Usefulness of Financial Reports

Topics: International Financial Reporting Standards, Financial statements, Balance sheet Pages: 7 (2172 words) Published: April 25, 2012
BFA201 ESSAY PART B: THE RESEARCH ESSAY A THEORETICAL DISCUSION Usefulness is the basic objective of financial accounting, according to the AASB s Statement of Accounting Concepts and Conceptual Framework. This essay discusses the theoretical principles and accounting rules underpinning financial reporting practices within the IFRS environment. Following the implementation of the International Financial Reporting Standards in 2005, many additional disclosure requirements were imposed on organisations which have proven to be costly and of little benefit to some organisations. Australia s new differential reporting framework is aimed at relieving these organisations of some of the disclosure requirements whilst remaining consistent with the basic objective. The purpose of this essay is to evaluate the objective of financial reports from a users and preparers perspective with particular reference to Australia s new differential financial reporting framework. Findings are that the qualitative characteristics that have evolved over time play an important role in determining the meaning of usefulness and that the differential financial reporting framework will have both positive and negative impacts on users and preparers of financial reports.

BFA201 ESSAY PART B: THE RESEARCH ESSAY A THEORETICAL DISCUSION Financial accounting is the process of summarising the transactions that occur within an entity and presenting them in the form of financial reports. In preparing the reports, organisations are subject to various regulators, in particular the Australian Accounting Standards Board (AASB). The AASB has developed a set of accounting standards that are consistent with those developed by the international regulator - International Accounting Standards Board (IASB), with minor differences for use in the Australian context (Leo 2011). It has also developed Statements of Accounting Concepts (SAC) that defines a reporting entity and outlines the objective of general purpose financial reporting (GPFR). Furthermore, it has issued a framework for the preparation and presentation of financial statements. SAC2 (1990) and the AASB Framework (2009) both highlight usefulness as the basic objective of financial accounting. The implications of this objective will be discussed from a preparers and users perspective, within the context of a new framework of differential reporting. SAC2 (1990) outlines the objective of GPFR. It acknowledges GPFR as a means of communicating relevant and reliable information about a reporting entity to users (SAC21990). GPFR is focused on providing information to meet the needs of users who do not have the power to request the specific information they require to assist them in making decisions concerning the allocation of scarce resources. SAC2 (1990) explains that efficient allocation of scarce resources will be enhanced if those who make the resource allocation decisions have the appropriate

BFA201 ESSAY PART B: THE RESEARCH ESSAY A THEORETICAL DISCUSION financial information on which to base their decisions. GPFR aims to provide this information. The AASB Framework for the Preparation and Presentation of Financial Statements (2009) contains the underlying principles to be followed in preparing and presenting financial statements for external users. The purpose of the framework is to provide guidelines to apply in preparation of financial statements to ensure they provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions (AASB Framework 2009). It outlines four main qualitative characteristics of financial statements that make them useful for users reliability, comparability and understandability. According to the AASB Framework (2009), to be useful, information must be relevant to the decision-making needs of the users . A study conducted by Cheung, Evans, & Wright (2010) outlines two attributes...
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