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Financial Reporting
Edition 5, 2020
MODULE 1: The role and importance of financial reporting
Part A: The role and importance of financial reporting 2
The role of financial reporting 2
The importance of financial reporting 3
Who must prepare general purpose financial reports? 7
Part B: The Conceptual Framework for Financial Reporting 12
The purpose and application of the Conceptual Framework 12
Objectives and limitations of general purpose financial reporting 13
Part C: Qualitative characteristics of useful financial information 15
Fundamental qualitative characteristics 15
Enhancing qualitative characteristics 18
Application of qualitative characteristics in IFRS 21
Part D: The elements of financial statements 21
Defining elements of financial statements 22
Criteria for recognising elements of financial statements 25
Derecognition of assets and liabilities 26
Part E: Measurement of elements of financial statements 27
Cost based and value based measures used in IFRS 27
Present value as a valuation technique 36
Part F: Application of measurement principles in the IFRSs 38
Leases 38
Employee benefits 43
Accounting for share based payments 48
Investment property 49
Professional judgement 51
Disclosures 52
PART A: The role and importance of financial reporting p2
Financial reporting is a process that provides entities with an important communication tool allowing the
management of an entity (preparers) to produce financial information for external stakeholders (users).
The role of financial reporting p2
Identification of target users of financial statements is critical
Effective financial reporting communicates the story of the entity during the period.
The IASB is focused on improving the communication effectiveness of financial statements (IASB 2016a).
Financial reports provide information about an entity’s financial position, and the effects of transactions and
other events that give rise to changes in financial position (Conceptual Framework, paras OB12–OB16).
The importance of financial reporting p3
Financial reporting is important because of the level of resources under the care of managers and the
significance and financial impact of the decisions made by users that are based on this information.
Information needs of the user
The focus of financial reporting is on the information needs of primary users, but this does not mean that
financial reports will be irrelevant to other users. Although the reports may not be specifically tailored to meet
their needs, other parties, such as regulators and members of the public, may find general purpose financial
reports useful (Conceptual Framework, para. OB10).
The IASB’s approach to resolving conflicting user information needs is to seek to provide the information that
will meet the needs of the maximum number of primary users. However, it is noted that focusing on common
information needs does not prevent an entity from providing additional information that may be useful to a
group of users (Conceptual Framework, para. OB8).
Understanding the international financial reporting standards p5
The information included in GPFSs must comply with the International Financial Reporting Standards (IFRSs)
and achieve fair presentation in accordance with the definition and recognition criteria in the Conceptual
Framework.
If a conflict is identified between provisions of an IFRS and the Conceptual Framework, the IFRS will take
precedence.
There are two series of international accounting standards.
1. The International Accounting Standards (IASs), are those standards issued from 1973 to 2001, before
the new International Accounting Standards Board (IASB) was formed.
2. International Financial Reporting Standards (IFRSs), are those standards issued under the IASB since
2001 and reflect the changes in accounting and business practices since that date.
Who must prepare general purpose financial reports? p7
IFRS are silent on which entities should prepare GPFRs. This matter is left to governments and regulatory
agencies.
Australia:
s292 of the Corps Act states that financial reports must be prepared by all disclosing entities, public
companies, large proprietary companies and registered schemes.
Section 296 stipulates that the report must comply with accounting standards.
In addition to formal regulations, there are examples of guidance on who should prepare reports based on
professional judgment linked to the needs of external users (e.g. Statement of Accounting Concept (SAC) 1,
para. 41)
The objective of general purpose financial reporting is to provide useful financial information to various users
to support their decision-making needs. In addition, there is a stewardship function, which involves reporting
on how efficiently and effectively management has used the resources entrusted to it.
International initiatives to decrease financial reporting complexity p9
An ongoing criticism of financial reporting is the complexity of financial reports. Improving the communication
effectiveness of financial reporting is a key focus for the IASB currently, and there are a growing number of
initiatives to help combat the issue, including:
- reducing differences in reporting standards between countries
e.g. working to converge US GAAP with IFRS
- reducing reporting requirements of specific organisations
e.g. small and medium-sized entities per IASB OR entities with Reduced Disclosure Requirements per
the AASB
- catering to the information needs of multiple stakeholders
e.g. users wish to measure performance from a range of perspectives – so there is a lot of non-
mandatory information in annual reports which make the preparation of financial statements seem
like compliance only.
IASB initiatives:
- Principles of disclosure – develop a disclosure standard that binds financial statements (IAS1 and
IAS8)
- Standard level review of disclosure – improve disclosure related to the respective standards
- Materiality – guidance on the application of materiality (discussion on also removing overwhelming or
distracting immaterial information)
Financial Reporting Council, UK: introduced a forum (Financial Reporting Lab) to provide companies and
investors with an opportunity to solve contemporary reporting needs.
PART B: The Conceptual Framework for Financial Reporting p12
The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial
statements. It is a practical tool that assists the IASB when developing and revising IFRSs (Conceptual
Framework, para. 1).
The purpose and application of the Conceptual Framework p12
When standards do not provide guidance or sufficiently specific guidance, it is the role of the Conceptual
Framework to provide guidance to facilitate consistency in the reporting of transactions and events.
The Conceptual Framework provides a formal frame of reference for:
- the types of transactions and events that should be accounted for;
- when transactions and events should be recognised;
- how transactions and events should be measured; and
- how transactions and events should be summarised and presented in financial statements.
Objectives and limitations of general purpose financial reporting p13
Decision-usefulness objective
Standard setters should seek to determine what types of information are most useful for decisions made by
users of financial statements.
Limitations of the decision-usefulness objective
- Lack of familiarity with new types of information – any evaluation of the usefulness of items of
information to users is biased by their familiarity with the information
- Decision-usefulness may vary among users – users make different types of decisions, such as whether
to sell their shares or whether to extend credit. Even the same type of user can make decisions based
on different models or frameworks
- Capable of multiple interpretations – criterion appears to be capable of supporting too many different
measurement bases
Types of financial reporting
General purpose financial reporting (broad focus) – users do not have the right to request reports to meet
their needs and rely on the financial statements for decision making
Under OB5 of the Conceptual Framework, primary users of GPFRs are existing and potential investors, lenders
and other creditors. Others, such as management, regulators or the general public, may find the info useful
but the reports are not specifically directed at them
Special purpose financial reporting (narrow focus) – users can request specialised reports (e.g. banks,
regulators) and use special purpose financial statements for decision making
Limitations of general purpose financial reporting
There are limitations to the extent that financial reporting can provide useful information to all users:
- Lack of familiarity with new types of information
- Decision usefulness may vary among users (see above for more detail)
- Capable of multiple interpretations
- Time and costs constraints in preparing GPFS
The IASB recommends the use of other sources (Conceptual Framework, para. OB6) to help gain a clearer
understanding and also explains that the reports are ‘not designed to show the value’ of the organisation but
to help decision-makers make their own estimates as to its value (Conceptual Framework, para. OB7).
In addition, financial reporting has a historical focus that may be an indicator of future performance.
Principles established in the Conceptual Framework (p14)
Accrual basis of accounting: recognises the effects of transactions and other events when they occur (which
may not relate to the time that cash is exchanged)
Going concern: presumes that the entity will continue to operate for the foreseeable future.
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