The Qualitative Characteristics of the IASB Framework - Coursework Example

The qualitative characteristics of the IASB framework Introduction The preparation and presentation of financial ments depends on the Frameworkwhich was initially issued by the IASC in 1989 and later on followed by the IASB in 2001. The basic concepts to prepare the financial statements are described in the Framework. The framework serves as a guide for the Board to develop accounting standards and guides in solving the different problems related to accounting which is not dealt with in the International Accounting Standard or International Financial Reporting Standard or Interpretation (IASPLUS, 2004). Information contained in the financial statements when it is conveyed is reliable only if it does not contain any errors. The IASB’s present definition of reliability is: “Information has the quality of reliability when it is free from material error and bias and can be depended on by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent” (IASB Framework, 1989, Para. 31). A framework comprises of (1) Objectives and (2) Conceptions that follow logically from those objectives. The IASB Framework is meant to help not only standard setters but at the same time it assists the preparers of financial statements to apply international financial accounting standards when they deal with topics on which measures have not yet been formulated, auditors to form their views with regard to the financial statements, and users to interpret information which the financial statements contains. All the above mentioned purposes of a financial statement will be better served only if the concepts are sound, all-inclusive, and internally coherent. Qualitative Characteristics of Financial Statements The qualitative characteristics are the properties that make the information furnished in financial statements helpful to users. The four key qualitative characteristics are understandability, relevance, reliability and comparability. Of the mentioned qualitative characteristics, Relevance and faithful representation are basic qualitative characteristics and Comparability, verifiability, timeliness, and understandability are ornamental qualitative characteristics (Framework 24). Understandability A crucial feature of the information furnished in financial statements is that it has to be promptly apprehensible by users. For this reason it is assumed that users have a rational knowledge of business and economic actions and accounting and a temperament to analyse the information with sensible thoroughness. But certain information with regard to complex matters, just because they are difficult to understand by users cannot be excluded. Such information is important from the view of its significance to the economic decision-making needs of users (Framework 25). Relevance If the information depicted by the financial statements is to be relevant for its users then such information will have to be relevant to the requirements of decision making. Information will be deemed to be relevant only when it can influence the economic decisions made by the users and help them to measure past, current and future events. Such information must also have the ability to confirm or correct the past evaluations made by the users (Framework 26-28). Reliability If the information has to be useful, then it has to be reliable as well. Information can be said to be reliable only when it is free from any kind of material errors. Data depicted by the final statements must not be biased and must be dependable by users in such a way that it represents faithfully that which it either proposes to constitute or could fairly be anticipated to constitute. Sometimes it may so happen that information is relevant but is not reliable in nature that is becomes potentially misleading. For instance if the claim for damages is disputed under a legal action then such amount or amounts in the final statement may not be recognizable, even though such amount has to be disclosed in the balance sheet (Framework 31-32). Comparability The financial statements of any entity must render users the capability of comparison. Comparison can be based through time so that the trend of financial position and the entities’ performance can be gauged by the user. Also to measure the relative fiscal position, cash flows and financial performance of different entities the final statements must be comparable. Consequently, the measurement and presentation of the financial result of similar transactions and other effects must be carried out in a coherent way throughout a firm and over time for that firm and in a dependable way for different firms. A vital proposition of the qualitative characteristic of comparability is that users have to be communicated the accounting policies applied in the formulation of the financial statements. Also they have to be made aware of any alterations that might take place in those policies and the results of such changes. Users must be able to recognize the differences between the accounting guidelines for same transactions and other outcomes employed by the same entity from period to period and by dissimilar entities (Framework 39-42). Main Purposes of Published Accounts of Companies Many companies view their annual statements as a potential efficient marketing instrument to broadcast their position on company fortunes. Many medium-sized and large companies allot large amount of money to make their final statements as attractive and information oriented as possible. In such cases the final statements becomes a medium through which a firm can link, control, advocate, orate, and argue any issues and topics (Reference for Business » Encyclopedia of Business, 2nd ed., retrieved from http://www.referenceforbusiness.com/small/A-Bo/Annual-Reports.html on April 7, 2010). In developing economies, published accounts are a means of computing the degree of taxation to be bore by the company so that payment can be made to the government. Whereas in cases of developed economies published accounts/statements serve as a measuring tool, a marketing written document which helps in attracting not only capitalists but also staff, suppliers and banks for loans, a stock market listing necessity and a means of market study data. Modern business is actually a galaxy of diverse relationships. These relationships are the ones that exist between the owners and employees and individual firm and its creditors. The common objective of the users of the published accounts is the economic welfare of the firm. Thus it can be said that "a firms success and even survival, its ability and willingness to maintain production and to invest in fixed or working capital are to a very considerable extent determined by its financial policies, both past and present (Friend, 1954). According to Helfert (1967) "financial analysis helps the manager or outside analyst appraise management performance, corporate efficiency, financial strengths and weaknesses credit worthiness and other aspects of a company, division or other financial unit based upon its past performance." The major users of financial statements are investors or capitalists, lenders, suppliers and in some cases the government may also make use of published financial statements. The purpose of published financial statements depends on the users. "The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions" (IASB) Owners and managers make use of published financial statements to take crucial business decisions which might affect the continued operations of a firm. Performance of financial analysis on these statements aids the management by providing a more elaborated understanding of the estimates. These statements are also utilized as a component of managements yearly report to the stockholders. Actually based on the published figures it is not possible to make precise comparability with regard to the performance of diverse companies in the same industry. Thus in order to decide the most attractive shares the trend is progressively more towards opening the books. Thus many corporations have recognized that in order to tap the capital market they will have to highlight the performance in their published accounts. They try to voluntarily give their shareholders more information than those required by law even though in some countries law is getting tougher with reference to disclosure requirements (Ball, 1967). The most important purpose of the published annual accounts of a business is to deliver info to the proprietors, which provide how their funds have been applied and the profits gained from such use. Thus financial analysis conducted from the published account helps the shareholders not only to decide which company to invest but it also helps them to understand and know about the management performance, financial strengths and weaknesses, credit worthiness, corporate efficiency and other facets of a company founded on its past performance proportional to that of its challengers. The compromise of published accounts may limit guesswork; and in reality they were not planned to induce investment decisions. In a case determined by the House of Lords -- Caparo Industries plc v Dickman and Others (1990) -- it was held that "liability for economic loss due to negligent mis-statement was confined to cases where the statement or advice had been given to a known recipient for a specific purpose of which the maker was aware and upon which the recipient had relied and acted upon to his detriment" (Malcolm, 2001). The outcome of all this is that investors/shareholders who depend on published accounts to decide with regard to their investment decision have no refuge in law in case the accounts turn out to be erroneous, or even sham. Additionally, for convenient intentions, it is doubtful that losses could be retrieved from the directors. Reference 1. Erich A Helfert, Techniques of Financial Analysis (Illinois Richard D Irwin Inc , 1967), page 2. 2. Howard, Malcolm, 2001. Accounting for share options. Publication: Financial Management (UK). 3. IAS PLUS, 2004. IASB Potential agenda project: Measurement, 4 August. Available at http://www.iasplus.com/agenda/measure .htm. 4. IASB Framework for the Preparation and Presentation of Financial Statements. April 1989. 5. Irwm Friend, What Business Can Do to Prevent Recessions from Problems in Anti-Recession Policy (New York Committee for Economic Development, 1954): page 6. 6. Reference for Business » Encyclopedia of Business, 2nd ed., retrieved from http://www.referenceforbusiness.com/small/A-Bo/Annual-Reports.html on April 7, 2010. 7. Robert Ball, The Declining Art of Concealing the Figures, Fortune, September 15th, 1967, page 137. 8. "The Framework for the Preparation and Presentation of Financial Statements" International Accounting Standards Board. Accessed 06 April 2010. Bibliography 1. Bartram, Peter. "Are You Being Read?" The Director. November 1998. 2. Fulkerson, Jennifer. "How Investors Use Annual Reports." American Demographics. May 1996. 3. Parks, Paula Lynn. "Satisfy Stockholders." Black Enterprise. April 2000. 4. Samuelson, Robert J. "Close to the Lunatic Edge: Corporate Annual Reports Often Tell Us More Than Their Authors Know or Intend." Newsweek. April 21, 1997. Read More