Financial Reporting Analysis: Concepts, Assumptions, and Examples

This report delves into the realm of financial reporting, providing a comprehensive overview of its core concepts and the crucial role it plays in disseminating financial information to stakeholders. The introduction sets the stage by defining financial reporting and its significance in conveying a business's performance. Task 1 undertakes a critical assessment of both fundamental and enhancing qualitative characteristics, as outlined by the IASB's conceptual framework, emphasizing their relevance and importance. Task 2 then illustrates how these concepts and assumptions are applied to financial statements, providing concrete examples of how they contribute to the quality of information delivered to stakeholders. The report examines concepts like recognition, measurement, and disclosure, along with assumptions such as economic entities, going concern, and periodicity. The conclusion summarizes the key findings and reiterates the significance of financial reporting in the preparation and assessment of financial statements, highlighting the impact of the IASB's framework. The report concludes with a list of references, including academic journals and online resources, to support the analysis.

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Critical assessment of every concept/assumptions listed under fundamental and enhancing
qualitative characteristics............................................................................................................1
TASK 2............................................................................................................................................2
Illustrating examples about concept and assumptions might be applied to financial statements
that give quality information to stakeholders..............................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................5

INTRODUCTION
Financial reporting is known as disclosure of financial outcome along with related
information to external stakeholders and management that how business is performing in specific
duration. The present report will discuss critical assessment of every concept under fundamental
and enhancing qualitative characteristics. Simultaneously, this would illustrate their application
to financial statements for providing quality information to stakeholders.
TASK 1
Critical assessment of every concept/assumptions listed under fundamental and enhancing
qualitative characteristics
The IASB's conceptual framework develops and revises IFRS on basis of consistent
concepts, to help the preparers with context of developing consistent policies of accounting
which are not covered through standard or with choice of accounting policy, and assisting every
party for interpreting and understanding IFRS. The main objective of financial reporting is to
provide information useful in undertaking credit and investment decisions, assessing useful
information with prospects of cash flow and helps for present and potential investors to asses
business ability for generating net cash inflow (Chychyla, Leone and Minutti-Meza, 2019). On
basis of fundamental concepts of accounting are stated as recognition, measurement and
presentation of financial statements. Recognition is known as process to incorporate items in
income statement or balance sheet which is probable that future economic benefit is linked with
item which flows from or to entity and cost of value of item could be measured with reliability.
Measurement comprises assigning monetary amounts at which financial statements are reported
and recognised (IASB publishes revised Conceptual Framework, 2019). Presentation of financial
statements signifies substance of economic phenomenon rather than showing in legal aspect.
Fundamental quality
Relevance: The relevant financial information is capable for creating variation in decisions made
through users as it represents best understanding about predictive and confirmatory value which
are interrelated. Predictive value provides helps to users for anticipate and predict future
outcomes and confirmatory value enables users for confirming and checking earlier predictions
or evaluations.
Faithful representation: It has requirement of substance of transactions which directly differs
through legal form and then these transactions must be accountant as per substance and
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economic reality. In simple words, it signifies item as representative of real world phenomenon
that purports for representing. It is necessity as various users have absence of time and expertise
for evaluating factual content of information. It is known as numbers and descriptions match
which is actually happened or existed. Thus, information should be neutral, complete and free of
material error and neutral depiction is directly supported through exercise of prudence and
prudence is exercise of caution for making judgements under various conditions of uncertainty
(Accounting principles, 2019). Henceforth, information should be relevant and faithfully
represented to be useful.
Enhancing quality
It reflects good understanding of various concepts such as comparability, verifiability and
understandability which are described in detailed aspect:
Comparability: Information that is directly reported and measured in same manner for multiple
companies are replicated considerable. It enables users for determining the actual similarities and
differences in economic events from duration. With reference to this application, organization
reflects consistent application of accounting standards.
Verifiability: It helps for assuring users that information shows faithfully economic phenomena
which purports for representing (Bratten, Causholli and Omer, 2019).
Timeliness: It means availability of information to decision makers in time to be capable for
influencing their decisions.
Understandability: Characterising, presenting and classifying information in clear and concise
manner makes it understandable. Some phenomena are inherently complex and could not make
easy for understand, to eliminate information would make financial reports potentially
misleading and incomplete.
TASK 2
Illustrating examples about concept and assumptions might be applied to financial statements
that give quality information to stakeholders
Concepts might be applied to financial statements
Recognition: The basic criteria for purpose of recognising elements in financial
statements is stated as Assets, liabilities, expenses and income. Assets and liabilities are
recognised in balance sheet as when it is probable that future economic advantage would flow to
entity along with cost of value that could be measured relatability are asset recognition. With
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context of liability, outflow of resources embodying economic advantages with settlement of
present obligation. The increment in future economic benefits on basis of increase and decrease
of liability arose could be measure reliably is income and vice versa as expense (Tomy, 2019).
Measurement: It comprise historical and replacement cost along with fair value and
replacement cost.
Disclosure: It might have material impact on financial statements of company as parties
involved in business transaction should disclose each material information to execution of
transaction.
Assumptions might be applied to financial statements
Economic entities: It separates transaction carried out through owner and business entity
and applied to different divisions within similar organizations (Ewert and Wagenhofer, 2019).
For instance, X has web designing business so internet cost, purchase of web design software is
attributed as business but travel cost for holidays in Greece and purchase of car is not accounted
as business transactions.
Going concern: It implies that business to remain in business with foreseeable future
with assumption about its existence in years ahead. For instance, every organization operates
with context to going concern but well known firms ceased to going concern such as Lehman
Brothers an investment banking firm was industry leader till it closed in September 2008,
because of global financial crisis.
Monetary units: The company records transaction which are restricted to those which
could be reduced to monetary terms. For instance, Y can consider acquisition cost of 40000 but
could not imply inflation in its books of account.
Periodicity: It shows that business could report its financial outcome which is certain
with designated period of time as consistently accounting could report its cash flows and
outcome on monthly, quarterly or yearly basis.
Accrual basis: It traces revenue with incur of revenues when earned and similar with
expenses as well. For instance, company should record its bad debts when they incur not with
intuition prior to it (Pavlopoulos, Magnis and Iatridis, 2019).
CONCLUSION
On basis of above report, it had been concluded that financial reporting is very important
for preparation of financial statements and to asses position as well. It had shown that conceptual
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framework IASB helps in developing consistent policies of accounting which are mandatory.
Thus, it had shown fundamental and enhancing quality with relevance, faithful representation,
verifiability, timeliness, comparability and understandability.
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REFERENCES
Books and Journals
Bratten, B., Causholli, M. and Omer, T. C., 2019. Audit firm tenure, bank complexity, and
financial reporting quality. Contemporary Accounting Research. 36(1). pp.295-325.
Chychyla, R., Leone, A. J. and Minutti-Meza, M., 2019. Complexity of financial reporting
standards and accounting expertise. Journal of Accounting and Economics. 67(1). pp.226-
253.
Ewert, R. and Wagenhofer, A., 2019. Effects of Increasing Enforcement on Financial Reporting
Quality and Audit Quality. Journal of Accounting Research. 57(1). pp.121-168.
Pavlopoulos, A., Magnis, C. and Iatridis, G. E., 2019. Integrated reporting: An accounting
disclosure tool for high quality financial reporting. Research in International Business and
Finance. 49. pp.13-40.
Tomy, R. E., 2019. Threat of entry and the use of discretion in banks’ financial
reporting. Journal of Accounting and Economics. 67(1). pp.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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