1.1 THE ROLE AND IMPORTANCE OF FINANCIAL REPORTING Information needs of each user (pg. 4) INTERACTION BETWEEN FINANCIAL REPORTING AND
• Management - also require financial information for REGULATORY ENVIRONMENT — WHO MUST PREPAR
THE ROLE OF FINANCIAL REPORTING (pg. 2 – 3)
decision making, but they can obtain information they GENERAL PURPOSE FINANCIAL REPORTS? (pg. 7 – 9)
Role is to: need internally and do not need to rely on GPFR. IFRS
• provide users with the information to achieve effective • Other users e.g. regulators and members of the public, IFRSs do not further clarify who must prepare GPFSs. In
decision making. such as community groups and potential employees - jurisdictions adopting IFRSs, legislation and other regul
• provide a stewardship or accountability role by requiring general purpose financial reports are not primarily requirements usually require GPFSs from entities that
managers to give an account of how they have used the directed to these users issued debt or equity securities traded in a public mark
resources provided by those users Conflicting Information Needs / Measurement IASB/ Conceptual Framework
Objective of General Purpose Financial Reporting is to: • Conceptual Framework provides that the primary users The IASB does not, however, limit GPFR to these entitie
• provide financial information about the reporting entity are the focus of general purposes financial reports. Conceptual Framework indicates that a reporting entit
that is useful to primary users for making decisions about • However, decision facing different users give rise to any entity that has existing and potential investors, len
providing resources to the entity, including conflicting needs and other creditors who rely on GPFR.
- buying, selling or holding equity and debt instruments; • For example, with information needs: Who can be a reporting entity?
- providing or settling loans and other forms of credit - Lenders want to assess an entity’s capacity to meet its A reporting entity can be a for-profit entity or a not-for
- exercising rights to vote on, or otherwise influence, interest and principal repayment obligations and the entity. A reporting entity can operate in the private sec
management’s actions that affect the use of the level of risk associated with a loan. As investors invest the public sector.
entity’s resources equity, they also want to assess risk and the ability of • Examples of for-profit private sector entities includ
Primary users include: the entity to service its debs so they can continue its companies, partnership, and trading trusts.
• those providing equity or debt finance operations and provide a return to investors • Examples of not-for-profit entities include registere
- existing and potential investors • For example, with measurement of assets: clubs, associations, charities and government
- lenders - lenders may prefer net realisable value of certain departments. A reporting entity can be one or a gr
- other creditors that must rely on general purpose assets provided as security to assess whether the entities comprising a parent and its subsidiaries.
financial reports security is sufficient in case the entity defaults. AASB
• Primary users do not include ✘: - However, investors may prefer value in use • In Australia, for-profit private sector entities are su
- Singh, who manufactures sugar free muesli bars hopes measurement, which better indicates the expected the Conceptual Framework and must prepare GPFR
to secure long term sales contracts with school benefits from continuing to use the assets. they satisfy both of the following conditions:
canteens all over the county. IASB approach to resolving conflicting needs 1. they have public accountability
- Milly, who runs a successful organic food café is keen • Provide the information that will meet ‘the needs of the 2. they are required by legislation to comply with
to expand into the food truck industry by obtaining maximum number of primary users’ Australian Accounting Standards.
finance via crowd-funding. • However, according to the IASB, focusing on common • Other for-profit private sector entities may noneth
- Van, who owns a fishing and camping store is keen to information needs does not prevent an entity from elect to apply the Conceptual Framework and prep
expand his product range by approaching his suppliers providing additional information that may be useful to GPFR
to ask about increasing his credit limit. another sub-group of primary users • Public accountability - A for-profit private sector en
Types of financial reporting • trying to meet the needs of the maximum number of this if:
• General purpose financial reporting (most obvious) primary users may have different implications - it has debt or equity instruments that are trade
• Technology advancements provide opportunities for • For example, for some entities, investors may be the public market or it in the process of issuing secu
various largest group of primary users, but for other entities, the for such trading; or
largest group of primary users may be lenders. - it holds assets in a fiduciary capacity for a broad
• investor updates, sustainability reporting corporate
of outsiders as one of its primary businesses’ e.
governance reporting and other prospective forward- UNDERSTANDING THE INTERNATIONAL FINANCIAL banks, insurance companies, securities brokers/
looking, information (to assist share investors) REPORTING STANDARDS & CONCEPTUAL FRAMEWORK and mutual funds
• other methods of dissemination that, together with
, 1.2 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING PRINCIPLES ESTABLISHED IN CONCEPTUAL FRAMEWORK have the internal knowledge held by manag
(pg. 14 – 15) for example, about key risks or key value dri
PURPOSE AND APPLICATION OF CONCEPTUAL FRAMEWORK Observing user or For example, on particular transactions or
Accrual Basis – requires expenses/revenues to be recognised market responses disclosures issued by the entity or on respon
(pg. 12 – 13)
when they are incurred/earned rather than when cash is to information external parties such as analysts
Conceptual Framework has formal frame of reference for:
paid/received.
- what transactions/events should be accounted for Faithful Representation (pg. 17)
Going Concern - assumes entity will continue to operate for
- when effects of transactions/events be recognised Requires that financial information faithfully represent
the foreseeable future and carrying amounts of assets and
- how effects of transactions/events be measured effects of transactions and events that they purport to
liabilities in the balance sheet are based on this assumption.
- how the effects of transactions and events should be represent and means that financial information is com
1.3 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
summarised and presented in financial statements neutral and free from error.
INFORMATION
Applying the Conceptual Framework for Financial Reporting E.g. Balance Sheet should faithfully represent the effec
Fundamental Qualitative Characteristics (pg. 15 – 18) the events that give rise to assets, liabilities and equity
point in time, normally the end of year.
Applying Fundamental Qualitative Characteristics (pg
For information to be useful, it must be both relevant a
faithfully represented.
• This may involve professional judgment in making
Relevance (pg. 15 – 17)
off between relevance and faithful representation.
OBJECTIVES AND LIMITATIONS OF GPFR (pg. 13 – 14) Information is relevant when it can influence user decision
• E.g. information about future cash flows expected
Lack of familiarity with new types of information making through either or both:
derived from an asset may be highly relevant, but i
• If financial statements users are not familiar with an item • predictive value – helps users to form expectations about
be difficult to faithfully represent because of the in
of information, it is difficult to assess its usefulness to outcomes of past, present and future events.
uncertainty of future events
their decision-making processes. - E.g. Financial information can be used to predict the
Process for making judgements:
• Preparers will then be faced with difficulties in trying to future cash flows of an entity and the timing and
1. Identify an economic phenomenon, informati
assess if the new item of information should be uncertainty of those cash flows.
about which may be useful to decision makers
recognised under an existing category in the financial • confirmatory value – helps users to confirm or correct
2. Identify the information that would be most r
reports or disclosed separately. their past evaluations.
about this phenomenon.
• Some users may not have the technical expertise to - E.g. Budgeted future cash flows can be compared with
3. Determine if the information is available and c
understand complex information e.g. information based actuals when financial statements relating to those
provide a faithful representation of the econo
on finance principles such as present value calculations. future periods are issued and the reasons for variances
phenomenon.
Decision-usefulness may vary among users are investigated.
ENHANCING QUALITATIVE CHARACTERISTICS (pg. 18 –
• Personal beliefs and values of users may determine the Materiality (pg. 16 – 17)
information used in decision making. Also relates to relevance – if information is material if it is
- E.g. investors may consider information about omitted, misstated or obscured and it could influence
environmental performance to be relevant for their decisions that the primary users of GPFR.
decision making, whereas others might exclude it from • however, what is material is a matter of professional
their decision-making models. judgment by preparers. Conceptual Framework does not
Capable of multiple interpretations prescribe quantitative thresholds for materiality because
• Preparers may differently perceive what is useful application of materiality is entity specific.
information to users than the users themselves. Examples of information being material regardless of amount
- E.g. fair value measurement may be useful for • An entity transacts with directors involving immaterial
Comparability (pg. 18 – 19)
investors to assess the entity’s future economic amounts to the entity. Information is more useful if it:
benefits but value in use may is better for preparers as - However, the disclosure of these related party
• Management - also require financial information for REGULATORY ENVIRONMENT — WHO MUST PREPAR
THE ROLE OF FINANCIAL REPORTING (pg. 2 – 3)
decision making, but they can obtain information they GENERAL PURPOSE FINANCIAL REPORTS? (pg. 7 – 9)
Role is to: need internally and do not need to rely on GPFR. IFRS
• provide users with the information to achieve effective • Other users e.g. regulators and members of the public, IFRSs do not further clarify who must prepare GPFSs. In
decision making. such as community groups and potential employees - jurisdictions adopting IFRSs, legislation and other regul
• provide a stewardship or accountability role by requiring general purpose financial reports are not primarily requirements usually require GPFSs from entities that
managers to give an account of how they have used the directed to these users issued debt or equity securities traded in a public mark
resources provided by those users Conflicting Information Needs / Measurement IASB/ Conceptual Framework
Objective of General Purpose Financial Reporting is to: • Conceptual Framework provides that the primary users The IASB does not, however, limit GPFR to these entitie
• provide financial information about the reporting entity are the focus of general purposes financial reports. Conceptual Framework indicates that a reporting entit
that is useful to primary users for making decisions about • However, decision facing different users give rise to any entity that has existing and potential investors, len
providing resources to the entity, including conflicting needs and other creditors who rely on GPFR.
- buying, selling or holding equity and debt instruments; • For example, with information needs: Who can be a reporting entity?
- providing or settling loans and other forms of credit - Lenders want to assess an entity’s capacity to meet its A reporting entity can be a for-profit entity or a not-for
- exercising rights to vote on, or otherwise influence, interest and principal repayment obligations and the entity. A reporting entity can operate in the private sec
management’s actions that affect the use of the level of risk associated with a loan. As investors invest the public sector.
entity’s resources equity, they also want to assess risk and the ability of • Examples of for-profit private sector entities includ
Primary users include: the entity to service its debs so they can continue its companies, partnership, and trading trusts.
• those providing equity or debt finance operations and provide a return to investors • Examples of not-for-profit entities include registere
- existing and potential investors • For example, with measurement of assets: clubs, associations, charities and government
- lenders - lenders may prefer net realisable value of certain departments. A reporting entity can be one or a gr
- other creditors that must rely on general purpose assets provided as security to assess whether the entities comprising a parent and its subsidiaries.
financial reports security is sufficient in case the entity defaults. AASB
• Primary users do not include ✘: - However, investors may prefer value in use • In Australia, for-profit private sector entities are su
- Singh, who manufactures sugar free muesli bars hopes measurement, which better indicates the expected the Conceptual Framework and must prepare GPFR
to secure long term sales contracts with school benefits from continuing to use the assets. they satisfy both of the following conditions:
canteens all over the county. IASB approach to resolving conflicting needs 1. they have public accountability
- Milly, who runs a successful organic food café is keen • Provide the information that will meet ‘the needs of the 2. they are required by legislation to comply with
to expand into the food truck industry by obtaining maximum number of primary users’ Australian Accounting Standards.
finance via crowd-funding. • However, according to the IASB, focusing on common • Other for-profit private sector entities may noneth
- Van, who owns a fishing and camping store is keen to information needs does not prevent an entity from elect to apply the Conceptual Framework and prep
expand his product range by approaching his suppliers providing additional information that may be useful to GPFR
to ask about increasing his credit limit. another sub-group of primary users • Public accountability - A for-profit private sector en
Types of financial reporting • trying to meet the needs of the maximum number of this if:
• General purpose financial reporting (most obvious) primary users may have different implications - it has debt or equity instruments that are trade
• Technology advancements provide opportunities for • For example, for some entities, investors may be the public market or it in the process of issuing secu
various largest group of primary users, but for other entities, the for such trading; or
largest group of primary users may be lenders. - it holds assets in a fiduciary capacity for a broad
• investor updates, sustainability reporting corporate
of outsiders as one of its primary businesses’ e.
governance reporting and other prospective forward- UNDERSTANDING THE INTERNATIONAL FINANCIAL banks, insurance companies, securities brokers/
looking, information (to assist share investors) REPORTING STANDARDS & CONCEPTUAL FRAMEWORK and mutual funds
• other methods of dissemination that, together with
, 1.2 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING PRINCIPLES ESTABLISHED IN CONCEPTUAL FRAMEWORK have the internal knowledge held by manag
(pg. 14 – 15) for example, about key risks or key value dri
PURPOSE AND APPLICATION OF CONCEPTUAL FRAMEWORK Observing user or For example, on particular transactions or
Accrual Basis – requires expenses/revenues to be recognised market responses disclosures issued by the entity or on respon
(pg. 12 – 13)
when they are incurred/earned rather than when cash is to information external parties such as analysts
Conceptual Framework has formal frame of reference for:
paid/received.
- what transactions/events should be accounted for Faithful Representation (pg. 17)
Going Concern - assumes entity will continue to operate for
- when effects of transactions/events be recognised Requires that financial information faithfully represent
the foreseeable future and carrying amounts of assets and
- how effects of transactions/events be measured effects of transactions and events that they purport to
liabilities in the balance sheet are based on this assumption.
- how the effects of transactions and events should be represent and means that financial information is com
1.3 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
summarised and presented in financial statements neutral and free from error.
INFORMATION
Applying the Conceptual Framework for Financial Reporting E.g. Balance Sheet should faithfully represent the effec
Fundamental Qualitative Characteristics (pg. 15 – 18) the events that give rise to assets, liabilities and equity
point in time, normally the end of year.
Applying Fundamental Qualitative Characteristics (pg
For information to be useful, it must be both relevant a
faithfully represented.
• This may involve professional judgment in making
Relevance (pg. 15 – 17)
off between relevance and faithful representation.
OBJECTIVES AND LIMITATIONS OF GPFR (pg. 13 – 14) Information is relevant when it can influence user decision
• E.g. information about future cash flows expected
Lack of familiarity with new types of information making through either or both:
derived from an asset may be highly relevant, but i
• If financial statements users are not familiar with an item • predictive value – helps users to form expectations about
be difficult to faithfully represent because of the in
of information, it is difficult to assess its usefulness to outcomes of past, present and future events.
uncertainty of future events
their decision-making processes. - E.g. Financial information can be used to predict the
Process for making judgements:
• Preparers will then be faced with difficulties in trying to future cash flows of an entity and the timing and
1. Identify an economic phenomenon, informati
assess if the new item of information should be uncertainty of those cash flows.
about which may be useful to decision makers
recognised under an existing category in the financial • confirmatory value – helps users to confirm or correct
2. Identify the information that would be most r
reports or disclosed separately. their past evaluations.
about this phenomenon.
• Some users may not have the technical expertise to - E.g. Budgeted future cash flows can be compared with
3. Determine if the information is available and c
understand complex information e.g. information based actuals when financial statements relating to those
provide a faithful representation of the econo
on finance principles such as present value calculations. future periods are issued and the reasons for variances
phenomenon.
Decision-usefulness may vary among users are investigated.
ENHANCING QUALITATIVE CHARACTERISTICS (pg. 18 –
• Personal beliefs and values of users may determine the Materiality (pg. 16 – 17)
information used in decision making. Also relates to relevance – if information is material if it is
- E.g. investors may consider information about omitted, misstated or obscured and it could influence
environmental performance to be relevant for their decisions that the primary users of GPFR.
decision making, whereas others might exclude it from • however, what is material is a matter of professional
their decision-making models. judgment by preparers. Conceptual Framework does not
Capable of multiple interpretations prescribe quantitative thresholds for materiality because
• Preparers may differently perceive what is useful application of materiality is entity specific.
information to users than the users themselves. Examples of information being material regardless of amount
- E.g. fair value measurement may be useful for • An entity transacts with directors involving immaterial
Comparability (pg. 18 – 19)
investors to assess the entity’s future economic amounts to the entity. Information is more useful if it:
benefits but value in use may is better for preparers as - However, the disclosure of these related party
