Users of General Purpose Financial Reporting (GPFR)

Primary Users

Emphasis on existing & potential providers of capital

1. Investors

2. Lenders and other Creditors

Especially those who can’t demand information directly from reporting entities

 Compare smaller investors & institutional investors

 Compare smaller suppliers & financial institutions

GPFR don’t provide all the information needed by the primary users

They also need to consider pertinent information from other sources e.g.

 general economic conditions and expectations

 political events and political climate

 industry and company outlooks.

Other Users of GPFR

Other parties may also find GPFR useful

However, GPFR are not primarily directed to these groups

 Regulators

 Members of the public

Accounting information designed to meet needs of investors & creditors

 will usually meet the needs of other user groups

Qualitative Characteristics of Useful Information

Qualitative Characteristics

Fundamental 1. Relevance
2. Faithful Representation

Enhancing 1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
5. Also consider materiality

Items are only recognized in the financial statements if they meet both the fundamental
characteristics

Relevance Faithful Representation Enhancing Characteristics

Relevant information is capable of
making a difference in decision-making
Information must faithfully represent
what it purports to represent
Means that the user is assured that
the information presented is
complete, without bias and neutral.
The qualitative characteristics enhance
usefulness of information that is
relevant and faithfully represented.
 Comparability
 Consistency over time and
across entities

 Reflect the economic substance  Policies can be changed if no

longer relevant

Predictive value 1) Complete Verifiability

value for future outcomes  i.e. all necessary information,  Different knowledgeable and
including descriptions independent observers could
 e.g. fair value reach consensus

e.g. property valuations by registered

valuers
Confirmatory value 2) Neutral i.e. unbiased Timeliness
i.e. feedback on previous evaluations Generally, older information is less
- the information presented is without useful
 e.g. compare sales, expenses bias or manipulation.
against budget
 Prudence is excluded from the
framework

3) Free from error Understandability assumes that users

 Estimates can still be regarded  have a reasonable knowledge
as free from error of business and economic
activities

 review and analyze

information diligently

 may need to seek aid of an

adviser for complex
economic phenomena
Materiality means relevance in the context of an organisation

 Omission or misstatement (or obscuration) could influence decisions

 Information is material if omitting, misstating or obscuring it could reasonably be expected to

influence the decisions that the primary users of general purpose financial statements make on
the basis of those financial statements, which provide financial information about a specific
reporting entity (New definition effective from 01/01/2020).

Example on Materiality: Tesco Ltd

The financial year ended on 31 December and draft financial statements have been prepared.

 Invoices valued at $3,000 were not included in Sales i.e. omitted from the financial statements

 Total Sales for the year is $1 million. This is a relevant base, since we’re dealing with invoices.

3,000/1,000,000 = 0.3% and clearly not material

 Therefore financial statements won’t be adjusted (the invoices can be included next year)

 However, we also need to calculate materiality against other relevant bases i.e. Profit & Receivables

If total Sales was $10,000

 3,000/10,000 = 30% which is clearly material

This error would require an adjustment to the current financial statements e.g.

 Dr Accounts Receivable 3,000

 Cr Sales 3,000
Elements of Financial Reporting

Assets Liability

A present economic resource controlled by the A present obligation of the entity to transfer an economic
entity as a result of past events. resource as a result of past events

 An economic resource is a right that has the  An economic resource is a right that has the potential
potential to produce economic benefits to produce economic benefits

Control is the present ability to direct the use of an

asset
An obligation is a duty or responsibility that
 by deploying it or allowing another party to do
 an entity has no practical ability to avoid
so.
 is owed to another party (or parties)
Rights may

 correspond to an obligation of another party

e.g. receive cash, goods or services; or The transfer does NOT need to be certain, or even likely
 not e.g. PP&E, Inventory  so long as it would require the entity to transfer an
economic resource in at least one circumstance

Equity Income and Expenses

Defined as Increase in economic benefits in the form of increase

in assets or decrease in liabilities, which increases
 Residual interest in the assets of any entity
proprietorship. Example, sales, fees, commission
after deducting liabilities
received.
 i.e. OE = A – L
Expenses
 Shareholders have a residual claim while
Decrease in economic benefits in the form of
creditors have a specific claim
decrease in assets or increase in liabilities, which
result in a decrease in proprietorship. Example,
wages, insurance.

Benefits of the Conceptual Framework

1. Provides a conceptual basis for consistent and logical accounting standards

2. Cost-effective approach

 Fundamental issues like objective & definitions don’t need to be reviewed when developing
new standards

 Framework can address issues where there’s no specific standard

 3. Makes the process more transparent

 helps users to understand conceptual basis for standards

4 Enhances accountability of standard setters

o Justify any departure from conceptual basis

May reduce political pressure [i.e. effect of lobbying].

Lobbying is the act of trying to persuade governments to make decisions or support

something. Lobbying can be done by many sorts of people, alone or in groups. Often it is done
by big companies or businesses. ... These people are called lobbyists.

Critiquing the Framework

Objective of GPFR

1. How about accountability and stewardship?

 Accountability/stewardship focuses on managers but decision usefulness focuses on users

 The framework acknowledges that users’ expectations about returns also depends on their
assessment of management’s stewardship of the entity’s economic resources.

2. How about other users?

 Some users are interested in social and environmental information.

 Is that less important than economic and financial information?

Chronology

Historically, standards were developed before the framework

 Now IASB is trying to fit the framework and standards … not an easy task!

The framework has been criticised

 for simply rationalizing/justifying existing practice

 rather than seeking the ‘best’ way and implementing radical changes in the profession
Measurement

The framework adopts a descriptive approach

 It acknowledges use of different approaches e.g. fair value, depreciated historical cost, net realisable
value

 i.e. a mixed-attribute model

Why has the framework not prescribed one method?

1. Cost of changing systems

2. Problems with fair value e.g. inactive markets

However recent standards and changes to the framework seem to support fair value