C2 Objective of Financial Reporting

CHAPTER 2: CONCEPTUAL FRAMEWORK – Objective of Financial Reporting
Conceptual Framework
The Conceptual Framework for Financial Reporting is a complete, comprehensive and single document
promulgated by the IASB. It is a summary of the terms and concepts that underlie the preparation and
presentation of financial statements for external users. In other words, the Conceptual Framework
described the concepts for general purpose financial reporting.
The Conceptual Framework is an attempt to provide an overall theoretical foundation for accounting. It
will be used in the future standard setting decision but no changes will be made to the current IFRS.
The Conceptual Framework provides the foundation for Standards that:
a) Contribute to transparency by enhancing international comparability and quality of financial

information.
b) Strengthen accountability by reducing information gap between the providers of capital and the
people whom they have entrusted their money.
c) Contribute to economic efficiency by helping investors to identify opportunities and risks across
the world.
Purposes of Revised Conceptual Framework
a) To assist the IASB to develop IFRS based on consistent concepts.

b) To assist the preparers of financial statement to develop consistent accounting policy when no
Standard applies to a particular transaction or other event or where an issue is not yet
addressed by an IFRS.
c) To assist preparers of financial statements to develop accounting policy when a Standard allows
a choice of an accounting policy.
d) To assist all parties to understand and interpret the IFRS.
Authoritative Status of Conceptual Framework
If there is a standard or an interpretation that specifically applies to a transaction, the standard or

interpretation overrides the Conceptual Framework.
In the absence of a standard or an interpretation that specifically applies to a transaction, management

shall consider the applicability of the Conceptual Framework in developing and applying an accounting
policy that results in information that is relevant and reliable.
However, it is to be stated that the Conceptual Framework is not an International Financial Reporting
Standard.
Users of financial information
Under the Conceptual Framework for Financial Reporting, the users of financial information may be
classified into two, namely:
1. Primary users
2. Other users
Primary Users
The primary users of financial information are the parties to whom general purpose financial reports are
primarily directed.
a) Existing and potential investors are concerned with the risk inherent in and return provided by
their investments.
b) Lenders and other creditors are interested in information which enables them to determine
whether their loans, interest thereon and other amounts owing to them will be paid when due.
Other Users
By residual definition, “other users” are users of financial information other than the above.
a) Employees are interested in information about the stability and profitability of the entity.
b) Customers have an interest in information about the continuance of an entity especially when
they have a long-term involvement with or are dependent on the entity.
c) Government and their agencies are interested in the allocation of resources and therefore the
activities of the entity.
d) Public – Financial statements may assist the public by providing information about the trend and
the range of its activities.
Scope of Revised Conceptual Framework
1) Objective of financial reporting

2) Qualitative characteristics of useful financial information
3) Financial statements and reporting entity
4) Elements of financial statements
5) Recognition and derecognition
6) Measurement
7) Presentation and disclosure
8) Concepts of capital and capital maintenance
Objective of Financial Reporting
The objective of financial reporting forms the foundation of the Conceptual Framework.
The overall objective of financial reporting is 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.
Financial Reporting is the provision of financial information about an entity to external users that is
useful to them in making economic decisions and for assessing the effectiveness of the entity’s
management through the annual financial statements.
However, financial reporting encompasses not only financial statements but also other information such
as financial highlights, summary of important financial figures, analysis of financial statements and
significant ratios.
Financial reports also include nonfinancial information such as description of major products and a
listing of corporate officers and directors.
Target Users
Existing and potential investors, lenders and other creditors have the most critical and immediate need
for information in financial reports.
Specific Objective of Financial Reporting
The overall objective of financial reporting is to provide information that is useful for decision making.
Accordingly, the specific objectives of financial reporting are:
a) To provide information useful in making decisions about providing resources to the entity.
b) To provide information useful in assessing the cash flow prospects of the entity.
c) To provide information about entity resources, claims and changes in resources and claims.
Economic decisions
Investors need general purpose financial report in order to enable them in making decisions whether to
buy, sell or hold equity investments.
Lenders and creditors need general purpose financial reports in order to enable them in making
decisions whether to provide or settle loans and other forms of credit.
Assessing cash flow prospects
Financial reporting should provide information useful in assessing the amount, timing and uncertainty of
prospects for future net cash inflows to the entity.
Economic resources and claims
The economic resources are the assets and the claims are the liabilities and equity of the entity.
Information about financial position can help users to assess the entity’s liquidity, solvency and the need
for additional financing.
Liquidity is the availability of cash in the near future to cover currently maturing obligations.
Solvency is the availability of cash over a long term to meet financial commitments when they fall due.
Changes in economic resources and claims
The financial performance of an entity comprises revenue, expenses and net income or loss for a period
of time.
Changes in economic resources and claims result from financial performance and from other events or
transactions, such as issuing debt or equity instruments.
Accrual accounting
Accrual accounting means that income is recognized when earned regardless of when received and
expense is recognized when incurred regardless of when paid.
Limitations of financial reporting
a) General purpose financial reports do not and cannot provide all of the information that existing
and potential investors, lenders and other creditors need.
The users need to consider pertinent information from other sources, for example, general
economic conditions, political events and industry outlook.
b) General purpose financial reports are not designed to show the value of an entity but the
reports provide information to help the primary users estimate the value of the entity.
c) General purpose financial reports are intended to provide common information to users and
cannot accommodate every request for information.
d) To a large extent, general purpose financial reports are based on estimate and judgement rather
than exact depiction.
Management stewardship
Information about how efficiently and effectively management has discharged its responsibilities to use
the entity’s economic resources helps users to assess management stewardship of those resources.
Such information is also useful for predicting how management will use the entity’s economic resources
in future periods.
MULTIPLE CHOICE THEORIES
1. In the Conceptual Framework for Financial Reporting, what provides the “why” of accounting?
a. Measurement and recognition concept

b. Qualitative characteristic of accounting information
c. Element of financial statement
d. Objective of financial reporting
2. The underlying theme of the Conceptual Framework is
a. Decision usefulness
b. Understandability
c. Timeliness
d. Comparability
3. The primary focus of financial reporting has been on meeting the needs of which of the following
groups?
a. Management
b. Existing and potential investors, lenders and other creditors
c. National and local taxing authorities
d. Independent CPAs
4. Which is an objective of financial reporting?
a. To provide information that is useful to those making investing and credit decisions
b. To provide information that is useful to management
c. To provide information about prospective investors
d. To provide information about ways to solve internal and external conflicts about the entity
5. Which is not an objective of financial reporting?
a. To provide information about assets and claims

b. To provide information that is useful in assessing sources and uses of cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about liquidation value of an entity

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CHAPTER 2: CONCEPTUAL FRAMEWORK – Objective of Financial Reporting

The Conceptual Framework provides the foundation for Standards that:

a) Contribute to transparency by enhancing international comparability and quality of financial

Purposes of Revised Conceptual Framework

a) To assist the IASB to develop IFRS based on consistent concepts.

Authoritative Status of Conceptual Framework

If there is a standard or an interpretation that specifically applies to a transaction, the standard or

In the absence of a standard or an interpretation that specifically applies to a transaction, management

Users of financial information

Scope of Revised Conceptual Framework

1) Objective of financial reporting

Objective of Financial Reporting

Specific Objective of Financial Reporting

Accordingly, the specific objectives of financial reporting are:

Assessing cash flow prospects

Economic resources and claims

Changes in economic resources and claims

a. Measurement and recognition concept

2. The underlying theme of the Conceptual Framework is

4. Which is an objective of financial reporting?

5. Which is not an objective of financial reporting?

a. To provide information about assets and claims

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