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Financial Reporting

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Table of Contents
Introduction................................................................................................................................4

Course Work Assignment..........................................................................................................4

Conclusion..................................................................................................................................9

References................................................................................................................................10

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Introduction
Conceptual framework is a set of generally accepted principles that forms the basis for
financial reporting for businesses. The conceptual framework was revised and reissued in
March 2018 which included new definitions of elements in financial statements, guidance on
measurement and de-recognition and concepts for presentation and disclosure [CITATION
IFR18 \l 16393 ]. The main purpose of conceptual framework is to assist IASB in developing
the IFRS standards and to assist preparers of accounts to develop accounting policies which
helps all the interested parties to understand and interpret the IFRSs. A critical discussion has
been carried out on assessing the utility of financial information and reports to investors and
creditors.

Course Work Assignment

According to Weetman, (2019) the main objective of financial reporting is to provide
financial information of the business entity to the current and potential investors, lenders and
other creditors in making effective decisions. Investors both existing and potential, lenders
and creditors are the primary users of the financial statements. Primary users need
information on the economic resources of the business entity (assets), claims against the
entity (liabilities) and changes in the resources and claims (equity). They also need
information on efficiency and effectiveness of management in discharging the responsibilities
to use the economic resources of the entity. However, according to Carlon, et al., (2020)
information needed by the creditors and investors would not be useful when it is misleading.
Financial information and reports presented should be accurate and free from errors to be
useful for the primary users.

According to ACCA Global, (2018), financial information and the reports would be useful
for the investors and creditors when it is relevant and faithfully represented. Relevance and
faithful representation are the fundamental qualitative characteristics underpinned under the
conceptual framework 2018 purported by IASB. Primary users like investors, creditors and
lenders consider the financial information to be relevant if it affects the economic decisions
of the users and is provided on timely basis to affect the decisions. Usefulness of financial
reports to the primary users would be enhanced it contains predictive and confirmatory value.
Predictive value helps the users in assessing the past, current and future events whereas
confirmatory value help them to confirm past assessments. However, according to IFRS,
(2018) relevance and faithful representation of information are subject to cost constraints. It

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should be determined whether the benefits from the financial information outweigh the costs
incurred for providing the information.

According to Bragg, (2018) usefulness of financial information to creditors and investors

depends on the materiality which is an entity specific aspect of relevance which is a threshold
quality. As per the conceptual framework 2018, financial information would be material to
the primary users when the omission or misstatement of the same could influence their
decisions. Materiality in financial reporting would help the investors and creditors in
assessing the important financial information before considering the other qualities of that
information. Materiality would acts as a cut-off point for the primary users as any
information that does not pass the test of materiality should not be considered further.
However according to Levy, et al., (2018) financial reports cannot meet all of the information
needs of the primary users. The business entity should aim to meet the common information
needs of all investors, lenders and other creditors.

According to Hendler & Zülch, (2018) materiality in financial reporting would assure
investors and creditors in considering both the quantitative and qualitative factors of the
financial information which would help them to make effective decisions. Quantitative aspect
of materiality help the primary users to consider the size of effect of the transaction or event
against measures like financial position, cash flows and performance of the business entity. It
would also affect the perceptions of primary users by taking account any unrecognised items
like contingent liabilities. Qualitative aspect of materiality help the primary users to consider
the internal factors like involvement of related parties, unexpected changes in trends etc. as
well as external factors like state of economy, geographic location etc. which would influence
their decisions. It is efficient to first assess the quantitative factors and if it is considered
immaterial, investors and creditors should consider qualitative factors. Quantitative threshold
would be lowered in the presence of a qualitative factor. However according to Modack, et
al., (2018) immaterial disclosures are unhelpful and should not be provided to the primary
users. Investors and creditors need information that is relevant to their decision making and
should not be obscured by information that cannot be reasonably expected to influence their
decisions.

According to Charles & Tully, (2018) financial reports helps the investors, lenders and
creditors in providing the financial information that aids them in making rational and prudent
investment and credit decisions. Faithful representation of financial as per the conceptual

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framework 2018 would help the primary users in making effective decisions as the
transactions are accounted and presented in accordance with their substance and economic
reality and not merely the legal form. However, it would be extremely difficult for the
developing countries for setting up the framework as it would be time consuming and
expensive for them to set up and follow the framework. The costs for following the
framework would be higher than the benefits from the quality of financial information
provided by following the framework.

According to Hermanson, et al., (2018), faithful representation of financial reports would

ensure completeness, neutrality and error free information. Faithful representation would help
the investors and creditors in financial information with necessary descriptions and
explanations which leads to better understanding for making effective decisions. It helps the
primary users in providing with the information that is neutral and free from bias. The
information would not be neutral if the selection or presentation of information deliberately
influences the decision making or judgement of the users in arriving at a predetermined result
or outcome. It also provides primary users with financial information that is free from error as
the error or omission of financial information would become unreliable and deficient in terms
of relevance and would mislead the users in making effective decisions. However, according
to Carlon, et al., (2020) it would be difficult to provide financial information that is perfect in
all aspects. Financial information are prone to bias and personal judgements and thus reduces
its reliability.

According to IFRS, (2018) enhancing qualitative characteristics increase the usefulness of

financial information to the primary users like current and potential investors, creditors and
lenders. Enhancing qualitative characteristics that influence the decisions of primary users
include comparability, verifiability, and timeliness and understand ability. Comparability
helps the primary users to compare financial statements of an entity over time to identify
trends in the financial position and performance. It would also help the users in comparing
the financial statements of various entities to evaluate their relevant performance and
financial position.

Disclosure and consistency of financial information would help the users to compare the
financial reports [ CITATION Bra184 \l 16393 ]. Comparability helps the primary users
informed of the accounting policies used in the preparation of financial statements and
changes to the accounting policies that affect the financial statements preparation. Consistent

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presentation of financial position and performance of the business entity over time helps in
assessing the progress of the entity which enhances relevance and faithful presentation of
information. However, according to Modack, et al., (2018) comparability is not as same as
uniformity. Change in accounting policies should be initiated if it makes the financial
information more relevant and reliable and should be changed if it is initiated by IFRS.

According to ACCA Global, (2018) verifiability is characteristic that helps in reaching a

consensus by different knowledgeable and independent observers that a particular
information is faithful representation although, it is not a complete agreement. Verifiability
helps the primary users to assure that the financial information faithfully represent the
economic phenomena that appear to represent through direct verification or through indirect
verification. For example, the primary users can verify the cash position of an entity through
direct verification i.e. by counting the cash. Indirect verification like recalculating inventory
amounts using same cost flow assumption like first-in-first-out method etc. would also help
the primary users in assessing the liquidity position of the business enterprise. However,
according to Levy, et al., (2018) verification of financial information is a complex and time
consuming process. Verification also would not always assure accuracy in financial
reporting.

Timeliness assures provision of financial information to the primary users in such a way that
it can influence their decisions [CITATION Wee197 \l 16393 ]. Timeliness and provision of
reliable information helps the primary users in assessing whether to invest in the company or
offer credit for the conduct of the business. However, if the financial information is presented
to primary users on a timely basis without covering all the aspects of transaction, the
information would use value as it would not be free from error or complete. Conversely,
financial information would become irrelevant to the investors and creditors if every aspect
of the transaction is analysed in detail. Financial information should be such that it should
satisfy the economic decision making of the users.

Understand-ability is the classification, characterising and presentation of information in a

clear and concise manner for better understanding by the primary users [ CITATION
Cha18 \l 16393 ]. Classification of financial transactions according to various bases and
presentation of financial information in a concise manner help the primary users a better
understanding of the business. This would lead to effective decisions in the organisation.
However, users of financial reports should have a reasonable knowledge of business and

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economic activities. The primary users should also have the capability of reviewing and
analysing the information in a diligent manner and need to be able to perceive its
significance. Also, according to Carlon, et al., (2020) enhancing qualitative characteristics
would not be useful to the primary users if information is not relevant and faithfully
presented. Enhancing characteristics only help the users in better understanding of
information that is relevant and faithfully represented.

According to ACCA Global, (2018) assessment of various financial statement elements

provide useful information to the primary users in effective decision making. Investors,
creditors and lenders would find the information on assets, liabilities, equity, incomes and
expenses of a business entity to assess the prospects for future net cash inflows to the entity.
It helps in assessing the stewardship of management in the economic resources of the entity.
Information on assets of the company helps the primary users to assess the economic
resources controlled by the entity and the management of the same for providing returns to
various stakeholders of the enterprise. However, according to Hermanson, et al., (2018)
improper recognition of assets in the financial statements would provide misleading
information to investors, lenders and creditors. Inappropriate classification and presentation
of assets in statement of financial position would lead to incorrect decisions.

Information on the liabilities of a business entity helps the primary users in analysing the
obligations to transfer economic resources [ CITATION Bra184 \l 16393 ]. Information on
the debt and liabilities of an enterprise would help the primary users in assessing the financial
leverage of the company. It helps to assess the ability of the company to pay back both long-
term and short-term debt as a result of legal or constructive obligations. Information on
equity would be primarily useful to the investors as it represents information on residual
interest in the assets of the company after deducting all its liabilities. Financial information
on incomes and expenses with different characteristics separately would help the primary
users in understanding the financial performance of the entity. However, wrong classification
and presentation of elements of financial statements leads to incorrect decisions by the users.

According to IFRS, (2018) different measurement bases used in assessing different classes of
elements of financial statements affect the decision making of the primary users of financial
reports. As per the IFRSs, a mixed measurement approach would provide most useful
information to the investors, creditors and lenders. Historical cost as a measurement basis
would help the users in assessing the cost that was incurred when the asset was acquired

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whereas current value helps the users in using the information available at the reporting date
which updates carrying amount of assets and liabilities. However, according to Levy, et al.,
(2018) using different measurement bases for related assets and liabilities would lead to
measurement inconsistency and thus faithful representation would be affected.

Information presented through measurement of assets and liabilities using fair value reflects
price that would be received or paid to sell/transfer asset/liability to the primary users
[CITATION Wee197 \l 16393 ]. Value in sue measurement basis helps to assess present
value of cash flows to be derived from use of asset or disposal. However, measurement
uncertainty arising from the measurement bases that must be estimated leads to unfaithful
representation of financial information.

Conclusion
Conceptual framework is a coherent system of interrelated objectives and fundamental
principles which prescribes the nature, function and limits of financial accounting and
financial statements. It provides guidance with respect to objective of financial reporting,
fundamental and enhancing qualitative characteristics of financial information, recognition,
de-recognition and measurement of financial statement elements etc. It does not override any
specific IFRS standard and is a principle based approach that helps primary users in effective
decision making.

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References
ACCA Global, 2018. Technical Aricles-Conceptual Framework. [Online]
Available at: https://www.accaglobal.com/lk/en/student/exam-support-
resources/professional-exams-study-resources/strategic-business-reporting/technical-
articles/conceptual-framework.html
[Accessed 2018].

Bragg, S. M., 2018. International Financial Reporting Standards (IFRS) 2019 Edition.
London: Accounting Tools.

Carlon, S. et al., 2020. Financial Accounting: Reporting, Analysis and Decision Making -
Conceptual Framework 2018. New Jersey: John Wiley and Sons.

Charles, I. & Tully, R., 2018. Essential IFRS 2018. London: Emile Woolf International.

Hendler, M. & Zülch, H., 2018. International Financial Reporting Standards (IFRS)
2018/2019 : Textausgabe der von der EU gebilligten Standards und Interpretationen. New
Jersey: John Wiley & Sons.

Hermanson, R. H., Edwards, J. D. & Maher, M. W., 2018. Accounting Principles A Business
Perspective · Volume 1. Georgia: 12th Media Services.

IFRS , 2018. https://www.ifrs.org/projects/2018/conceptual-framework. [Online]

[Accessed 2018].

Levy, A., Bouheni, F. B. & Ammi, C., 2018. Financial Management USGAAP and IFRS
Standards. New Jersey: Wiley.

Modack, G., Lubbe, I. & Herbert, S., 2018. Financial Accounting IFRS Principles. 5 ed.
CapeTown: Oxford University Press, South Africa.

Weetman, P., 2019. Financial Accounting An Introduction. 8 ed. Essex: Pearson Education
Limited.

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