The Financial Accounting Standards Board has developed a conceptual framework fo

Question

The Financial Accounting Standards Board has developed a conceptual framework for financial accounting and reporting. The FASB has issued seven Statements of Financial Accounting Concepts.

These statements set forth objectives and fundamentals that will be the basis for developing financial accounting and reporting standards. The objectives identify the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting concepts that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of Statement of Financial Accounting Concepts No. 2, "Qualitative Characteristics of Accounting Information," is to examine the characteristics that make accounting information useful. The characteristics or qualities of information discussed in Concepts No. 2 are the ingredients that make information useful and are the qualities to be sought when accounting choices are made.

What is the most important quality for accounting information as identified in Statement of Financial Accounting Concepts No. 2? Explain why it is the most important.

Explanation / Answer

The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial statements for external users. The IFRS Framework serves as a guide to the Board in developing future IFRSs and as a guide to resolving accounting issues that are not addressed directly in an International Accounting Standard or International Financial Reporting Standard or Interpretation. In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the IFRS Framework. This elevation of the importance of the [IFRS] Framework was added in the 2003 revisions to IAS 8. The IFRS Framework Scope The IFRS Framework adresses: the objective of financial reporting the qualitative characteristics of useful financial information the reporting entity the definition, recognition and measurement of the elements from which financial statements are constructed concepts of capital and capital maintenance [IFRS Framework, Scope] Chapter 1: The Objective of general purpose financial reporting The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments and providing or settling loans or other forms of credit. [F OB2] The primary users need information about the resources of the entity not only to assess an entity's prospects for future net cash inflows but also how effectively and efficiently management has discharged their responsibilities to use the entity's existing resources (i.e., stewardship). [F OB4] The IFRS Framework notes that general purpose financial reports cannot provide all the information that users may need to make economic decisions. They will need to consider pertinent information from other sources as well. [F OB6] The IFRS Framework notes that other parties, including prudential and market regulators, may find general purpose financial reports useful. However, the Board considered that the objectives of general purpose financial reporting and the objectives of financial regulation may not be consistent. Hence, regulators are not considered a primary user and general purpose financial reports are not primarily directed to regulators or other parties. [F OB10 and F BC1.20-BC 1.23] Information about a reporting entity's economic resources, claims, and changes in resources and claims Economic resources and claims Information about the nature and amounts of a reporting entity's economic resources and claims assists users to assess that entity's financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability to obtain financing. Information about the claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the reporting entity. [F OB13] A reporting entity's economic resources and claims are reported in the statement of financial position. [See IAS 1.54-80A] Changes in economic resources and claims Changes in a reporting entity's economic resources and claims result from that entity's performance and from other events or transactions such as issuing debt or equity instruments. Users need to be able to distinguish between both of these changes. [F OB15] Financial performance reflected by accrual accounting Information about a reporting entity's financial performance during a period, representing changes in economic resources and claims other than those obtained directly from investors and creditors, is useful in assessing the entity's past and future ability to generate net cash inflows. Such information may also indicate the extent to which general economic events have changed the entity's ability to generate future cash inflows. [F OB18-OB19] The changes in an entity's economic resources and claims are presented in the statement of comprehensive income. [See IAS 1.81-105] Financial performance reflected by past cash flows Information about a reporting entity's cash flows during the reporting period also assists users to assess the entity's ability to generate future net cash inflows. This information indicates how the entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends to shareholders, etc. [F OB20] The changes in the entity's cash flows are presented in the statement of cash flows. [See IAS 7] Changes in economic resources and claims not resulting from financial performance Information about changes in an entity's economic resources and claims resulting from events and transactions other than financial performance, such as the issue of equity instruments or distributions of cash or other assets to shareholders is necessary to complete the picture of the total change in the entity's economic resources and claims. [F OB21] The changes in an entity's economic resources and claims not resulting from financial performance is presented in the statement of changes in equity. [See IAS 1.106-110]

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