Learning Unit 2
The framework of accounting
The objective of general-purpose financial reporting is
= to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decision
relating to providing resources to the entity.
Those decisions involve decisions about:
Buying, selling or holding equity and debt instruments;
Providing or settling loans and other forms of credit; or
Exercising rights to vote on, or otherwise influence, management’s actions
that affect the use of the entity’s economic resources.
To make the above decisions, users assess:
Prospects for future net cash inflows to the entity;
Management’s stewardship of the entity’s economic resources.
To be able to make both the above assessments, users need information about
both:
The entity’s economic resources, claims against the entity and changes in
those resources and claims; and
How efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources.
WHAT IS STEWARDSHIP?
Users of financial reports need information to assist them assessing
management’s stewardship
(The idea that management has the responsibility to manage wealth and
other assets equitably and sustainably.
That is, stewardship holds that owners do not have an absolute right to
use their property however they see fit but
have the obligation to use it to help others and it ensure that no harm is
done to the poor, one’s employees, the environment or anything else.)
The Conceptual Framework explicitly discuss this need as well as the need
for information that helps users assess the prospects for future net cash
inflows to the entity.
1
, WHO ARE THE USERS OF FINANCIAL REPORTS?
= Users of financial reports are an entity’s existing and potential investors,
lenders and other creditors.
Those users must rely on financial reports for much of the financial
information they need.
Largely, financial reports are based on estimates, judgements and models rather
than exact depictions.
The Conceptual Framework establishes the concepts that underlie those
estimates, judgements and models.
The concepts are
= the goal towards which the Board and preparers of financial reports strive.
As with most goals,
= the Conceptual Framework’s vision of ideal financial reporting is unlikely to be
achieved in full, at least not in the short term, because it takes time to
understand, accept and implement new ways of analysing transactions and other
events.
- Nevertheless, establishing a goal towards which to strive is essential if
financial reporting is to evolve so as to improve its usefulness.
Qualitative characteristics of useful financial information:
Definition:
For information to be useful = it must be relevant and provide a faithful
representation of what it purports to present.
Relevance and faithful representation are the fundamental qualitative
characteristics of useful financial information, and the guiding concepts
that apply throughout the revised “Conceptual Framework”.
2
The framework of accounting
The objective of general-purpose financial reporting is
= to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decision
relating to providing resources to the entity.
Those decisions involve decisions about:
Buying, selling or holding equity and debt instruments;
Providing or settling loans and other forms of credit; or
Exercising rights to vote on, or otherwise influence, management’s actions
that affect the use of the entity’s economic resources.
To make the above decisions, users assess:
Prospects for future net cash inflows to the entity;
Management’s stewardship of the entity’s economic resources.
To be able to make both the above assessments, users need information about
both:
The entity’s economic resources, claims against the entity and changes in
those resources and claims; and
How efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources.
WHAT IS STEWARDSHIP?
Users of financial reports need information to assist them assessing
management’s stewardship
(The idea that management has the responsibility to manage wealth and
other assets equitably and sustainably.
That is, stewardship holds that owners do not have an absolute right to
use their property however they see fit but
have the obligation to use it to help others and it ensure that no harm is
done to the poor, one’s employees, the environment or anything else.)
The Conceptual Framework explicitly discuss this need as well as the need
for information that helps users assess the prospects for future net cash
inflows to the entity.
1
, WHO ARE THE USERS OF FINANCIAL REPORTS?
= Users of financial reports are an entity’s existing and potential investors,
lenders and other creditors.
Those users must rely on financial reports for much of the financial
information they need.
Largely, financial reports are based on estimates, judgements and models rather
than exact depictions.
The Conceptual Framework establishes the concepts that underlie those
estimates, judgements and models.
The concepts are
= the goal towards which the Board and preparers of financial reports strive.
As with most goals,
= the Conceptual Framework’s vision of ideal financial reporting is unlikely to be
achieved in full, at least not in the short term, because it takes time to
understand, accept and implement new ways of analysing transactions and other
events.
- Nevertheless, establishing a goal towards which to strive is essential if
financial reporting is to evolve so as to improve its usefulness.
Qualitative characteristics of useful financial information:
Definition:
For information to be useful = it must be relevant and provide a faithful
representation of what it purports to present.
Relevance and faithful representation are the fundamental qualitative
characteristics of useful financial information, and the guiding concepts
that apply throughout the revised “Conceptual Framework”.
2
