Financial Reporting
Module 1
The role & importance of financial reporting
1.1 – Role and importance of FR
Overview of Module 1
Roles of FR
Conceptual
Framework
Qualitative
Module 1 characteristics
Elements
Measurement
Learning Objectives – FR Module 1
• Explain the role and importance of financial reporting
1
• Explain the role of the IASB Conceptual Framework
2
• Describe the objective and limitations of general purpose financial statements
3
• Explain the definitions and recognition criteria of financial statement elements
4
• Explain the application of the standards and apply specific standards
5
• Discuss and demonstrate the importance of professional judgment and explain how
6&8 materiality is assessed and determine the materiality of transactions
• Explain the implications of using cost and fair value accounting
7
Why is financial reporting important?
Have you invested in Bitcoin?
Source: Qantas
Balanced scorecards [Link]
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Why is financial reporting important
Misstated Inflated
$5 billion assets by
in earnings $11 billion
Earnings
inflated by
$1.4 billion
Accounting
fraud of
$3.9 billion
Are you able to…
Identify the definition for each of these elements:
Assets
Liabilities
Equity
Income
Expenses
Provide users with (financial) information
Decisions…decisions…decisions…
Mary has been told that there are great advantages in investing in Timber Plantations.
Should she invest?
ANZ Bank is looking at lending to ABC Learning. Should it do this?
Frank has been asked to provide his consulting services on credit
to a manufacturing organisation. What credit terms should he offer?
Provide users with (financial) information
Learning Objectives – FR Module 1
• Explain the role and importance of financial reporting
1
• Explain the role of the IASB Conceptual Framework
2
• Describe the objective and limitations of general purpose financial statements
3
• Explain the definitions and recognition criteria of financial statement elements
4
• Explain the application of the standards and apply specific standards
5
• Discuss and demonstrate the importance of professional judgment and explain how
6&8 materiality is assessed and determine the materiality of transactions
• Explain the implications of using cost and fair value accounting
7
The objective of financial reporting
The Conceptual Framework: Chapter 1 – The objective of GPFR
1.1: The foundation of the Conceptual Framework is the ‘objective’ of GPFR.
The objective of financial reporting
The Conceptual Framework: Chapter 1 – The objective of GPFR
1.1: The foundation of the Conceptual Framework is the ‘objective’ of GPFR.
From this – everything else flows.
If we understand this, we can start understanding financial reporting and why the standards
are created the way they are
1.2: The objective of GPFR is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity.
These decisions involve:
buying, selling or holding equity or debt instruments, or
providing or settling loans and other forms of credit.
Reporting framework
Corporate
Investor Sustainability Remuneration
governance
updates reporting reporting
reporting
The importance of financial reporting
The level of resources controlled by managers
Financial impact of decisions made by users
Figure 1.1 Financial statement user decisions
User Decision & Questions
Should I invest money in the company?
- What capital gain can I expect?
Shareholders (owners)
- What dividends might I get?
- What level of risk am I taking?
Should I sell goods to the company (on credit)?
- How credit worthy is the customer?
Suppliers (creditors)
- What credit terms should I offer?
- What risk am I taking of a bad debt?
Should I lend money to the company?
- How much should I lend?
- What security is available?
Banks (lenders)
- What interest rate should I charge?
- When should the principal be repaid?
- What are the chances of a default?
How is the company performing?
Competitors - How profitable is the company?
- How strong is the balance sheet?
Role of financial reporting
Primary: Useful information for decision makers
Secondary: Stewardship or accountability
Information needs of the user
Focus of this subject is on profit-seeking entities & IFRS
Not all entities have to prepare IFRS based financial reports
This subject only focuses on an entity’s obligations under the IFRSs
The emphasis in CPA FR is on profit-seeking entities in global financial markets
Who must prepare GPFR?
In Australia, the reporting obligations for companies are found in Part 2M.3 (Financial
Reporting) of the Corporations Act.
This includes s. 292, which specifies that financial reports must be prepared by all
disclosing entities, public companies, large proprietary companies and registered
schemes, and s. 296 stipulates that the financial report must comply with accounting
standards.
The obligations of other types of entities are included in other federal or state-based
legislation.