International reporting financial standards are the guidelines that are used when preparing financial reports (Rutherford, 31). They are used by the international accounting standards board as an outline when preparing financial statements. These financial standards gives the accountants a guideline when they are preparing financial statements and this ensure that the accountants follow the right financial standards and prepare financial reports as per the required financial statements (Rutherford, 31).
The international financial reporting standards ensure that information provided concerning the entity ensures that transparency is maintained when preparing financial statements (Schroeder, 20). It also ensures that people who are interested in investing in the business receive information that is more precise and reliable (Melville, 202). Financial reporting involves the preparation of financial information to users who include customers, banks, government, employees, investors and management who need this information to make informed economic decisions (Schroeder, 20).
Before all these users make any decision concerning the organization they will need to review the financial reports of the organization to help them make decisions. The organization which is the reporting entity usually prepares financial statements which include the balance sheet, statement of retained earnings, profit and loss account and cash flow statement (Melville, 202). These financial statements help users of information to be able to understand how the management uses the entity’s resources to achieve the set goals and objectives.
It also helps users to know the financial position of the business and the cash flow of the entity (Schroeder, 20). Investors in the entity need the financial reports enable them know the returns of their investment in the organization. Information provided in the financial statements helps them to know when to buy or sell their investment. It also helps them to know when to hold and also provide information which helps to determine whether the entity would be able to pay dividends at the right time (Rutherford, 31).
Information in financial statements helps lenders to determine whether it should lend to the entity or not. It gives lender information to determine whether the entity would be able to pay loans (Rutherford, 31). Employees also use the information to determine if their employer would be able to pay them in time and if the employer would b e able to provide them with retirement benefits. The government needs the financial reports to determine whether an entity is able to pay taxes and also for the purpose of resource allocation.
Customers are also users of the information and they use this information to know the stability and continuity of the entity. Objectives of financial reporting The general-purpose of financial reporting is to give users of financial statements the most useful information as possible at the least cost to enable them to make informed economic decisions (Melville, 202). On the other hand, users of this accounting information need to cover a rational understanding of business as well as financial accounting procedures to understand financial statements well.
Internationally, as planned at distinctively in the present conceptual framework through the IASB, there are two key goals of financial reporting (Rutherford, 31). The main goal of financial reporting is to enable the management to provide information to the owner or shareholder of the business to show how they have used the entity’s resources to achieve the set goals and objectives in the organization (Rutherford, 31). Since the shareholders have given the management powers to use resources of the business, the management therefore has the responsibility to report to the shareholder concerning the performance of the business.
The information that is provided through financial reporting also helps to give information about the financial performance and situation of the business. This is help when it comes to the creation of economic resolutions. Management should ensure that they maximize the shareholders’ wealth and this should be reflected in the financial statements (Melville, 202). Underlying assumption of international financial reporting standard Accrual Basis Financial reports that are prepared by an entity are prepared on the basis of accrual so as to meet the objectives of an entity (Melville, 202).
This means that transactions are recognized when they occur and not when cash is received. This assumption helps to provide information about past events that are useful for decision making by the users of the information. Going concern assumption This assumption assumes that the business would be in operation for the foreseeable future and that the entity has no intentions to close the business in the near future (Michael et al, 2003). The qualitative characteristics of financial reporting
These are qualities that make financial reporting useful to user of financial information when making economic decisions. The main qualitative characteristics of financial information include understability of the information, relevancy of information, reliability of information and comparability (Bromwich et al, 2006). The quality of understability requires that financial statements must be prepared in a manner that can be easily understood by users (Michael et al, 2003). However, users are required to have at least basics knowledge about business, accounting and economic activities.
Users should also be willing to study carefully the information provided. All information that is relevant should be included the financial reports even if there is some information that may be difficult for some users to understand (Bromwich et al, 2006). Relevance requires that all information that is relevant for decision making be included in financial reporting (Michael et al, 2003). Relevance is when information include in the financial reports affects the economic decision made by the users of the financial statements.
Information can only be useful to users if it is relevant. Relevant information helps users to make economic decisions since it gives them opportunity to assess the past, present and future actions. Information that has no effect on the decisions made by the users is irrelevant and therefore should not be included in financial reporting (Michael et al, 2003). The relevance of certain information in financial reporting may be affected by its materiality. Information that is material affects decision making in that its omission can mislead users to make wrong decisions.
Relevant information must have a predictive value and confirmatory value meaning that for information to help capital providers for instance investors to make predictive decisions about the future information should be valuable and information is able to change the past or present depending on previous evaluations (Bromwich et al, 2006). Reliability of information is important for financial reporting. For financial information to be useful for decision making it must be reliable (Rutherford, 31). Information that is free from any material error and biasness is reliable and therefore useful for decision making by users.
International financial reporting standards require that information be represented in a faithful way for such information to be reliable. Comparability of information is important in financial reporting as it helps users to compare information for different financial years and for different reports from different entities (Bromwich et al, 2006). By comparing financial reports for different periods helps to compare the performance of the entity for the different periods. Information should also be represented in their real value for financial information to be reliable.
The constraints on relevant and reliable information Timeliness of information Some information if delayed to report may be come irrelevant. For relevant information to be reported in time it will mean that some aspect of information need to be included and this may weaken the relevance of information (Michael et al, 2003). Before all relevant information is reported, the cost of reporting must be considered alongside with the benefits that the entity will gain. Relevant information should give more benefits than the cost incurred when reporting (Bromwich et al, 2006).