The Conceptual Framework Established By The Australian Accounting Standards Board Accounting Essay


A reporting entity is a body or organisation from which financial information is required for the users to make crucial decisions. As indicated in SAC 1 all reporting entities should prepare general purpose financial reports for the society.

Organisations are in command of a wide range of resources that are paramount to the Australian economy's performance. As a result of the large scale operations conducted by businesses involving significant amounts of capital, assets and resources a conceptual framework has been developed to ensure the welfare of the community at large. It is this framework requires business entities to produce general purpose financial reports 'which aim to provide information useful to people making economic decisions' (Hoggett, J, Edwards, L, Medlin, J, Tilling, M 2009, p.730).

As outlined in SAC 2, one of the intentions of general purpose reporting is to meet the information needs of users who are not equipped with the knowledge of the specific financial reports, which caters more to the needs for internal users, such as managers and investors. General purpose financial reports always entail the statements of: financial position, income, cash flows, in addition, if required by the AASB a consolidated statement of: financial position, income and cash flows. Users require information regarding the financial position of an entity to assess the businesses ability to generate funds and its ability to pay its short tern debts (Leo, K, Hoggett, J, Sweeting J, Radford, J 2005). Stakeholders and shareholders, alike are interested in the performance of organisations, more importantly a company's ability to use its capital and resources effectively, and efficiently. The preparation and distribution of financial reports provides users of the financial information, such as shareholders, to make the decision of continuing its investing in company or choosing to invest its resources elsewhere.

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According to Accounting and Finance 3B (n.d.) website the second important target of general purpose reporting is 'to ensure that reports can be used to hold companies accountable for the resources they control.' Organisations are accountable to those that have a direct financial stake in the company. For example, an organisation that relies on external funds to operate on a daily basis would require banks as resource providers and suppliers to provide products on credit. As an entity, it is therefore the organisation's job to make clear its financial position and its allocation and use of resources provided by lenders through the general purpose reports.

Once the general purpose financial reports are prepared the next issue to address would be the quality and the reliability of the report itself. For the reports to be of any help to the users, the information provided in the document must be relevant, reliable, comparable and understandable. These qualities are also known as the four primary qualitative characteristics.

Information is regarded as understandable if it is expected that users with some knowledge of accounting and business are able to comprehend the information. This qualitative characteristic does not suggest, however, that complicated events or transactions be pulled out of the reports. It merely implies that information be recorded in a manner that can easily be understood, although the task of simplifying complex transactions can be a challenge itself for the preparers' of the report. Nonetheless, it is an important step and component of general purpose reporting.

Relevance is another factor of financial reporting. Information is considered to be relevant if it is free from bias and if it assists users of the information to make informed decisions for the future. To have relevant information in the general purpose financial reports, accounting information must be timely. For instance, statement of financial position released a few weeks after the end of the accounting period will considerably be more relevant than a financial statement that is released months later. It must also be noted, that having information that is relevant decreases the reports reliability, as less time is spent on precision.

As outlined in paragraph 31 in the AASB framework another important qualitative characteristics is reliability. According to the Framework for the Preparation and Presentation of Financial Statements for information to be reliable it must be free from misrepresentation of information and can be relied upon by users to represent faithful and unbiased information (2009). In contrast, with relevance, reliability requires time and precision in the preparation of reports, this can also lead to the report becoming outdated. Therefore, accountants must ensure to prepare reports that are reliable, yet at the same time relevant.

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Finally the qualitative characteristic comparability requires the preparers of general purpose financial reports to use consistent methods of reporting and measurement, on the other hand methods of reporting and measurement may be changed if not relevant (Deegan, C 2006). Consistent methods of measuring and reporting enable financial reports to be compared over time by users of the financial information.

In conclusion, general purpose financial reports attempt to provide investors and potential investors with information that assist in the decision making process, similarly companies display their allocation and uses of scarce resources to its investors and stakeholders. It is also important that information presented in the reports incorporate the four key qualitative characteristics. According to the AASB relevance, reliability, comparability and understandability are significant in the preparation of reports, as without the characteristics reports are not considered to be useful for users. Thus, it is crucial for preparers to pay special attention and address the four qualitative characteristics whilst preparing the general purpose financial reports.