Financial Reporting

This homework assignment examines the fundamental concepts and assumptions of financial reporting, analyzing their importance in providing quality information to stakeholders. It critically assesses key qualitative characteristics and explores how concepts like recognition, measurement, and disclosure are applied in financial statements. The assignment also examines basic assumptions like the economic entity, monetary unit, periodicity, going concern, and accrual basis, illustrating their practical application with examples.

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Critical assessment of each concept/ assumptions listed under fundamental and enhancing
qualitative characteristics............................................................................................................1
TASK 2............................................................................................................................................2
Illustrating with examples that concepts/ assumptions might be applied to financial statements
to offer quality information for stakeholders..............................................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial reporting is defined as disclosure of financial outcome and its related
information to external stakeholders and management that how organisation is performing over
specific duration. The present report will give overview of conceptual framework which is
required by financial statements and which comply with different accounting concepts. In the
same series, it will articulate about proper assumptions and concept as important element for
preparing financial statements.
TASK 1
Critical assessment of each concept/ assumptions listed under fundamental and enhancing
qualitative characteristics
The International Accounting standards boards had issued a conceptual framework for
preparation and presentation of financial statements. It sets out multiple concepts which shape
these financial statements for external users as it has absence of status of accounting standard
along with case of Statement of Principles through accounting standards of UK (IASB publishes
revised Conceptual Framework, 2019). This assist for future development of IFRS standards or
for reviewing existing international accounting standards and promotes regulations
harmonisation, procedures and accounting standards related to financial statements to decrease
number of alternative treatments of accounting.
The objective of financial reporting is to offer financial information related to financial
position, performance and alterations in financial position of enterprise which is important for
broad range of users for purpose of undertaking economic and business decisions (Chychyla,
Leone and Minutti-Meza, 2019).
The fundamental concept of financial reporting is its objective which states that this
reporting helps in bridging the gap between why accounting is done in an organisation and how
it is done in an organisation. The two aspects of this bridge states that accounting is done to
successfully maintaining records of an organisation by using various financial reporting methods
such as recognition in which all transactions are identified, measurements in which all
calculations of records are done and financial statement presentation in which all transactions are
presented in relevant records.
Fundamental quality:
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Faithful representation and relevance are qualitative characteristics as faithful
representation directly seeks to increase underlying features of neutrality, completeness and
freedom by error. It is referred as representation of substance of economic phenomena rather
than legal representation. With context of relevant financial information is with ability for
creating difference in decision undertaken through users (Kalyani, Mathur and Gupta, 2019).
Financial information has confirmatory, predictive value or both as these both are interrelated.
Thus, information must be both relevant and faithfully represented with its application.
Moreover, to enhance these qualitative characteristics there is implication of
comparability, verifiability, timeliness and understandability. Information related to reporting
entity is essential as it could be compared with same information about other business for
another date and duration. It enables users for determining and understanding similarities and
differences. Verifiability leads to assure users that information represents faithfully the economic
phenomena as it shows different knowledgeable and independent observes to reach consensus.
Timeliness means about availability of information to decision makers in time about capability
for influencing decisions and understandability by classifying, presenting and characterising
information.
TASK 2
Illustrating with examples that concepts/ assumptions might be applied to financial statements to
offer quality information for stakeholders
Recognition is defined as process to incorporate statement of financial position and profit
and loss which attains definition of element along with satisfying criteria for purpose of
recognition. It is highly probable about future economic benefit linked with item would flow to
or for forming entity and cost of item or its value could be measured through reliability. After
recognition, decision has to be undertaken that how it would be measured (Luke, 2019). For
purpose of inclusion in financial statements, there must be presence of monetary value as it is on
bases of current and historical cost, realisable and present value. According to framework,
measurement basis must be commonly adopted through organization for forming financial
statements is historical cost. Moreover, disclosure concept is considered in financial statements
as statement of comprehensive income is newly aggregated in statement of financial
performance. On the contrary, this framework does not include single or two statements as it has
only need of total or subtotal for profit and loss provided. Furthermore, it has been noticed that
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income statement is initial source of information about business's financial performance for
reporting period and it is only represented in exceptional circumstances.
The basic assumptions are:
 Economic entity: Each of business transactions are kept with accountant of sole
proprietorship separately through personal transactions of owner of business. On
basis of legal perspective. Owner and sole proprietor are considered to be single
entity but for accounting, they are two different entities (Dumay, La Torre and
Farneti, 2019). For instance, if owners pay cash in business then business should
record cash coming in bank account as asset and similarly, trace amount owned to
owner as capital.
 Monetary unit: In this assumption, each business transactions and relationships are
expressed in terms of money or monetary units. For example, management team of
business is most valuable asset but in this one does not have ability to convert these
talented people in monetary unit.
 Periodicity: It has been stated that accounting guideline allows one to divide
complex, ongoing activities of business into specific duration of year, month, week,
quarter etc. For instance, tax bill of property is retained on 20 December of every year
so on profit and loss statement for year ended 31st December 2018 amount is known.
 Going concern: On basis of this principle it has been assumed that company would
continue to exist for long enough to carry its aims along with commitment and would
not liquidate foreseeable future (Accounting principles, 2019). In case financial
situation of company, accountant has belief that company would not be capable for
continue so this assessment must be disclosed. For instance, eastern organisations
close its one branch and continue with others. So in this organization is going concern
due to shutting down small part of business does not directly impair ability of
business to operate.
 Accrual basis: The method of accounting under which revenues are recognised on
profit and loss statement when they are earned. In this aspect, balance sheet is also
impacted at time of revenue by increment in cash, accounts receivable and decreased
in unearned revenues. In this accrual basis, expenses are matched with revenue of
statement of profit and loss when expenses get expired with transformed title to
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buyer. For instance, company must record expense for estimated bad debts which
have not yet incurred.
CONCLUSION
From the above report it had been concluded that for business decision making, there
must be appropriate application of fundamental and qualitative characteristics such as relevance,
faithful representation and recognition, measurement and concept of disclosure.
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REFERENCES
Books and Journals
Chychyla, R., Leone, A. J., & Minutti-Meza, M. (2019). Complexity of financial reporting
standards and accounting expertise. Journal of Accounting and Economics. 67(1). 226-253.
Dumay, J., La Torre, M., & Farneti, F. (2019). Developing trust through stewardship:
Implications for intellectual capital, integrated reporting, and the EU Directive
2014/95/EU. Journal of Intellectual Capital. 20(1). 11-39.
Kalyani, S., Mathur, N., & Gupta, P. (2019). Does Corporate Governance Affect the Financial
Performance and Quality of Financial Reporting of Companies? A Study on Selected
Indian Companies. In Business Governance and Society (pp. 105-125). Palgrave
Macmillan, Cham.
Luke, B. (2019). A Review of Third Sector Reporting Frameworks: Communicating Value
Created in Small and Micro Social Enterprises. In Handbook of Research on Value
Creation for Small and Micro Social Enterprises (pp. 26-45). IGI Global.
Tomy, R. E. (2019). Threat of entry and the use of discretion in banks’ financial
reporting. Journal of Accounting and Economics. 67(1). 1-35.
Online
Accounting principles. 2019. [Online]. Available through
<https://www.accountingcoach.com/accounting-principles/explanation>.
IASB publishes revised Conceptual Framework. 2019. [Online]. Available through
<https://www.iasplus.com/en/news/2018/03/cf>.
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