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This essay is about how the users make the correct economic decisions. It explains how the development of conceptual framework has affected the objectives and nature of general-purpose financial reports (GPFRs). The purpose of financial reporting is to help users or stakeholders to develop the usefulness in economic decision making. All the stakeholders or the users like employees, suppliers, investors, lenders, government and their agencies, customers, and the public supposed to know how to use the information from GPFRs.
Accounting can be defined as a concerned with communicating, collecting, and analyzing financial report (McLaney & Atrill 2008). Its information is helpful for those who have to make decisions and plans about businesses, as well as those who want to control its businesses (Jones 2006). Accountants require to the standard that can guide them in preparing the GPFRs which include the important characteristics like understandability, reliability, relevance and comparability (Alexander & Britton 2004).
2. Conceptual Framework
The conceptual framework can be defined as the development of a consistent and coherent set of accounting principles that emphasize the presentation and preparation of financial reports (Jones 2006). Standard-setting bodies such as the UK's ASB (Accounting Standards Board), the US's FASB (Financial Accounting Standard Board), and the IASB (International Accounting Standards Board) have sought to build up a conceptual framework that would support accounting practice (Alexander & Britton 2004). The basic idea of a conceptual framework is to create a set of fundamental accounting principles which will help in standard setting (Jones 2006).
2.1 The development of the Conceptual Framework
There were four steps to develop the conceptual framework which taken by the AASB (See figure 1). Firstly, it was to define the scope of financial report. The second step was to define the reporting entity. This step means, to establish which type of entities should set up the GPFRs. Thirdly, it was to decide the objectives of GPFRs which establish the types of report, the users of financial reports, and the information needs that suitable for those needs. The last step was to describe the concepts of reporting processes as well as the qualitative characteristics of financial reporting.
Before that, the AASB (Australian Accounting Standards Broad) was developed four concepts statements which namely SACs (Statements of Accounting Concepts). On the other hand, the AASB was rejected its own part of framework as known as SAC 3 and SAC 4 in 2005 (Elliott & Elliott 2008). However, it still uses the SAC 1 and SAC 2 as component of concept statements which are more detail in the objective of financial report and the reporting entity than the IASB.
3. The Nature and Objectives of GPFRs
SAC 1 is about which entities are required to publish financial statements. Hence, SAC 1 interprets the reporting entity as a user that's obliged to prepare GPFRs for making economic decision (Hoggett & Edwards 1996). SAC 1 also aims to establish and interpret the concepts of the reporting entity, and to set a benchmark for the minimum standard required for financial reporting (Hoggett et al. 2009).
SAC 2 is about the objectives of GPFRs. SAC 2 needs to identify the users of GPFRs and the types of information which GPFRs should provide (Walker 2003). Furthermore, both of the FASB and the IASB broadly agree that the objective of financial reports is to prepare useful information which relevant and reliable to help the users or stakeholders to decide the allocation of its resources (Elliott & Elliott 2008). This objective is included in decision making model as illustrated in appendix figure 2.
In other word, the main idea of accounting is provide accounting information to users that fulfils their needs, thus enabling them to make decision (Jones 2006). Another objective of GPFRs is to present financial statements for evaluating the stewardship of managers (Alexander & Britton 2004). Stewardship can be defined as making individuals accountable for assets and liabilities (Jones 2006). In particular, stewardship focuses on the physical existence of assets and seeks to prevent their loss and fraud.
The main users are usually considered to be the present and future shareholders. Based on the IASB's Framework that adopted by the AASB, the users of GPFRs are investor, lenders, suppliers, government and other agencies, employees, customers and the last user is public (Hoggett & Edwards 1996). The first user is investors which need the information to help them to take decision about management and its investments (Elliott & Elliott 2008). For example, to help investors to decide whether to sell or buy, hold shares and measure the ability to pay those shares. Lenders use the information to establish whether its interest and loans would be paid on time (Hoggett et al. 2009).
Moreover, suppliers need the information to decide whether to sell to the entity and determine longer-term stability if the company is a major customer (Jones 2006). Employees need the information to assess the ability to provide remuneration, retirement benefits and employment opportunities (Elliott & Elliott 2008). Customers use the information to assess the stability of the continuance existence of the company (Elliott & Elliott 2008). Example, for future provision of servicing product warranties. Government and other agencies apply the information to be aware of the commercial activities of the company, and to produce national statistics (Alexander & Britton 2004). Furthermore, the last user is public. The members of the public apply the information to assess recent developments in the company's property and changers in its activities.
In order to be helpful to users, there are four principal characteristics which can classify into the relating to content (reliability and relevance) and the relating to presentation (understandability and comparability) (See figure 3). The reliability information is open from unbiased and material error (Jones 2006). Relevance in financial statements means the information needs to have the quality of relevance when it influences the economic decision of the users (Elliott & Elliott 2008). Understandability refers to the information which must be presented in a readily understandable way (Jones 2006). Even though, the comparability characteristic means that users can be informed of the accounting policies employed in the preparation of the financial reports, any changes in its policies and the effects of the changes (Alexander & Britton 2004).
In conclusion, a conceptual framework is created to help accountant to make a set of accounting principles that will help standard-setting. The essence of this is the objective of GPFRs is to provide financial information useful to a wide range of users for making economic decision (Jones 2006). In order to be helpful, the financial statements need to have the understandable, reliable, comparable, and relevant information. Therefore, the users or the shareholders have to know or understand about the objectives and the nature of GPFRs that listed in the conceptual framework.