Definition Financial Reporting 16 a document promulgated rds Board. The Conceptual Framework for complete, comprehensive and single by the International Accounting Standai The Conceptual Framework is a summary of the terms = concepts that underlie the preparation and presentation oj financial statements for external users. The Conceptual Framework is an attempt to provide an overall theoretical foundation for accounting- The Conceptual Framework is intended to guide standard. setters, preparers and users of financial information in the preparation and presentation of statements. It is the underlying theory for the development of accounting standards and revision of previously issued accounting standards. The Conceptual Framework is concerned with general purpose financial statements, including consolidated financial statements. The financial statements are Prepared at least annually and directed toward the common needs of a wide range of users. Haney rer special Purpose financial reports, for example. oa and computations Prepared for tanateba Purposes, outside the scope of the Conceptual Framework.Purposes of Conceptual Framework a. To assist the FRSC in developing accounting standards and reviewing existing standards. ; b. To assist preparers of financial statements in applying accounting standards and in dealing with issues not yet covered by GAAP. ce. To assist the FRSC in the review and adoption of International Financial Reporting Standards. d. To assist users of financial statements in interpreting the information contained in the financial statements. e. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP. £ To provide information to those interested in the work of the FRSC in the formulation of PFRS. Authoritative status of Conceptual Framework If there is a standard or an interpretation that specifically applies to a transaction, the standard or interpretation overrides the Conceptual Framework. In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in developing and applying an accounting policy that results in information that is relevant and reliable. However, it is to be stated that the Conceptual Framework is not a Philippine Financial Reporting Standard. The Conceptual Framework does not define standard for any particular measurement or disclosure issue. ' Nothing in this Conceptual Framework overrides any specific Philippine Financial Reporting Standard. In case where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall prevail over the Conceptual Framework.Users of financial information i 1 Reportin, Under the Conceptual Framework for Financia’ ., the users of financial information may be classified into two, namely: a. Primary users b. Other users users include the existin ers and other creditors. employees, customers, The other users include the J governments and their agencies, and the public. g and potential] The primary investors, lend Primary users The primary users of financial information are the parties to whom general purpose financial reports are primarily directed. Such users cannot require reporting entities to provide information directly to them and therefore must rely on general purpose financial reports for much of the financial information they need. Existing and potential investors Existing and potential investors are concerned with the risk inherent in and return provided by their investments. The investors need information to help them determine whether they should buy, hold or sell. ping halen are also interested in information which Saens em to assess the ability of the entity to pay Lenders and other creditors Existi F intoreaeann potential lenders and other creditors are whether thei information which enables them to determine eir loans, interest thereon and other amountsOther users By residual definition, "other users" are users of financial information other than the existing and potential investors, lenders and other creditors. Other users are so called because they are parties that may find the general purpose financial reports useful but the reports are not directed to them primarily. Employees Employees are interested in information about the stability and profitability of the entity. The employees are interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities. Customers Customers have an interest in information about the continuance of an entity especially when they have a long-term involvement with or are dependent on the entity. Governments and their agencies Governments and their agencies are interested in the allocation of resources and therefore the activities of the entity. These users require information to regulate the activities of the-entity, determine taxation policies and as a basis for national income and similar statistics. Public Entities affect members of the public in a variety of ways. For example, entities make substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trend and the range of its activities.Scope of Conceptual Framework . Objective b Qualit: a rete neial information . Qualita acteristics of useful fina c. Definition, recognition and measurement ie eran from which financial statements are cone 5 d. Concepts of capital and capital mainten Financial reporting s the provision of ternal users that d for assess) financial information is useful to them in Financial reporting i: ing the effectiveness about an entity to exte making economic decisions an of the entity's management. nancial information to The principal way of providing fil i 2 h | financial statements. external users is through the annua However, financial reporting encompasses not only financial statements but also other means of communicating information that relates directly or indirectly to the financial accounting process. Financial reports include not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of financial statements } and significant ratios. Financial reperte also include nonfinancial information such as description of major products and a listi officers and directors. Cee Ore OBJECTIVE OF FINANCIAL REPORTING The objective of financial i i Heat ile an a a sorting forms the foundation of The «oot : Rascal ieee of financial reporting is to provide to existing and pean pou the reporting entity that is useful in making decisions bout tones lenders and other creditors ut providing resources to the entity. The objective of . . goal of ome reporting is the "why", p aeSee Target users Financial reporting is directed primarily to the existing and potential investors, lenders and other creditors which compose the primary user group. The reason is that existing and potential investors, lenders and other creditors have the most critical and immediate need for information in financial reports. As a matter of fact, the primary users of financial information are the parties that provide resources to the entity. Moreover, information that meets the needs of the specified primary users is likely to meet the needs of other users such as employees, customers, governments and their agencies. The management of a reporting entity is also interested in financial information about the entity. However, management need not rely on general purpose financial reports because it is able to obtain or access additional financial information internally. Specific objectives of financial reporting The overall objective of financial reporting is to provide information that is useful for decision making. Specifically, the Conceptual Framework for Financial Reporting states the following objectives of financial reporting: a. To provide information useful in making decisions about providing resources to the entity. b. To provide information useful in assessing the cash flow Prospects of the entity. : ¢. To provide information about entity resources, claims and changes in resources and claims.Economic decisions Bxisting and potential investors nood general purpose financial reports in order to enable them in making decisions whether to buy, sell or hold equity investments. nders and other creditors need ports in order to enable them in Je loans and other Existing and potential le general purpose financial re : making decisions whether to provide or sett! forms of credit. Assessing cash flow prospects Decisions by existing and potential investors about buying, selling or holding equity instruments depend on the returns that they expect from an investment, for example, dividends. Similarly, decisions by existing and potential lenders and other creditors about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. Consequently, financial reporting should provide information that is useful in assessing the amount, timing and uncertainty of prospects for future net cash inflows to the entity. Economic resources and claims General purpose financial reports provide information about the financial position of a reporting entity. Financial position is information about the entity's economic resources and the claims against the reporting entity. The economic resources are the assets and the claims are the liabilities and equity of the entity. In other words, the financial position comprises the assets, ree egd and equity #f an entity at a particular moment in2 Information about the nature and amounts of an entity's economic resources and claims can help users identify the entity's financial strength and weakness. Otherwise stated, information about financial position can help users to assess the entity's liquidity, solvency and the need for additional financing. Liquidity is the availability of cash in the near future to cover currently maturing obligations. Solvency is the availability of cash over a long term to meet financial commitments when they fall due. Information about priorities and payment requirements of existing claims can help users to predict how future cash flows will be distributed among those with a claim against the reporting entity. Changes in economic resources and claims General purpose financial reports also provide information about the effects of transactions and other events that change the economic resources and claims. Changes in economic resources and claims result from financial performance and from other events or transactions, such as issuing debt or equity instruments. The financial performance of an entity comprises revenue, expenses and net income or loss for a period of time. In other words, financial performance is the level of income earned by the entity through the efficient and effective use of its resources. The financial performance of an entity is also known as results of operations and is portrayed in the income statement and statement of comprehensive income.Usefulness of financial performance Information about financial performance helps users to understand the return that the entity has produced on the economic resources. Information about the return the entity has produced provides an indication of how well management has discharged its responsibilities to make efficient and effective use of the entity's economic resources. Information about past financial performance is usually helpful in predicting the future returns on the entity's economic resources. Information about financial performance during a period is useful is assessing the entity's ability to generate future cash inflows from operations. Accrual accounting Accrual accounting depicts the effects of transactions and other events and circumstances on an entity's economic resources and claims in the periods in which those effects occur even if the resulting cash receipts and payments occur in a different period. In other words, under the accrual basis, the effects of transactions and other events are recognized when they occur and not as cash is received or paid. Simply stated, accrual accounting means that income is recognized when earned regardless of when received and expense 1s recognized when incurred regardless of when. paid. Information about financi i : cial performance measured in iy aaa with accrual accounting provides a better basis aa Rite Past and future performance than information 'Y about cash receipts and Payments during a period.Limitations of financial reporting a General purpose financial reports do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. These users need to consider pertinent information from other sources, for example, general economic conditions, political events and industry outlook. b. General purpose financial reports are not designed to show the value of an entity but the reports provide information to help the primary users estimate the value of the entity. c. General purpose financial reports are intended to provide common information to users and cannot accommodate every request for information. d. To a large extent, general purpose financial reports are based on estimate and judgment rather than exact depiction.