Financial statement possess certain qualitative characteristics that every enhance the usefulness of the information they Covey to a wide range of users. In this article,we shall look at the elements and desired qualities of financial statements. We shall also look at the Concept of capital and capital and maintenance, from the point of view of accountant. A number of these issues are covered in the framework for the preparation and presentation of financial statements issued by the international accounting standard board(IASB).
The (IASB) framework of financial statements:
In July 1989, the international accounting standards committee ( IASC), now replaced by the international accounting standards board (IASB), produce a document titled,r framework for the preparation and presentation of financial statements issued or. Simply the framework. This document set out the concepts that determine how financial reporting are prepared and the information they contain. This is why the IASB framework is also is called" conceptual framework".
A conceptaul framework is clearly defined set of objectives and principles that can lead to the production of c consistent accounting for standards. The Framework is therefore the "conceptual framework" the frame of reference from which the accounting standards issued by the IASB are constructed.
Purpose of the framework;
The framework is expected to serve the following purpose:
- Assist the IASB in the development of future accounting standards and in the review of existing Standards..
- Assist the IASB in promoting harmonisation of regulations, accounting standards and procedures, relating to the presentation of financial statements by providing a basis for reducing the number of alternatives accounting treatments permitted by international accounting standards.
- Assist national standard setting bodies in developing national standards.
- Assist preparer's of financial statements in applying international accounting standards and in dealing with issues not yet convered by an international accounting standards IAS.
- Assist authors in forming an opinion as to whether financial statement confoms to IASs.
- Assist users of financial statements in interpreting the information contained in financial statement that comply with IASs
- Provide those who are interested in the work of the IASB with information on its approach to the formulation of accounting standards.
Status of the framework;
As stated above, the financial framework Des cribes the basic concept that guide the preparation of financial statements for presentation to a wide range of users. The framework is not an accounting standards; neither does it override the requirements of any specific standard. Thus, in the event of conflict between the framework and an international financial reporting standard (IFRS), the latter will prevail. Such conflict will gradually cease to exist as future accounting standards will be produced in accordance with the guide lines framework.
Scope of the framework;
The framework deal's with the following:
- The objectives of financial statements
- Underlying assumptions.
- Qualitative characteristics of financial statements
- Definition, recognition,and recommendations measurements of the Elements of financial statements
- Concept of capital and capital maintenance
Objectives of financial statements:
The objectives of financial statements or reporting,are to provide information about the financial position, performance and changes in financial position that will assist as wide spectrum of users in making useful economic decisions. The framework identifies the following users of financial information: investors, employees,lender, suppliers, customers, government and the public.
Information relating to financial position is normally found in the statement of financial position of an entity, and is affected and by the following;
- Economic resources controlled by the entity ( This information will enable users to predict the ability of the entity to generate cash.
- Financial structure of the entity ( users can predict borrowing needs, distribution of future incomes and the ability of the entity to raise new finance.
- Liquidity and solvency of the entity ( users need this information to predict the ability of the entity to meet financial commitment as they fall due.
Information on the financial performance of an entity is basically provided by the income statement. Such information is useful in evaluating the returns obtained by an an entity from the resources available to it.
Information about changes in financial position is contain in the statement of Cash flow and is useful in assessing an entitys ability too generate cash and how the cash generated is utilized.
The framework specifies and explains the two my main assumptions that underline the preparation of financial reporting. This assumptions are the accural basis of accounting and the going concern principles.
When financial statement are prepared under the accural basis of accounting,the effects of transactions and other events are recognized when they occur and not as cash or its equivalent is received or paid. They are recorded in the accounting records and reported in the financial statements,of the period to which they relate.
Going concern basis;
Under going concern basis, the enterprise is regarded as a going concern,that is as continuing in operation for the foreseeable future. It is assumed that the enterprise has niether the intention nor the necessity to liquidate or reduce materially the scale of its operation.
Qualitative characteristics of financial statements framework:
Meaning of qualitative characteristics;
According to the framework qualitative characteristics are the attributes that makes the information provided in financial statements useful to users. The framework identifies four principles qualitative characteristics namely:
Information in financial statements should be readibly uunderstable by users who have business, economic and accounting knowledge and willingness to study the information carefully. Although financial reports should be understandable,complex matters that are relevant to economic decisions making should not be a excluded merely because they are too difficult for users to understand.
To be useful, financial information should be relevant to the decision making needs of users. According to the framework, information has the quality of relevance when it influence the economic decisions of users by helping them evaluate past,present or future events or confirming,or correcting,their past evaluation. Information may be considered relavant either because it is material. Financial information is mayerima if its omission or mistatement could affect the economic decisions of users. Although materials is not classified as a qualitative characteristics, the framework regards materiality as a threshold or cutoffc point. Any information that fails the test of materiality need not be disclosed separately in the financial statements.
According to the framework, information is said to be reliable when it is free from materials bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. In view of the inherent difficulties in identifying certain transactions or in finding appropriate methods of measurements or presentation, financial statements cannot be perfectly accurate hence faithful representation might be regarded as describing the closet that accountants can come towards the absolute of total accuracy. (Lewis and pendrill,1996).
Reliability is enhance when the following principles are observed in the preparation of financial statements:
- Substance over form,. Transactions should be accouteda for according to their substance and economic reality even if their legal form is different.
- Neutrality information should be objectives and free from bias.
- Prudence, reasonable effort should be made to ensure that the position,or degree of success of an entity is not overstated (Alexander and Britton 1996)
- Completeness, Financial information must be complete, if the information is to be reliable.
1. Users should be able to compare the financial statements of an entity through time (that is, over a period of time), to identify trends in it's financial position and performance.
2. Users should also be able to compare the financial statements of different entities to determine their relative financial position, performance and changes in financial position.
To efficiently compare an entitys financial information over time, accounting transactions should be consistently treated and correspondingly, information of preceedings period should be disclosed. Similarly, to compare financial information across entities, the financial statements of the different entities should comply with the requirements of a set of accounting standards and their separate accounting policies should bb disclosed.
Trade off between qualitative characteristics of financial statements:
There is usually a trade off between the different qualitative characteristics discussed above. Emphasis on one of the attributes may lead to reduction in the application of another desirable quality. Under such circumstances, it is necessary to strive to achieve an appropriate balance among the characteristics in order to meet the objectives of financial statements.
Examples of these trade off are as follows;
- Timeliness, in some cases it may take some time for every detail of a transaction to be determined. In such cases, Financial information cannot be presented on a timely basis if financial statements are to be reliable. On the other hand ,delay in presenting financial statements may affect the relevance of the information. A balance has to be struck between the benefits of reliability and relevance. The overriding consideration should be how best the information satisfies decisions making needs.
- Trade off between cost and benefits, There is also "trade off" between cost and benefits of preparing and presenting financial information. In principle, the benefits derived by user's should exceed the cost of providing and presenting information.
- Trade off between qualitative characteristics. Trade off may also arise between the qualitative characteristics in other circumstances. For instance, if market values are more relavant but less reliable than historical cost. On the other hand historical cost are usually not relavant for a decision making purpose.
Financial statements are usually required to give a true and fair view or present fairly the financial position and performance of an entity. The framework does not define these Concept but it states that the application of qualitative characteristics of financial information and compliance with appropriate accounting standards will lead to financial statements that gives a true and fair view.
The financial reporting framework is the set of rules, regulations, and guidelines that govern how financial statements are prepared. The framework provides guidance on what information should be included in financial statements, how that information should be presented, and what disclosures should be made.
The financial reporting framework is important because it helps ensure that financial statements are prepared in a consistent and transparent manner. This allows investors and other users of financial statements to compare companies across industries and over time.
The financial reporting framework is also important because it helps ensure that companies comply with accounting standards and other regulations. This compliance helps to protect investors by providing them with accurate and reliable information.
The financial reporting framework is constantly evolving as new accounting standards are issued and new regulations are enacted. Companies must keep up with changes in the framework in order to ensure that their financial statements are prepared in accordance with the latest requirements.