The Objective Of Financial Reporting And Qualitative Characteristics And Constraints Accounting Essay

The Objective Of Financial Reporting And Qualitative Characteristics And Constraints Accounting Essay1 presentmentThe U.S. Financial Accounting Standards shape up (FASB) and the International Accounting Standards Board (IASB), namely the Boards, jointly published a Discussion Paper and received 179 responses. The Exposure blueprint was created from the Boards redeliberations regarding issues being raised by respondents. The Boards published this common Exposure Draft for the public to comment and it is the Boards broader conceptual framework.The Boards ar considering their frameworks to provide standards that argon consistent, converge their standards, to amplify a general and enhanced conceptual framework. The Boards decided that a reconsideration of concepts would non be efficient because many aspects of the frameworks are consistent and do not need fundamental re flock. The Boards are focused on improving and converging their existing frameworks.The conceptual framework for m singletary inform established by the Board displays the concepts that underlie financial reportage. This conceptual framework consists of 2 chapters the intention of financial reporting and soft singularitys and constraints of decision multipurpose financial reporting tuition useful financial reporting in markation.2 Chapter 1 The Objective of Financial ReportingThis conceptual framework establishes the objective of general purpose financial reporting by business entities in the private sector, which is the foundation of the framework. The objective of general purpose financial reporting is to provide financial schooling to current peachy provides to manufacture decisions. This entropy might also be useful to users who are not capital providers.The general purpose financial reporting develops superior reporting standards to jock in the efficient functioning of economies and the efficient allocation of resources in capital markets. General purpose financial reporting focuses on an extensive range of users call for that lack the ability to obtain financial entropy needed from the entity. It should be broad enough to comprehend information for the various users. on that pointfore, the financial report is where they view on to acquire information. Diverse users whitethorn require different information which might go beyond the scope of general purpose financial reporting.The financial reports are prepared from the entitys perspective (deemed to have substance on its own, spate from that of its owners), instead of the entitys capital providers. An entity attains economical resources (its assets) from capital providers in exchange for claims to those resources (its liabilities and beauteousness). Capital providers implyEquity investorsEquity investors normally invest economic resources in an entity expecting to receive a return on, as well as a return of, the resources invested in. Hence, equity investors are concerned with the amount, timin g, uncertainty of an entitys succeeding(a) cash flows and the entitys competence in generating those cash flows which affects the prices of their equity interests. Furthermore, they are concerned with the functioning of directors and management of the entity in discharging their business to make efficient and profitable use of the assets invested.LendersLenders usually expect to receive a return in the form of interest, repayments of borrowings, and increases in the prices of debt securities. Lenders have similar interests as the equity investors.Other creditorsOther creditors provide resources because of their relationship with the entity, instead of a capital provider no primary relationship.Employee salary or compensationSuppliers lengthened creditCustomer prepay for goods and servicesManagers responsible for preparing financial reportsCapital providers make decisions through useful information provided in financial reporting by particular entity. Financial reporting ser vice in assessing cash flow prospects depends on the entitys current cash resources and the ability to generate sufficient cash to recover its capital providers. Besides, financial reporting usefulness in assessing stewardship involves the managements responsibilities to protect the entitys economic resources (assets) from unfavourable effects. Management is also liable for safeguarding the assets of the entity which conforms to the laws, regulations and contractual provisions thus, the importance of managements performance in the decision usefulness.The general purpose financial reporting is limited to information which does not smooth pertinent information from other sources that should be considered by the users. Financial reporting information is based on estimates, judgements, and models of the financial effects on an entity of transactions and other events in which, is only ideal for preparers and standard setters to strive. Achieving the frameworks vision of ideal financia l reporting to the fullest will be difficult in the short term because of technical infeasibility and cost constrains.Financial reporting should include information near the economic resources of an entity (assets), the claims of the entity are (liabilities and equity), the effects of transaction and any events or circumstances that passel affect the entitys resources and claims and provide useful information around the ability of entity to generate its cash flow and how well the entity meets its management responsibilities.The usefulness of financial reporting to the usersProvide useful information about the amount, timing, and uncertainty of future cash flowTo identify the entitys financial strengths and weaknesses (especially for capital providers)To indicate the potential of entitys cash flow for its economic resources and claimsTo identify the effectiveness of the entitys management responsibilitiesTo assess availabilities of the entitys constitution and quantity of the res ources for the use in its operationTo estimate the values of the entity.The quantitative measures and other information regarding the changes in entitys economics resources and claims in the financial report can help the users to assess the amount, timing, and uncertainty of its cash flow and indicate the effectiveness of management responsibilities.Furthermore, the entity must provide a positive return on its economic resources in order to generate net cash inflows and return the earning to its investors. Other information like variability of returns, other(prenominal) financial performance, and managements ability can be used to assess the entitys future financial performance.The information regarding the accrual accounting in financial reporting can better provide the users to assess the entitys past financial performance and future prospects in generating net cash inflows without obtaining additional capital from its investors.The entitys cash flow performance in financial repo rting help the investors to understand the entitys business model and operation through assessing how the entity obtains and spends cash. Information about its borrowing, repayment of borrowing, cash dividends and other distribution to investors, as well as the factors of entitys liquid state and solvency, can also assist the investors to determine the entitys cash flow accounting.Besides, information about the changes of entitys resources and claims not resulting from financial performance may assist the investors to differentiate the changes that are results of the entitys financial performance and those that are not.The information of management explanation should be included in financial reporting to assist users for a better perceptiveness about management decision in any events and circumstances that have affected or may affect the entitys financial performance. It is because the cozy parties know about the entitys performance than the external users.3 Chapter 2 Qualitativ e Characteristics and Constraints of Decision-Useful Financial Reporting InformationFundamental soft typicals strike out useful financial reporting information from information that is not useful or is misleading. For information to be useful, it must have two fundamental soft characteristicsRelevance capable of making a difference in the decisions made by users as capital providers. Information is applicable when it has predictive value, realiseatory value, or both.Predictive value information that is assists the capitals providers to form their own expectations about the future.Confirmatory value information that confirms or changes past or present expectations based on previous evaluations.IASB said that information is relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluation. FASB believes that to be relevant, accounting information must be capable of making a d ifference in a decision by helping users to form predictions about the outcome of past, present, and future events or to confirm or correct expectations. Since some(a) users may have been obtaining information elsewhere other than financial reporting, and emphasizes the relevance of information in their decisions, relevant information does not really make a difference in the past or in the future. Any information that might be able to make a difference is said to be relevant.Faithful way depiction of an economic phenomenon is complete, neutral, and free from material error.Complete includes all information that is necessary for faithful representation of economic phenomena.Neutrality information which is bias free.Freedom from error estimation of the economic phenomena is based on the appropriate inputs and each input must reflect the best available information.Relevance is concern with the connection between economic phenomena with the decisions of capital providers and not th eir depictions, therefore should be consider first. Then, the faithful representation is apply to determine which depictions of economic phenomenon best corresponds to the relevant phenomenon.Enhancing qualitative characteristics improves the decision usefulness of financial reporting information that is relevant and faithfully represented. They are used to distinguish more-useful information from less-useful information. The enhancing qualitative characteristics are comparability, verifiability, timeliness, and understandability.ComparabilityComparability is the quality of information that enables users to identify similarities and the differences between two sets of economic phenomena. Since the essence of decision making is to lead between alternatives, the information is more useful if it can be compared with similar information about the other entities and with similar information about the same entity for some other period. Comparability should not be confused with uniformit y. Overemphasizing on uniformity may reduce comparability by making unlike things look alike.The IASB simulation actually discusses comparability as a qualitative characteristic which is equally important as relevance and faithfully representation. However, FASB concludes that comparability is an enhancing qualitative characteristic because no matter of how comparable the information may be, it will not be useful if it is irrelevant to users decisions and does not faithfully represent the economic phenomena.VerifiabilityA quality of information that helps to assure users that information faithfully represents the economic phenomena that it purports to represent. If the information is verifiable, the knowledgeable and independent observers could come to the general consensus. The verifiability of the information focuses on whether the recognition or measurement mode is correctly applied. Verification can either be direct or indirect. An amount or other representation itself verifi ed such as by counting cash or observing marketable securities and their quoted prices are called direct verification. An example of verifying the carrying amount of inventory by checking the inputs (quantities and costs) and recalculating the ending inventory victimization the same cost flow assumption (accounting convention or methodology average cost and first-in, first-out) is indirect verification.IASB Framework does not include verifiability as an transparent aspect, yet FASB does. FASB observed that some of the information which is faithfully represented may not necessarily be verifiable. Therefore, if the information is verifiable, it is generally more useful. Thus, FASB concluded that verifiability is an enhancing qualitative characteristic.TimelinessTimeliness means having information available to decision makers forrader it loses its capacity to influence decisions. A lack of timeliness can rob information of its potential usefulness. The IASB Framework discusses timel iness separately, as a constraint that could rob information of relevance. However, FASB concluded that reporting information in a timely agency can enhance both the relevance and faithful representation of the information since information can be reported in a timely appearance but has no relevance, or information delayed in reporting remains its relevance.UnderstandabilityUnderstandability is the quality of information that enables users to comprehend its meaning. When the information is classified, characterized, and presented all the way and concisely, the understandability will be enhanced. Although the reporting information has to be understandable, the users of the financial report should also review and analyze the information with reasonable diligence as the users are assumed to have a reasonable knowledge of business and economic activities and to be able to read the financial report.Enhancing qualitative characteristics should improve the usefulness of financial inform ation and should be maximized to the extent possible. However, if the information is irrelevant or not faithfully represented, the enhancing qualitative characteristics cannot make that information useful for decision. Besides, the application of the enhancing qualitative characteristics is an iterative process which does not follow the prescribed order.In addition, FASB considered whether some other qualitative characteristics should be added, such as transparency, true and fair view, credibility, internal consistency, and high quality. FASB concluded that it would be scanty if transparency is added as one of the qualitative characteristics. True and fair view is not a qualitative characteristic itself, but it should result from applying the qualitative characteristics. FASB concluded that it should be the goal to achieve high quality to which financial reporting and standard setters aspire. By adherence to the objective and qualitative characteristics of financial reporting infor mation, the goal can be achieved. Therefore, the characteristics mentioned in not added as the qualitative characteristics of the financial reporting information.In a nutshell, the qualitative characteristics of financial reporting information in this draft can be categorized into fundamental qualitative characteristics and enhancing qualitative characteristics as shown in the following understand 1Compared to the conceptual framework issued by the Malaysian Accounting Standard Board (MASB) in 2007, most of the qualitative characteristics are identical to the characteristic discussed in this draft. However, the most distinctive aspect which can be found is MASB did not categorize the qualitative characteristics into fundamental and enhancing qualitative characteristics. The qualitative characteristics concluded by MASB are shown in the figure below.Figure 2MASB concluded that the relevance of information is affected by its nature and materiality while FASB discusses materiality unde r the constraints of financial reporting. MASB provides that the economic decisions of users taken on the basis of the financial statements could be influenced when the omission or misstatement of the information is material. Thus, materiality provides a threshold or cut-off point preferably than being a primary qualitative characteristic which information must have for it to be useful.Besides, MASB also discussed about substance over form and discreetness under the characteristic of reliability. MASB provides that if information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. However, FASB did not identify substance over form as a component of faithful representation as it would be redundant to do so. In addition, FASB did not conclude prudence as a qualitative characteristic because it might conflict with the quality of neutrality.MASB discussed the characteristic of timeliness as a constraint on relevant and reliable information. If there is undue delay in the reporting of information it may lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. However, FASB concluded timeliness as an enhancing qualitative characteristic of the financial reporting information.There should be a balance between the qualitative characteristic as the IASB Framework says In practice a balancing, or trade-off, between qualitative characteristics is a great deal necessary. Generally the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements. The relative importance of the characteristics in different cases is a matter of skipper judgments.The information provided by financial reporting is limited by materiality and the cost of providing.Material ityMateriality depends on the nature and amount of the item judged in the particular circumstance of its omission or misstatement. It is important to consider the materiality of information because material omissions or misstatements will cause information to contain error, making it biased and incomplete. However, it is hard to specify a uniform quantitative threshold at which the information is material.Concepts Statement 2 and IASB Framework find materiality similarly but discuss materiality it differently. IASB describes materiality as an aspect of relevance and does not indicate that it has a relationship to other qualitative characteristics. On the other hand, Concepts Statement 2 provides that materiality should be considered together with qualitative characteristics (not only relevance). Thus, the Boards conclude that materiality is pertinent to all of the other qualitative characteristics. personifyThe Boards emphasized the balance between the benefits of financial reporti ng information and the cost of providing and using it.Costs of providing informationCost of collecting and processingCost of verifyingCost of disseminatingCost of analysis and interpretationCost resulted from omission of decision-useful informationBenefits of financial reporting informationMore efficient functioning of capital marketLower cost of capitalImproved access to capital marketFavourable effect on public relationsBetter management decisionsHowever, the major problem for the standard setters in conducting rigorous cost-benefit analyses is the difficulty in qualifying the benefits of a certain reporting requirement. Besides, it is also difficult to obtain complete, quantitative information about the initial and ongoing cost of a requirement and impose them. Nevertheless, standard seekers should take into account both benefits and costs of proposed financial reporting requirements.There are 3 constraints of financial reporting information mentioned by the MASBBalance between b enefit and costAs mentioned in FASB, cost is one of the constraints of financial reporting information and the Boards emphasizes on the balance between the benefits of financial reporting information and the cost of providing and using it.Balance between qualitative characteristicMASB provides that, In practice a balancing or trade-off, between qualitative characteristics is often necessary. The relative importance of the characteristics in different cases is a matter of professional judgments. The FASB also mentions, In assessing whether the benefits of reporting information are likely to justify the costs, it is necessary to consider whether one or more qualitative characteristics might be scarified to some degree to reduce cost.TimelinessMASB mentioned that a constraint which is not mentioned in the conceptual framework of FASB timeliness. MASB provides that if there is undue delay in the reporting of information it may lose its relevance. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other event are known. On the other hand, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decisions in the interim. Management may need to balance the timely reporting and the provision of reliable information.