past performance. Information should not be in the form of an explicit forecast if they are to give predictive value (Shenkar et al. 2014).
Faithful representation- In order for the information to be reliable, they must faithfully represent all the transactions and any other associated events. Therefore, the balance sheet of reporting entity should make representation of all the transactions that would help in meeting the criteria of recognition. Most of the financial information presented has the risk of being presented less faithfully that they purports portray. The fact that such information’s are less faithfully represented is due to inherent difficulties in either applying the measurement and presentation techniques or identifying the transactions (Henderson et al. 2015).
Verifiability- Verifiability is the factor that helps in assuring that information’s are faithfully represented what is purports to present. Evidence helps in supporting the financial information and individual information enable them to see whether such information’s are represented faithfully. If the information can be audited, then it is verifiable.
Comparability- In order to identify the trends in the financial performance of organization, users must be able to compare the financial statements of reporting entity. For evaluating the relative financial position of entities, financial statements of different entities should be prepared in such a way that it would assist comparability. The important implications of comparability are that users are informed about the accounting policies that are engaged in preparation of financial statements (Adams 2015).
Timeliness- Information reported may lose its relevance if there is any undue delay in presenting the information. It is required by management to create balance between the reliable information provision and relative merits of timely reporting. All the aspects of transactions are necessary to be reported if the information is to be provided on timely basis. This will help in impairing reliability of the financial information’s. On other hand, information is considered highly reliable if the reporting is delayed until the aspects are known. Satisfying the economic decision making needs of users helps in achieving the balance between reliability and relevance (Biddle et al. 2016).
Understandability- Understandability is one of the essential qualities of information that is provided in the financial statements, as it is readily understandable by users. For enhancing the understandability factors, it is assumed that users have reasonable knowledge of business and economic activities along with willingness to study the information with reasonable diligence. However, the information should not be excluded on the ground that it might be difficult to understand by users because of its complexities and should be included in the financial statements because of its relevance.
Elements of financial statements:
Assets- The resources are the assets that are controlled by entity from the economic benefits are normal to flow to entity. The economic benefit for future is embodies in the assets is the potential to make direct and indirect contribution to cash equivalent and cash of entity. Assets might also take the form of convertibility into cash or capability of reducing cash outflows.
Liabilities- Liabilities is the financial element indicating present obligations of organization. Such obligations might be enforceable legally as a statutory requirements or a binding contract. The conceptual framework creates distinction between future commitment and present obligations and obligations arises when acquisition of assets are done by entering into an irrecoverable amount (Cheng et al. 2014).
Income- Framework incorporates the income definition as encompasses both gains and revenue. Ordinary activities of entities leads to arising of revenue and is known by several names such as interest, sales, dividends, royalties and fees. Income helps in enhancing several kinds of assets and settlement of liabilities helps in generating liabilities. Unrealized gains of an organization arising from long-term assets carrying amount and marketing securities revaluation is also included in the definition of income (Christensen et al. 2015).
Expenses- In the ordinary course of business the expenses are the cost incurred by the organization and it also encompasses loss. The asset depletion or outflow such as inventory, cash and cash flow, plant equipment and property are usually taken the form. Unrealised expenses such as those arising from increase effects of rate of exchange are involved in the definition of expenses.
Equity- Equity is the interest of ownership in the entity that has different rights in relation to repayment of contributed equity and dividend receipt. Measurement of liabilities and assets forms the basis of amount of equity that is depicted in the balance sheet.
Concepts of capital and capital maintenance:
Needs of financial statements users should form the basis of selection of appropriate concept of capital.
Financial capital- Almost all the entities in the financial statements preparation make use of concept of financial capital. The synonymous of Capital with the equity or net assets of company under the financial concepts of capital such as invested purchasing power and invested money (Hribar et al. 2014). If the financial statement users are concerned about the purchasing power of invested capital or maintenance of nominal capital, then financial capital concept should be adopted.
Physical capital- Capital under physical concept is regarded as entity based physical capital that includes operating capability. Physical capital concept is used when the user’s main concern is operating capability of entity (Leuz and Wysocki 2016).
Use of fair value in preparation and presentation of financial statements:
Fair value measurement as per IFRS 13 that requires disclosure of fair value measurements and it seeks to increase the comparability and consistency of measurements using a fair value hierarchy. As per the hierarchy, input is characterized into techniques of valuation into three levels. The characteristics of assets and liabilities are taken into account by reporting entity that is being measured by considering the price of assets and liabilities at the measurement date. Historical value is the old accounting principle that depicts the economic conditions when assets are purchased. Using historical concepts for preparation of financial statements, a lack of inaccuracy is created within the financial reports. Fair value method on other hand helps in facilitating the comparison of similar assets (Lara et al. 2016). Since the valuations of instruments of finance are done at the time and using the discount rate of same, there can be efficient comparison of assets with the market. Valuing the financial instruments using the historical cost, valuation of identical assets with identical cash flow would be done differently based on time they are purchased. For the same assets under fair value accounting, different entities record different prices depending upon the credit standing and market accessibility. Moreover, difference in assets price due to factors affecting the industry is eliminated by fair value (Collier 2015).
From the analysis of conceptual reporting framework, it can be inferred that there are several uses of such framework in the financial information representation by reporting entity. Framework is concerned with the general purpose financial reporting such as consolidated financial statements. The importance of conceptual framework assists financial statements preparers in developing accounting policies. Therefore, it can be said that such framework is of great importance to both users and preparers of financial statements. Moreover, it has been ascertained that valuation of financial statements using fair value are more significant compared to historical value measurement because of several benefits offered by fair value.
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