CPA 115 Financial Reporting Summary

Topics: Balance sheet, Generally Accepted Accounting Principles, Financial statements Pages: 41 (11661 words) Published: April 10, 2014
MODULE 1 THE FRAMEWORK AND ITS APPLICATION IN FINANCIAL REPORTING Part A: The role of a framework of accounting in global financial markets Objective of General Purpose Financial Reporting
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Key factors driving the globalisation of financial markets

Technological innovation
Financial innovation
Reduction of barriers to capital flows
Convergence of generally accepted accounting principles
Two types of Theories
Positive/Descriptive theories: attempt to explain phenomena
Normative/Prescriptive theories: prescribe how something should be done. Normative theories are developed through a process of deductive reasoning which begins with setting objectives. The developer of the theory sets whatever objectives he desires. Having set the objectives, the developer should then deduct the assumptions that underlie those objectives. Once the objectives are specified, and any underlying assumptions deducted, the developer would then deduct the principles that flowed logically from both the objectives and the assumptions. In turn, the principles then enable the inventor to deduce the definitions, activities and observable actions that should result. The role of a framework of accounting

To provide guidance to accounting standard setters when developing reporting requirements To provide a formal frame of reference for the types of transactions and events that should be accounted for, when they should be recognised, how they should be measured. To facilitate communication between preparers, auditors and users of financial statements by providing a common set of definitions, criteria and other principles. Limitations of a framework

Economic and legal constraints
Social and political constraints
Human resource constraints
Professional judgement
Development of International Financial Reporting Standards
Standard-setting arrangement
Domestic adoption of IFRSs
Part B: The IASB Framework for the Preparation and Presentation of Financial Statements Users of General Purpose Financial Statements
Existing and potential investors, lenders and other creditors Approach adopted to deal with the diversity of users’ information needs To seek to provide the information set that will meet the needs of the maximum numbers of primary users Objective of General Purpose financial statements

Stewardship function of management: how efficiently and effectively management have used the resources entrusted to them Decision Usefulness objective: those wishing to assess the accountability of management are assumed to do so to assess an entity’s prospects for future net cash inflows Accountability of Management

Limitations of the decision-usefulness objective
Lack of familiarity with new types of information
Decision usefulness may vary among users
Capable of multiple interpretations
Reporting Entity
The critical feature identifying an entity as a reporting entity is the existence of users who depend on general purpose financial statements produced by that entity for resource allocation decisions. Users who can command the tailoring of financial statements to meet their specific needs would not be considered dependent users. Assumptions of general purpose financial statements

Accrual Basis
Going Concern
Characteristics of general purpose financial statements
Understandability: financial information must be readily understood by users who have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence Relevance

Comparability: users are able to compare the financial statements of an entity through time and compare the financial statements of different entities 5 Aspects of Reliability
Faithful representation...
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