Conceptual Framework - Essay Example

This helps a myriad of users in making crucial economic decisions. Financial statements are needed to be prepared by keeping in view that the needs of the users of financial statements are fulfilled. They must contain all the information that is necessary for the general users’ financial information. However, some users require non-financial information about an entity which cannot be found in financial statements. The word ‘user’ mostly involves the current and prospective investors whose decisions are greatly influenced by financial statements.

Financial statements show the ability of an entity to generate cash and cash equivalents in a timely manner. This helps in the determination of the fact whether an entity can pay its employees, other obligations and can settle its liabilities in time and still generate good profits. The information about the changes in the financial position of an entity helps in the evaluation of an entity’s performance over time and the current trend i.e. whether the profits are increasing or decreasing with the passage of time.

Financial statements also present the financial structure of an entity which helps in understanding the future borrowing needs, solvency and liquidity. These are the critical pieces of information that an investor requires. Literature Review IASB requires that the financial statements must have four qualitative characteristics namely understandability, relevance, reliability and comparability. The attribute of relevance requires that the information provided in the financial statements must be relevant to the needs of the users.

Irrelevant information cannot influence the decision making of a user. Paragraph 26 of framework says that the predictive and confirmatory roles of information are interrelated. For instance, information about asset holding enables a user to predict an entity’s ability to capitalize on the opportunities and to cope with adverse situations. For users who had made such predictions in a preceding period, the same information would play a confirmatory role as an entity’s structure and the outcome of previous predictions would be evident.

Users use the financial statements to make a lot of predictions and they can make that foresight effectively if the relevant information is disclosed properly. For example, some items of income or expense are not conventionally seen in financial statements as they are unusual. Proper and separate disclosure must be made for such items so that their relevance becomes significant. For a piece of information to be reliable, it must be material. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of financial statements.

In statistical terms, information is regarded as material if it is more than 5% of the total profits. It depends on the size and nature of the item or adjudged error whether it is material or not. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful (Para 30). However, in some cases, the nature of information alone proves to be significant in the determination of its relevance. For example, when a new segment is reported, it affects the decisions of users as their assessment of risks and opportunities is affected.

The future