The conceptual framework for financial reporting established the concepts for financial reporting. The framework is gathering systems of concepts that flow from an objective. The objective of the framework identifies the purpose of financial reporting. The framework does not establish standards for particular financial reporting issues.
The frameworks do not tend to override standards and it does not constitute support for providing financial reports that do not comply with them.
Further, financial reporting tends to be dynamic in nature meaning it evolves over time. Financial reporting standards developed in response to changes in business practices and the economic environment helps in the development of the framework.
The financial reporting frameworks discuss the objective of financial reporting in terms of information that is useful to a wide range of users in making economic decisions.
Both frameworks of FASB or IASB list a variety of present and potential users including, among others, investors, creditors, employees, suppliers, customers, and governmental agencies.
Various questions are raised as to how reporting frameworks are to be used. All these questions involve the effects of adopting a proprietary perspective from a business perspective.
The objective of the applicable financial reporting framework
The applicable financial reporting framework is the set of rules used as guidelines in the preparation of financial statements. The framework is based on the size and nature of the business and the location and the laws and regulations governing the business.
For instance, the applicable financial reporting framework for businesses located in the United States of America would be Generally accepted accounting principles while the IFRS frameworks would be applicable in most the other countries. The objectives of the applicable financial reporting framework are as follows:
- Providing information to make investment and credit decisions:
Applicable FRF’s main purpose is to provide external financial reporting. This helps to provide information that is useful to present and proposed investors and creditors along with other stakeholders.
These are helpful in making decisions related to investment, credit, and similar resource allocation decisions.
- Provide information for assessing cash flow prospects
Applicable FRF is poised to meet the objectives of the business. It shall provide information to related stakeholders to assess the amounts, timing, and uncertainty of cash flows of business along with outflows.
Such information flow helps in assessing an entity’s ability to generate net cash inflows and provide returns to investors and creditors.
- Provide information on resources and claims
Applicable FRF helps the business in generating information about net cash flows. This helps to provide knowledge about the economic resources of the entity and claims applicable to those liabilities.
Information about the effects of transactions and other events and circumstances is also essential.
The Qualitative Characteristics of Applicable Financial Reporting Framework
It means that appliable FRB is to be useful in making investment decisions, credit, and similar resource allocation decisions where such information must be useful and to the point.
Relevant information is useful for making decisions for users by helping them to evaluate the potential effects of past, present, or future transactions on future cash flows. Further, timeliness and relevant information help make decision-making much easier and more accurate.
- Faithful representation.
Applicable FRF shall be able to make an investment, credit, and similar resource allocation decisions. Information provided by the framework shall be based on the data it wants to report for representation.
- Comparability and consistency.
Comparability of financial statements enhances the usefulness of financial reporting information in making an investment, credit, and other management decisions.
Comparability and consistency of information are two important features that users seek to confide in.
Should the Objective Focus on Financial Statements or on Financial Reporting?
The objectives of financial reporting focus on financial reporting while IASB’s framework focuses on financial statements. The difference is not as significant as it might appear because the primary focus of the conceptual framework is on financial statements.
The beginning importance of the conceptual framework was the concept to establish boundaries of financial reporting and differentiating between financial statements and information to be provided to users outside the business.
Interaction between Financial Reporting and Management’s Perspective
The other issue would be the requirement of interaction between general-purpose external financial reporting and management perspective.
Applicable FRB makes it clear that general-purpose external financial reporting is directly related to the needs of users who do not have much information that the business provides to them. Management has the ability to obtain the information it needs.
Hence, general-purpose financial reporting is not directly related to the information needs of management.