CON 8: Conceptual Framework for Financial Reporting: Chapter 8, Notes to Financial Statements Deloitte Accounting Research Tool

First, the objective of financial reporting is to provide information about the company that is useful to potential investors, creditors and lenders in making decisions about the company. Because these parties cannot require that companies provide this information about company resources and claims on the company’s assets, they rely on financial reports to give summaries of this information. The second section of SFAC 8 provides information on what makes financial information useful and how to balance usefulness with cost considerations. This section of the conceptual framework tells financial statement users that information should be relevant and faithfully represent the underlying economics of the company.

• This helps auditors prepare legible reports that can be understood around the globe.
• Financial reporting is represented as fourfifths of the information spectrum, with other information comprising the other fifth.
• The organization could be an enterprise, a charitable organization or even a local sports club.
• Unfortunately, the use of a standard monetary unit for measurement purposes poses a dilemma unlike a yardstick, which is always the same length, a currency experiences change in value.
• Continuity supports the measurement and recording of assets and liabilities at historical cost.

Another example is that when International Accounting Standards Board proposes the removal of prudence in the description of faithful representation, it raises concern among stakeholders at large. Alexander and Archer predicted the possibility for International Accounting Standards Board to increase the use of current value measurement but some stakeholders may consider it as uncertain or unpredictable. In other words, the adoption of current value measurement is merely another indicator to prudence, as both of them involve estimation and predictability.

Similar to Conceptual Framework of Accounting(

Of course, many foreign countries with historically high inflation routinely require inflation-adjusted financial statements. Feedback on past events helps confirm or correct earlier expectations. For example, when a company presents comparative income statements, an investor has information to compare last year’s operating results with this year’s. This provides a general basis for evaluating prior expectations and for estimating what next year’s results might be. Information about a company’s financial performance is useful in assessing a company’s ability to generate future cash flows. Don’t think that the conceptual framework is a useless exercise in accounting theory.

Accrued expenses are a liability with an uncertain timing or amount; the uncertainty is not significant enough to qualify it as a provision. One example would be an obligation to pay for goods or services received from a counterpart, while the cash is paid out in a later accounting period—when its amount is deducted from accrued expenses. The objective of business financial reporting is to provide information that is useful for making business and economic decisions. Therefore, the conceptual framework is critical for a thorough understanding of the financial accounting process. The reasoning is that investors prefer information that does not unnecessary raise expectations.

About the IFRS Foundation

Additionally, the section provides guidelines for how to enhance these characteristics. Among the list, the framework itself is the foundation of which accounting regulators tabulate their decisions on future standard settings. It identifies the objective of general purpose of financial reporting so that useful information is provided to stakeholders.

After performing a comprehensive review of the framework, the Board decided to add a project to its agenda to address presentation and measurement concepts. The Board concluded that those areas were the most deficient and could conceptual framework accounting provide significant benefits in addressing current and future financial reporting problems. The lack of concepts in these areas has led to inconsistent decisions in the presentation and measurement requirements in GAAP.

Advantages and disadvantages of regulating accounting information through accounting standards.

In comparison to rules-based approach, International Accounting Standards Board is continuously committed to adopt principles-based conceptualization in the framework design. Accounting regulators are opined that such approach is able to define fundamental accounting concepts, such as recognition, measurement and reporting requirement, distinctively . It is “a broader, have fewer exceptions, guidance, and interpretations” (Lee, 2006, pg. 1), which lays the basic premise of providing useful financial information to stakeholders such as lenders and creditors, existing and potential investors .

Explain how accounting principles affect financial statement analysis. Because of the cost-benefit constraint discussed earlier, however, it would be impossible to report all relevant information. Further, too much information could adversely affect understandability and, therefore, decision usefulness. Those who provide financial information must use judgment in determining what information best satisfies the full disclosure principle within reasonable cost limitations. The four enhancing characteristics of useful accounting information are comparability, verifiability, timeliness, and understandability. Once information exhibits both relevance and faithful representation, improvements in one or more of the four enhancing characteristics can make the accounting information even more useful.