Conceptual Framework for Financial Reporting – Just as an introduction some language thoughts to better understand what we are talking about.
Conceptual: consisting of concepts Conceptual Framework for Financial Reporting
Concept: an abstract or generic idea generalized from particular instances Conceptual Framework for Financial Reporting
Framework: a basic conceptual structure (as of ideas) Conceptual Framework for Financial Reporting
So that is a lot of concepts! Conceptual Framework for Financial Reporting
It shows implicit that it is about ideas, thoughts and/or notions. It is likely to suggest the result of reflecting, reasoning or meditating rather than of imagining. So it is the result of a due care thought process to enhance the understanding of Financial Statements and the IFRS standards defined to contribute to transparency, strengthen accountability and contribute to economic efficiency.
Transparency – enhancing the comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions.
Strengthen accountability – reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Standards and Accounting Guidelines based on the Conceptual Framework provide information needed to hold management to account. As a source of comparable information, those Standards and Accounting Guidelines are also of vital importance to regulators. Conceptual Framework for Financial Reporting
Contribute to economic efficiency – helping investors to identify opportunities and risks, thus improving capital allocation. For businesses, the use of a single, trusted accounting language derived from Standards and Accounting Guidelines based on the Conceptual Framework lowers the cost of capital and reduces reporting costs.
The Framework’s purpose is to assist the IASB in developing and revising IFRSs that are based on consistent concepts, to help preparers to develop consistent accounting policies for areas that are not covered by a standard or where there is choice of accounting policy, and to assist all parties to understand and interpret IFRS.
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(b) requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. Conceptual Framework for Financial Reporting
Read the Footnotes
A horse called “Read The Footnotes” ran in the 2004 Kentucky Derby. He finished seventh, but if he had won, it would have been a victory for financial literacy proponents everywhere. It’s so important to read the footnotes. The footnotes to financial statements are packed with information. Here are some of the highlights:
- Significant accounting policies and practices – Companies are required to disclose the accounting policies that are most important to the portrayal of the company’s financial condition and results. These often require management’s most difficult, subjective or complex judgments.
- Income taxes – The footnotes provide detailed information about the company’s current and deferred income taxes. The information is broken down by level – federal, state, local and/or foreign, and the main items that affect the company’s effective tax rate are described.
- Pension plans and other retirement programs – The footnotes discuss the company’s pension plans and other retirement or post-employment benefit programs. The notes contain specific information about the assets and costs of these programs, and indicate whether and by how much the plans are over- or under-funded.
- Stock options – The notes also contain information about stock options granted to officers and employees, including the method of accounting for stock-based compensation and the effect of the method on reported results.
Read the MD&A
You can find a narrative explanation of a company’s financial performance in a section of the quarterly or annual report entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” MD&A is management’s opportunity to provide investors with its view of the financial performance and condition of the company. It’s management’s opportunity to tell investors what the financial statements show and do not show, as well as important trends and risks that have shaped the past or are reasonably likely to shape the company’s future.
The SEC’s rules governing MD&A require disclosure about trends, events or uncertainties known to management that would have a material impact on reported financial information. The purpose of MD&A is to provide investors with information that the company’s management believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It is intended to help investors to see the company through the eyes of management. It is also intended to provide context for the financial statements and information about the company’s earnings and cash flows.
See also: Conceptual Framework 2018
Conceptual Framework for Financial Reporting
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