Evaluating Financial Reporting Concepts for Stakeholder Information

This report provides a critical assessment of the conceptual framework for financial reporting, focusing on fundamental and enhancing qualitative characteristics. It discusses the importance of relevance and faithful representation in financial reporting and how these concepts, along with enhancing qualitative characteristics like timeliness, comparability, verifiability, and understandability, contribute to the quality of financial information. The report also illustrates how recognition, measurement, and disclosure principles, alongside assumptions like economic entity, going concern, monetary unit, and periodicity, are applied to financial statements to provide stakeholders with valuable insights for decision-making. Examples, such as the accrual basis of accounting, are used to demonstrate the practical application of these concepts in ensuring the accuracy and reliability of financial reporting.

Business Financial Reporting
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Table of Contents
Introduction......................................................................................................................................3
1. Critical assessment of each of the concepts / assumptions listed under the Fundamental and
Enhancing Qualitative Characteristics.............................................................................................3
2. Illustration with appropriate examples how the concepts / assumptions may be applied to the
financial statements to provide quality information for the stakeholders........................................4
Conclusion.......................................................................................................................................6
Reference list...................................................................................................................................7
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Introduction
Financial reporting is one of the primary and most essential parts of a business in the present
scenario. It is a compulsion for every business to prepare its financial reports at the end of each
accounting year. The financial reports of a company are prepared by the internal management of
a company that presents information related to the company along with presenting the financial
statements of the company. However, there are certain regulations and frameworks to be
followed in case of financial reporting. This report evaluates the conceptual framework for
financial reporting along with discussing the regulatory framework to be followed for financial
reporting.
1. Critical assessment of each of the concepts / assumptions listed under the Fundamental
and Enhancing Qualitative Characteristics
Financial reporting can be referred to as the disclosure of financial information and financial
figures of a company to the management and the public (in case if the company is involved in
public trading) on how the company has been performing or what is its present financial position
(Barth, 2018). Financial reporting in a company is done with certain objectives. They are as
follows –
 To provide information to an organization’s management for planning, analyzing,
benchmarking as well as decision-making
 To provide financial information to an organization’s investors, debt providers, creditors
and promoters to enable them in making prudent and rational decisions on investment
and credit
 To provide information about the organization’s position and financial condition to its
shareholders
 To provide information regarding the procurement and usage of resources by an
organization
The overview of financial reporting shows that the fundamental concept behind financial
reporting is to act as a bridge between the objectives of accounting and how the accounting is
done. Financial reporting is also done in a company in order to create its recognition among
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stakeholders and rival companies, in order to enable them to conduct the measurement of its
performance along with the presentation of the financial statements of the company to public.
However, there are certain fundamental qualities that financial reporting in a company requires
following. For example, the fundamental quality of financial reporting is “relevance” (Strojek-
Filus & Szewieczek, 2015). Financial reporting documents should be showing a good
understanding of the predictive value along with confirmatory value. The reporting should be
relevant enough for the users of financial reporting documents to interpret and use them. On the
other hand, another fundamental quality of financial reporting is “faithful representation”
(Strojek-Filus & Szewieczek, 2015). This means that every financial reporting document
presented by a company must be showing faithful representation of the financial condition and
performance of the company. The reports should be showing good understanding regarding the
completeness and neutrality of the reports along with displaying that the reports are free from
error.
The financial reporting documents must also contain enhancing qualitative characteristics. This
characteristic indicates that financial reporting documents should be showing a good and sound
knowledge regarding timeliness, comparability, verifiability and understandability of financial
information (Weygandt et al., 2015). The timeliness of information in financial reports refers that
accounting information must be timely enough in order to take quick actions by the users. The
comparability of financial reports should be present in order to compare it with the financial
reports of other companies or rivals. Similarly, the verifiability assures a user about the fairness
of business transactions and understandability helps financial reporting users to comprehend the
information present in the reports.
2. Illustration with appropriate examples how the concepts / assumptions may be applied to
the financial statements to provide quality information for the stakeholders.
In order to provide quality information to stakeholders, there are various concepts or assumptions
to be applied to financial statements. For example, the recognition and measurement concepts are
applied to financial statements. According to the recognition concept, an item must be
recognized in financial statements when it can meet the four basic criteria, which are subject to
materiality and cost effectiveness – definition, measurability, reliability and relevance
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(Canibano, 2017). On the other hand, the measurement concept says that an item can be entered
in financial statements based on cost principles – historical cost, current cost, present value and
realizable value (Scott, 2015). The disclosure principle is another concept, which may be applied
to financial statements in order to give necessary information to people about making decisions.
There are various assumptions such as economic entity assumption, time period assumption,
monetary unit assumption, etc., which may also be applied to financial statements. The economic
entity assumption assumes that any business is a separate economic entity from the owners of the
business and is separate from other economic entities as well (Warren & Jones, 2018). The going
concern concept assumes that a business will remain operating for the near future as well. On the
other hand, the monetary unit assumption assumes that the monetary unit in which a business
trades is long to remain stable in the long run as well and is not to lose its purchasing power
(Canibano, 2017). The periodicity assumption assumes that a business can be reporting its
financial outcomes within a certain designated period (Bebbington & Larrinaga, 2014).
The accrual basis is another commonly applied accounting concept in which expenses of a
business are matched with its related revenues and are reported only when the expenses take
place and not when the cash is actually paid (Brusca et al., 2015). For example, if an
organization ABC Ltd. purchases inventories worth $3000 from a supplier on creditor, the
statement of financial position of the company will have $3000 in the asset column as inventory
and $3000 as creditors on the liabilities. Therefore, in this way, each accounting concept and
assumptions can be applied to financial statements in order to provide quality information to
users.
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Conclusion
Thus, from the discussions made in the report, the conceptual framework for financial reporting
such as its objectives, its fundamental concepts and fundamental quality requirements have been
understood. From the discussion it has been found that the regulatory framework for financial
reporting must be based on accrual basis, going concern concept, etc. have been realized.
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Reference list
Barth, M. E. (2018). The Future of Financial Reporting: Insights from Research. Abacus.
Bebbington, J., & Larrinaga, C. (2014). Accounting and sustainable development: An
exploration. Accounting, Organizations and Society, 39(6), 395-413.
Brusca, I., Caperchione, E., Cohen, S., & Rossi, F. M. (2015). Comparing accounting systems in
Europe. In Public Sector Accounting and Auditing in Europe (pp. 235-251). Palgrave Macmillan,
London.
Canibano, L. (2017). Accounting and intangibles.
Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Strojek-Filus, M., & Szewieczek, A. (2015). Reliability and faithful representation in the
accounting theory–a literature review.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting.
John Wiley & Sons.
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