Users of General Purpose Financial Reporting (GPFR)
Primary Users
Emphasis on existing & potential providers of capital
1. Investors
2. Lenders and other Creditors
Especially those who can’t demand information directly from reporting entities
Compare smaller investors & institutional investors
Compare smaller suppliers & financial institutions
GPFR don’t provide all the information needed by the primary users
They also need to consider pertinent information from other sources e.g.
general economic conditions and expectations
political events and political climate
industry and company outlooks.
Other Users of GPFR
Other parties may also find GPFR useful
However, GPFR are not primarily directed to these groups
Regulators
Members of the public
Accounting information designed to meet needs of investors & creditors
will usually meet the needs of other user groups
Qualitative Characteristics of Useful Information
Qualitative Characteristics
Fundamental 1. Relevance
2. Faithful Representation
Enhancing 1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
5. Also consider materiality
Items are only recognized in the financial statements if they meet both the fundamental
characteristics
Relevance Faithful Representation Enhancing Characteristics
Relevant information is capable of Information must faithfully represent The qualitative characteristics enhance
making a difference in decision-making what it purports to represent usefulness of information that is
relevant and faithfully represented.
Means that the user is assured that Comparability
the information presented is Consistency over time and
complete, without bias and neutral. across entities
Reflect the economic substance Policies can be changed if no
longer relevant
Predictive value 1) Complete Verifiability
value for future outcomes i.e. all necessary information, Different knowledgeable and
including descriptions independent observers could
e.g. fair value reach consensus
e.g. property valuations by registered
valuers
Confirmatory value 2) Neutral i.e. unbiased Timeliness
i.e. feedback on previous evaluations Generally, older information is less
- the information presented is without useful
e.g. compare sales, expenses bias or manipulation.
against budget
Prudence is excluded from the
framework
3) Free from error Understandability assumes that users
Estimates can still be regarded have a reasonable knowledge
as free from error of business and economic
activities
review and analyze
information diligently
may need to seek aid of an
adviser for complex
economic phenomena
Materiality means relevance in the context of an organisation
Omission or misstatement (or obscuration) could influence decisions
Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence the decisions that the primary users of general purpose financial statements make on
the basis of those financial statements, which provide financial information about a specific
reporting entity (New definition effective from 01/01/2020).
Example on Materiality: Tesco Ltd
The financial year ended on 31 December and draft financial statements have been prepared.
Invoices valued at $3,000 were not included in Sales i.e. omitted from the financial statements
Total Sales for the year is $1 million. This is a relevant base, since we’re dealing with invoices.
3,000/1,000,000 = 0.3% and clearly not material
Therefore financial statements won’t be adjusted (the invoices can be included next year)
However, we also need to calculate materiality against other relevant bases i.e. Profit & Receivables
If total Sales was $10,000
3,000/10,000 = 30% which is clearly material
This error would require an adjustment to the current financial statements e.g.
Dr Accounts Receivable 3,000
Cr Sales 3,000
Elements of Financial Reporting
Assets Liability
A present economic resource controlled by the A present obligation of the entity to transfer an economic
entity as a result of past events. resource as a result of past events
An economic resource is a right that has the An economic resource is a right that has the potential
potential to produce economic benefits to produce economic benefits
Control is the present ability to direct the use of an
asset
An obligation is a duty or responsibility that
by deploying it or allowing another party to do
an entity has no practical ability to avoid
so.
is owed to another party (or parties)
Rights may
correspond to an obligation of another party
e.g. receive cash, goods or services; or The transfer does NOT need to be certain, or even likely
not e.g. PP&E, Inventory so long as it would require the entity to transfer an
economic resource in at least one circumstance
Equity Income and Expenses
Defined as Increase in economic benefits in the form of increase
in assets or decrease in liabilities, which increases
Residual interest in the assets of any entity
proprietorship. Example, sales, fees, commission
after deducting liabilities
received.
i.e. OE = A – L
Expenses
Shareholders have a residual claim while
Decrease in economic benefits in the form of
creditors have a specific claim
decrease in assets or increase in liabilities, which
result in a decrease in proprietorship. Example,
wages, insurance.
Benefits of the Conceptual Framework
1. Provides a conceptual basis for consistent and logical accounting standards
2. Cost-effective approach
Fundamental issues like objective & definitions don’t need to be reviewed when developing
new standards
Framework can address issues where there’s no specific standard
3. Makes the process more transparent
helps users to understand conceptual basis for standards
4 Enhances accountability of standard setters
o Justify any departure from conceptual basis
May reduce political pressure [i.e. effect of lobbying].
Lobbying is the act of trying to persuade governments to make decisions or support
something. Lobbying can be done by many sorts of people, alone or in groups. Often it is done
by big companies or businesses. ... These people are called lobbyists.
Critiquing the Framework
Objective of GPFR
1. How about accountability and stewardship?
Accountability/stewardship focuses on managers but decision usefulness focuses on users
The framework acknowledges that users’ expectations about returns also depends on their
assessment of management’s stewardship of the entity’s economic resources.
2. How about other users?
Some users are interested in social and environmental information.
Is that less important than economic and financial information?
Chronology
Historically, standards were developed before the framework
Now IASB is trying to fit the framework and standards … not an easy task!
The framework has been criticised
for simply rationalizing/justifying existing practice
rather than seeking the ‘best’ way and implementing radical changes in the profession
Measurement
The framework adopts a descriptive approach
It acknowledges use of different approaches e.g. fair value, depreciated historical cost, net realisable
value
i.e. a mixed-attribute model
Why has the framework not prescribed one method?
1. Cost of changing systems
2. Problems with fair value e.g. inactive markets
However recent standards and changes to the framework seem to support fair value
