Financial Reporting: Conceptual Framework and Application

This report provides a comprehensive overview of financial reporting, encompassing its conceptual framework, objectives, and the crucial qualitative characteristics that underpin it. The report delves into the significance of financial reporting in representing an organization's financial activities and its role in facilitating informed decision-making for both internal and external stakeholders, including investors and creditors. It explores fundamental qualitative characteristics such as relevance and faithful representation, and how these characteristics enhance the usefulness of financial information. The report also examines the key concepts applied during the preparation of financial statements, including the economic entity, going concern, monetary unit, periodicity, and accrual basis assumptions. Furthermore, it emphasizes the importance of adhering to globally recognized accounting standards, such as IFRS, to ensure standardization and comparability of financial information across different entities. The report concludes by highlighting the essential role of financial reporting in presenting accurate accounting statements and supporting effective decision-making processes. The report includes a detailed table of contents, introduction, task-based sections, and references for further reading.

Financial Reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
1. Explaining qualitative characteristic of concepts for financial reporting...........................1
2. Concept applied while preparing the financial statements.................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Financial reporting is the representation of the formal record of the financial activities of a
person, entities or other businesses. It implies for the process of identifying the strength and
weaknesses of the enterprise in monetary terms by setting up strategic relationship between the
elements of income and balance sheet statement. The present study describes the conceptual
framework and objectives of the financial reporting. Furthermore, it explains about the
qualitative characteristics of the reporting and the assumptions that are taken into account while
preparing the financial statements.
TASK
1. Explaining qualitative characteristic of concepts for financial reporting.
The conceptual framework addresses the objectives of the financial reporting and the
qualitative characteristics of the financial information. The framework also includes the
recognition, measurement and disclosures (Satsuk and et.al., 2018). The primary purpose of
financial reporting is to provide information to the internal and the external users like investors,
creditors, managers, owners, government etc.
Fundamental qualitative characteristics- Relevance- the confirmatory value and the predictive value are interrelated to each other
and makes the financial information more relevant (Dou and et.al., 2018). It is very
important the financial information must contain a high relevance so that users can make
a difference in their decision making. Information that fulfils the material concept is
accounted as more relevant. Faithful representation- It means the representation of the economic phenomenon in
number or words in the financial reports rather than just representing only the legal form.
A useful information is one which is not only relevant but also faithfully represent the
purpose for which it is framed. This qualitative feature seeks to maximization of the
underlying quality such as neutrality, error free and completeness.
There are few characteristics which enhances the quality of financial reporting and are
mentioned as follows: Comparability- Information about the entity's reporting becomes more useful when it can
be compared with the information of the other entities (Amiram and et.al., 2018). It

enables the user in determining the similarities and the differences among several entities
so that best alternative can be chosen by them. Verifiability- It means that reporting on which different independent and knowledgeable
observers reach the consensus, that particular information presented is faithful. It assists
the users in assuring that the economic phenomena depicted is in accordance with the
purpose. Timeliness- Timely information must be provided to the decision makers so that it could
be capable of influencing the decisions of them. This characteristic helps in avoiding the
delay in availing the information.
 Understandability- Presenting, classifying and characterising the information concisely
and clearly makes the reporting understandable (Leuz and Wysocki, 2016). Some
phenomena that are present in the statement are complex and are not easy for
understanding so for excluding such data, complete specification must be provided.
Financial reports are framed for those people who has the wide knowledge of economic
or business activities and who analyse or review the information with due diligence.
2. Concept applied while preparing the financial statements.
In the context of business unit, with the motive to assess monetary performance,
accountant prepare as well as disclose final accounts by taking into account specific concepts
and principles. Hence, by preparing and furnishing annual reports to the stakeholders business
units disclose their financial performance. Practice of recording the items in the balance sheet
and income statement helps in recovering future monetary benefits that are associated in relation
to the items and measurement of the cost of items can be reliably assessed. The general criteria
followed under recognition is assets and liabilities are recognised in balance sheet for measuring
the financial position of the company (Abbott and et.al., 2016). The income and the expenditure
are recognised in income statement for assessing the financial performance of the corporate.
Measurement concept includes assigning the monetary values at which elements of financial
statements will be reported or recognised. The measurements are based on different assumptions
in varying situations such as historical cost, realizable value, current cost and present value.
Basic assumptions- At the time of drafting financial statements assumptions which are
followed by an accountant enumerated below:

 Economic entities- According to this assumption, the economic activities of the
enterprise can be determined with a specific accountability unit. It is also called as the
entity concept. It states that the activities of the business are separate from its owners. An
individual, divisions and departments of the company are considered as distinct entities. Going concern- This assumption states that a business entity will remain in operational
existence for a foreseeable future or indefinite period (Satsuk and et.al., 2018). This
continuity assumes that the cost on the assets of the business will be recovered in the
future by way of return generated through the successful operations. The values of the
balance sheet for the assets are shown or recorded at the actual realizable cost. Monetary unit- As per this assumption, the accounting records only those transactions
that are expressed in terms of money. The other qualitative characteristics like employee
satisfaction, employee morale are not included. It includes only those events that can be
measured in terms of money. Periodicity- The time period assumption assumes that the economic life of the business
can be divided into artificial time periods such as monthly, quarterly and annually. In
accordance with this, companies report in discrete interval of time (Dou and et.al., 2018).
This allows the enterprise to send interim reports for providing the information about the
activities of the corporate to the shareholders.
 Accrual basis- It is a basic assumption in the process of accounting. It assumes that
revenue is realized at the time of sales of goods and services irrespective of the fact when
the actual cash is received. In other words, such concept of accounting lays focus on
recording revenue/expenses at the time when they earned/incurred.
CONCLUSION
From the above report it is concluded that financial reporting is an essential function for
every organization as it helps in presenting the accounting statements accurately and facilitate
decision making for the users. It can be summarized from the report that for ensuring
standardization companies should follow IFRS. Besides this, it can be inferred that by following
globally recognized accounting tools and concepts

REFERENCES
Books and Journals
Abbott, L. J. and et.al., 2016. Internal audit quality and financial reporting quality: The joint
importance of independence and competence. Journal of Accounting Research. 54(1). pp.3-
40.
Amiram, D. and et.al., 2018. Financial reporting fraud and other forms of misconduct: a
multidisciplinary review of the literature. Review of Accounting Studies. 23(2). pp.732-783.
Dou, Y. and et.al., 2018. Blockholder exit threats and financial reporting quality. Contemporary
Accounting Research. 35(2). pp.1004-1028.
Leuz, C. and Wysocki, P. D., 2016. The economics of disclosure and financial reporting
regulation: Evidence and suggestions for future research. Journal of Accounting
Research. 54(2). pp.525-622.
Satsuk, T. P. and et.al., 2018. International standards of the public sector financial reporting in
ensuring economic security. Revista Publicando. 5(18). pp.330-340.
Online
Conceptual Framework for Financial Reporting (2018). 2019. [Online]. Available through:
<https://www.iasplus.com/en/standards/other/framework>