Purpose
Assists IASB to develop IFRS Not an IFRS
Prepares to create accounting policies if needed Forms the basis on which IFRS is developed
Assists all parties to understand and interpret IFRS May not overrule IFRS
Objective of general-purpose financial reporting:
To provide financial info about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions relating to providing resources to the entity.
Objective & limitations regarding:
Users Users = anyone who finds financial reports useful.
3 primary users investors, lenders, creditors
Other users Management (already has access to info)
Tax authorities (given info based on tax legislation)
Information Financial reports only include financial information
Which “user decision” to Only provide info that will help them make decisions about the
cater for provision of resources to the entity.
Categories of provision of resources:
1. Loans/credit
2. Equity/debt
3. Management actions
Usefulness Depends on whether its relevant & a faithful representation
What information to include?
Users need to make predictions di erent users may need di erent information. To meet these
needs, financial reports must include 2 categories:
Info about its economic resources, claims against the entity and changes in those resources &
claims
Management e iciency & e ectiveness in performing their responsibility to the entity’s
economic resources
2 basic assessments users make using financial information:
Prospects for future net cash inflows
Management’s stewardship of entity’s economic resources
Information about position and performance
Position Balance between Compare economic resources (assets) and claims against
nature of resources the entity (liabilities & equity)
and claims Also consider:
Liquidity
Solvency
Funding structure & possible need for financing
Performance Indicator of the Changes in resources & claims caused by combination of
(and other) return on the entity’s the entity’s financial performance (income earned &
economic resources expenses incurred) and other events and transactions
unrelated to performance (equity contributions, changes in
assets & liabilities that did not increase/decrease equity)
Accrual accounting: Depicts transaction when it occurs, not when cash flow takes place
, Qualitative characteristics
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
1. Relevance
Information is relevant if it could make a di erence in the user’s decision making
Must have predictive and/or confirmatory value:
Predictive = users can use info as ‘inputs’ to make their own predictions/forecasts
Confirmatory = users can use info as ‘feedback’ on their previous predictions
Relevance involves materiality:
Info is material of omitting/misstating/obscuring it could reasonably be expected to influence
decisions of primary users of general-purpose financial reports.
2. Faithful representation
Information must faithfully represent the substance of the phenomena that it purports to represent
(substance over form)
Information must be:
Complete: depicting all info necessary for users to understand the phenomenon being
depicted
Neutral: free form bias (manipulation to get a response that is either favourable/unfavourable)
Free from error: no errors/omissions in description of phenomena and selection & application
of processes used to produce the information (NB: Free from error ≠ perfect)
ENHANCING QUALITATIVE CHARACTERISTICS
Comparability Identify similarities & di erences Comparison form 1 year to the next & 1
and among similar items entity to the next
The same method being applied to A single entity across multiple periods/
Consistency a specific item across multiple entities in 1 period
Verifiability Di erent knowledgeable & Direct verification: Verify through direct
independent observers could reach observation.
consensus, although not Indirect verification: Verify by checking
necessarily complete agreement inputs & recalculating outputs, checking
that a particular depiction is a that correct process is applied,
faithful representation (gives users recalculating balance
a measure of confidence)
Timeliness Info must be available to decision makers in time to be capable to influence
their decisions (usually soon after year-end)
Understandability Info is classified, characterised and presented clearly and concisely.
Assume that user has reasonable knowledge, will carefully review & analyse
info provided and will seek help from advisor for complex issues
EQC is only used to improve usefulness of information FQC is a MUST for useful information
Financial statements
Financial reports give information about economic phenomena
Financial statements give information about the elements
GENERAL-PURPOSE FINANCIAL STATEMENTS
A particular form of general-purpose financial report that provides information about the reporting
entity’s assets, liabilities, equity, income and expenses that is useful to users
Assists IASB to develop IFRS Not an IFRS
Prepares to create accounting policies if needed Forms the basis on which IFRS is developed
Assists all parties to understand and interpret IFRS May not overrule IFRS
Objective of general-purpose financial reporting:
To provide financial info about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions relating to providing resources to the entity.
Objective & limitations regarding:
Users Users = anyone who finds financial reports useful.
3 primary users investors, lenders, creditors
Other users Management (already has access to info)
Tax authorities (given info based on tax legislation)
Information Financial reports only include financial information
Which “user decision” to Only provide info that will help them make decisions about the
cater for provision of resources to the entity.
Categories of provision of resources:
1. Loans/credit
2. Equity/debt
3. Management actions
Usefulness Depends on whether its relevant & a faithful representation
What information to include?
Users need to make predictions di erent users may need di erent information. To meet these
needs, financial reports must include 2 categories:
Info about its economic resources, claims against the entity and changes in those resources &
claims
Management e iciency & e ectiveness in performing their responsibility to the entity’s
economic resources
2 basic assessments users make using financial information:
Prospects for future net cash inflows
Management’s stewardship of entity’s economic resources
Information about position and performance
Position Balance between Compare economic resources (assets) and claims against
nature of resources the entity (liabilities & equity)
and claims Also consider:
Liquidity
Solvency
Funding structure & possible need for financing
Performance Indicator of the Changes in resources & claims caused by combination of
(and other) return on the entity’s the entity’s financial performance (income earned &
economic resources expenses incurred) and other events and transactions
unrelated to performance (equity contributions, changes in
assets & liabilities that did not increase/decrease equity)
Accrual accounting: Depicts transaction when it occurs, not when cash flow takes place
, Qualitative characteristics
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
1. Relevance
Information is relevant if it could make a di erence in the user’s decision making
Must have predictive and/or confirmatory value:
Predictive = users can use info as ‘inputs’ to make their own predictions/forecasts
Confirmatory = users can use info as ‘feedback’ on their previous predictions
Relevance involves materiality:
Info is material of omitting/misstating/obscuring it could reasonably be expected to influence
decisions of primary users of general-purpose financial reports.
2. Faithful representation
Information must faithfully represent the substance of the phenomena that it purports to represent
(substance over form)
Information must be:
Complete: depicting all info necessary for users to understand the phenomenon being
depicted
Neutral: free form bias (manipulation to get a response that is either favourable/unfavourable)
Free from error: no errors/omissions in description of phenomena and selection & application
of processes used to produce the information (NB: Free from error ≠ perfect)
ENHANCING QUALITATIVE CHARACTERISTICS
Comparability Identify similarities & di erences Comparison form 1 year to the next & 1
and among similar items entity to the next
The same method being applied to A single entity across multiple periods/
Consistency a specific item across multiple entities in 1 period
Verifiability Di erent knowledgeable & Direct verification: Verify through direct
independent observers could reach observation.
consensus, although not Indirect verification: Verify by checking
necessarily complete agreement inputs & recalculating outputs, checking
that a particular depiction is a that correct process is applied,
faithful representation (gives users recalculating balance
a measure of confidence)
Timeliness Info must be available to decision makers in time to be capable to influence
their decisions (usually soon after year-end)
Understandability Info is classified, characterised and presented clearly and concisely.
Assume that user has reasonable knowledge, will carefully review & analyse
info provided and will seek help from advisor for complex issues
EQC is only used to improve usefulness of information FQC is a MUST for useful information
Financial statements
Financial reports give information about economic phenomena
Financial statements give information about the elements
GENERAL-PURPOSE FINANCIAL STATEMENTS
A particular form of general-purpose financial report that provides information about the reporting
entity’s assets, liabilities, equity, income and expenses that is useful to users
