Discuss about the International Financial Reporting Standards (IFRS).
At the present time public companies are obliged by Corporation Act 2001 in order to prepare GPFRs (General Purpose Financial Reports) at least once a year and also communicate the GPFRs to the users those desire to know the financial performance of the organizations. On the other hand, there are a lot of regulations as well as guidelines that the public companies must follow in the preparation of the GPFRs (Kieso, Warfield & Weygandt, 2011). Furthermore, due to some exceptions, private companies are not compelled to prepare GPFRs.
Along with this, this research essay would be beneficial to describe the importance of GPFRs for the business organization. Moreover, the essay would also be helpful to articulate the difference between GPFRs and Special Purpose Financial Statements. In addition to this, the essay would also be valuable to describe the reason behind that the “true and fair view” requirement is a central component of Australian financial reporting. Also, this essay would be advantageous to illustrate the reasons behind that only public companies, but not the private companies, require to produce GPFRs. Finally, this research paper will express International Financial Reporting Standards (IFRS) in an effective and a more comprehensive manner.
Importance of GPFRs
In fact, the GPFRs are very important for the business organizations. The main reason behind it is that, GPFRs play a significant role in order to reveal transparency and to develop trust between the organization and investors of that particular organization. Along with this, GPFRs are issued by the business organizations in order to give support to investors as well as creditors in the decision making process. GPFRs mainly take in balance sheet, income statement, cash flows statement, and statement of retained earnings to prepare financial reports in an appropriate way (Mather, Ramsay & Serry, 1996). Moreover, the set of financial statements is labeled as ‘general purpose’ as a result of it involves all the essential financial statements that may be used by the people to perform a lot of business activities. In addition to this, public companies use GPFRs in order to communicate the performance as well as competence of the companies with the outer people of the organization.
On the other hand, GPFRs are also helpful for both creditors as well as investors in order to foresee the future performance of the company (Bazley, Hancock, & Robinson, 2014). Moreover, with the help of GPFRs, the investors of the firm would be able to analyze the ability of the firm to pay off its current as well as future debts in a proper way. In addition to this, GPFRs are important because of these reports play a vital role in order to provide more financial information to the potential investors of the company; so they can make their decision about the investments in an effective and a significant way. Also, GPFRs are not designed to explain the value of a business organization. In contrast, GPFRs play a major role to give information related to the organization to its existing as well as potential investors; so they may estimate the value of the organization in an accurate way (Krambia-Kapardis & Clark, 2010). For that reason, it can be said that, GPFRs are very important for the business organizations and they must prepare GPFRs to provide accurate information about the companies to the investors, lenders and creditors.
Difference between General Purpose Financial Reports and Special Purpose Financial Statements
There are a lot of differences between General Purpose Financial Reports and special purpose financial statements. For case, a general purpose financial report is a common audit report that endorses the compliance with the appropriate accounting standards simply. Apart from this, a special purpose financial report or statement is a report that is not categorized as a GPFR (Elliott & Elliott, 2007). A special purpose financial statement is a statement that is prepared by using a special purpose framework to outfit the specific needs of users who be going to use it. In opposite to this, a GPFR is prepared in order to meet the specific needs of the users who are totally depending on the information. On the other hand, the special purpose framework makes GPFRs and special purpose differ from one another. For case, GPFRs are prepared for the public use whereas special purpose financial statements intended for the draw on of internal users (Henderson, Peirson, Herbohn, & Howieson, 2015). In other words, it also can be said that special purpose financial reports are only used by the management or particular external users such as: government bodies, banks, and so on of the firm.
In addition to this, the GPFRs disclose more financial information related to the firm that enhances the level of transparency and accountability in an effective way. But, special purpose financial statements release less financial information that condenses the level of transparency as well as accountability (Albrecht, Stice, & Stice, 2007). Apart from this, GPFRs are helpful to satisfy the needs of the users while special purpose is unable to satisfy the requests of users. The main reason behind it is that GPFRs disclose all the information related to the financial statements of the firm. But, special purpose reveals little information linked to the financial statements of the firm. Moreover, GPFRs require more time as well as cost to prepare while special purpose needs few time and charge in order to get ready. In other words, it can be said that, special purpose financial statements are faster and cheaper to arrange than GPFRs (Berrington, & Bhandari, 2011). In this way, these are the major difference between the GPFRs and special purpose financial statements.
“True and Fair View” Requirement is a Central Component of Australian Financial Reporting
There is no specific definition of “True and Fair View.” But, it is well-known that the “True and Fair View” requirement is an essential element of Australian financial reporting. There are numerous reasons behind this. For case, the main reason is that, as per the section 297 of Corporations Act, business organizations are obliged to turn out true and fair financial statements to improve the level of transparency as well as accountability in an effective and a more comprehensive manner (Vladu, Mati, & Salas, 2012). On the other hand, “true and fair view” plays a significant role in order to reveal the financial position as well as performance of the company in an accurate way. In addition to this, the financial statements for a financial year offer a true and fair view of the financial position as well as performance of the consolidated entity at what time consolidated financial statements are requisite by the public or government bodies. Along with this, “True and Fair View” requirement consists of all the financial information of business organizations that is essential to improve the level of transparency and simplicity in an effective way (International Monetary Fund. 2006). For that reason “True and Fair View” requirement is considered as a crucial element of Australian financial reporting.
Public Companies, But Not the Private Companies, Require To Produce GPFRs
It is true that public companies are obliged to produce GPFRs. But, private companies are free from to produce GPFRs. There are numerous reasons behind this. For case, the major reason behind it is that all the public companies as well as large proprietary companies are reporting entities. All reporting entities are obliged to prepare GPFRs (Bandy, 2013). Apart from this, private companies are the non-reporting companies and for that reason they are not obliged to make GPFRs. On the other hand, people invest their money only in the public listed companies and therefore they need all the financial information related to the companies in order to predict future profitability of the companies in an accurate way. Apart from this, private companies do not make GPFRs because of there is no specific need to demonstrate all the financial statements of the organizations to the public (Parker & Graham, 2008).
In addition to this, public companies have some accountability to the government of the nation. They are obliged to fulfill their liability or accountability in a proper way. If public companies are unable to execute their accountability then GPFRs permit management as well as governing bodies to fulfill their accountability in an effective and a more comprehensive manner. This is also the major reason that public companies are compelled to prepare GPFRs and these reposts must be as per the accounting standards of the nation (Parker & Graham, 2008). Apart from this, private companies do not have any specific liability to perform to the government. They are only obliged to fulfill all the common liabilities towards the government of the nation. For that reason; there is no specific need to prepare GPFRs to the private companies. In this way, these are the main reasons for those public companies, but not the private companies are obligated to prepare GPFRs.
International Financial Reporting Standards (IFRS)
In current, IFRS has become the global standard in order to prepare financial statements of public companies. IFRS (International Financial Reporting Standards) are a set of accounting standards that are developed by the IASB (International Accounting Standards Board). Along with this, IFRS indicate a set of GAAP (Generally Accepted Accounting Principles) that are used by companies in order to prepare financial statements in an effective and a significant manner. Moreover, IFRS are planned as a common global language; so that company accounts may be comprehensible as well as analogous crosswise international boundaries (Mirza, Holt & Orrell, 2010).
In addition to this, IFRS (a set of international accounting standards) play a major role to explain that how particular types of transactions as well as other events must be reported in the financial statements of the firms. Moreover, IFRS are essential to indicate that how accountants must maintain as well as report their accounts exactly. IFRS were developed to have a general accounting language, as a result business as well as accounts can be recognized from company to company as well as country to country (Wiley-VCH, 2011). Apart from this, IFRS play a critical role in order to maintain stability as well as transparency all the way through the financial world.
On the other hand, IFRS are very helpful to businesses as well as individual investors in order to make well-informed financial decisions. It is because of with the help of IFRS, businesses and investors would be proficient to perceive right that what has been going on with a corporation in which they desire to invest their money. In this way, it can be said that IFRS are an effective set of accounting standards that are developed as well as maintained by the IABS in an effective way (Ankarath, Mehta, Ghosh, & Alkafaji, 2010). Moreover, with the help of IFRS standards, the business organizations and other people who are willing to invest their money would be able to compare the financial performance of the publicly listed companies and would also be able to make investment decisions in an appropriate way.
On the basis of above discussion, it can be assumed that GPFRs are very essential for the public companies. Moreover, public companies are required to prepare GPFRs as per the pre-determined accounting standards. It is also observed that, private companies are not obliged to prepare GPFRs. Apart from this, it can be observed that, there are numerous differences between general purpose financial reports and special purpose financial statements. The major difference is that GPFRs are prepared to the public while special purpose statements are prepared to some specific people such as: management of the firm, government entities and so on. Also, it is examined that, GPFRs plays a momentous role in order to reveal the transparency and to improve the efficiency of the business organizations in an effective and a more comprehensive manner. Finally, it is also observed that IFRS are the global accounting standards that are developed by the IASB in order to maintain transparency as well as accountability in the financial statements of the business organizations.
Albrecht, W.S., Stice, E.K., & Stice, J.D. (2007). Financial Accounting. Australia: Cengage Learning.
Ankarath, N., Mehta, K.J., Ghosh, T.P., & Alkafaji, Y.A. (2010). Understanding IFRS Fundamentals: International Financial Reporting Standards. US: John Wiley & Sons.
Bandy, G. (2013). Financial Management and Accounting in the Public Sector. NY: Routledge.
Bazley, M., Hancock, P., & Robinson, P. (2014). Contemporary Accounting PDF. Australia: Cengage Learning Australia.
Berrington, M., & Bhandari, V. (2011). Pinnacle Financial Statements, Volume 2. Australia: IFRS SYSTEM.
Elliott, B., & Elliott, J. (2007). Financial accounting and reporting. Australia: Pearson Education.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in Financial Accounting. Australia: Pearson Higher Education AU.
International Monetary Fund. (2006). Australia: Financial Sector Assessment Program - Technical Note - Investor Protection, Disclosure, and Financial Literacy. Australia: International Monetary Fund.
Kieso, D.E., Warfield, T.D., & Weygandt, J.J. (2011). Intermediate Accounting, Study Guide. UK: John Wiley & Sons.
Krambia-Kapardis, M., & Clark, C. (2010). Public Sector Financial Reporting. A Users Needs Study in Cyprus, Lemesos-Cyprus.
Mather, P., Ramsay, A., & Serry, A. (1996). The use and representational faithfulness of graphs in annual reports: Australian evidence. Australian Accounting Review, 6(12), 56-63.
Mirza, A.A., Holt, G., & Orrell, M. (2010). International Financial Reporting Standards (IFRS) Workbook and Guide: Practical insights, Case studies, Multiple-choice questions, Illustrations. US: John Wiley & Sons.
Parker, X.L., & Graham, L. (2008). Information Technology Audits 2008. Australia: CCH.
Vladu, A.B., Mati, D. and Salas, O.M. (2012). True And Fair View And Creative Accounting Conceptual Delimitations Based On Papineau`S Tree Methodology. Annales Universitatis Apulensis Series Oeconomica, 14(1), pp. 104-115.
Wiley-VCH (2011). International Financial Reporting Standards (IFRS) 2011. US: John Wiley & Sons.