Compare and contrast the objectives of GPFR's in the current AASB Framework with that proposed in the IASB Exposure Draft. Do you think the IASB proposal is an improvement? Why, or why not? Do you think that the objective in either of these documents is appropriate? Why, or why not?
"In view of the information needs of the users of general purpose financial reports identified in the preceding paragraphs, the position adopted in this Statement is that the objective of general purpose financial reporting is to provide information to users that are useful for making and evaluating decisions about the allocation of scarce resources" (SAC 2, page 11 as per par 26).
"The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers. Capital providers are the primary users of financial reporting. To accomplish the objective, financial reports should communicate information about an entity's economic resources, claims on those resources, and the transactions and other events and circumstances that change them" (Exposure draft May 2008).
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Objective of General Purpose Financial Reporting, as the name offers concerned with the objectives of general financial reports. In the exposure draft and current conceptual framework the Objective of General Purpose Financial Reporting is classifying the three key component of the general purpose financial reporting model. These are the users of general purpose financial reports, the purpose for which users may require information and what information is required by users from the management. Lastly explains the suitability of these documents for organisations.
First, it classifies the users of general purpose financial reports, who actually need information. In current frame work the word user suggests the broad categories of users of general purpose financial reports where compare to exposure draft it name the group of users and emphasis capital provider as primary users of the financial report. Secondly, identifies the purpose for which users may require information. In both current conceptual framework and Exposure Draft are similarly identifying the reasons, which are users of report requires information to make and evaluate decision about the allocation of resource.
Lastly, what information is required by users from the management and governing bodies to be able to make decisions? In current conceptual framework the word "broader objective of providing information" is used which means it must address everything and take into account the individual and group needs served by reporting organisation and they required to discharge their accountability to the users of the report. On the other hand exposure draft provides set of information about transactions and other events which will depend on the quality of the financial information provided with out the management being held accountable to the user. This will motivate the management to creative accounting.
Financial reports have been harsh for their lack of relevance to small and closely held entities as well as the primary financial statement users (Shannon 1992). Exposure draft is concentrating on providing more pacific information to investor to make decisions that leads to simplifying all accounting jargon which requires people to have much more accounting background information to interpret it while ignoring the share holder that may not have that information.
The executive board of private corporations make only partial use of the financial reports because they are able to get hold of financial information for decision making purpose with out going to financial reports and another cause is their little understand and knowledge of the accounting standards (McCahey 1986).
The financial report prepared according with accounting standards have very low compliance with accounting standard. Unaudited exempt proprietary companies are evidence of there irrelevance (Ramsay and Sutcliffe 1986).
The financial report prepared according with accounting standards does not provide the information for decision making purpose for companies (Shanahan 1987). Study by Abdel- khalik (1983 page 58) show that out of ten accounting standards only three are highly relevant to private companies. Another study by Carsberg et al (1985 page 62) states that only fewer accounting standards with fundamental topics where relevant to small business.
Increase in the information demand financial reports are using technical jargon that has reduced financial report ability to communicate with the users of financial reports. This is incredibly true for non- experts users of small business. Author also state that it is doubtful that the balance sheet now gives increasing number of deferred debits and deferred credits left over from it. He describes as a pseudo matching process (Henderson 1988). We may be able to overcome these problems by limiting the choices for example by using only one method of depreciation instead of four which will stop the creativity and it can be standardise all over the world.
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In light of all the above evidence this essay suggests that the objective of these documents have been questioned over the years and that question mark remains there as there always chooses left for managements in other words back doors for reporting entities to produce creative accounting and still complying these artificial accounting standards.