In addition the 2018 revised Conceptual Framework sets out:
- the qualitative characteristics of useful financial information;
- a description of the reporting entity and its boundary;
- definitions of an asset, a liability, equity, income and expenses and guidance supporting these definitions;
- criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them (derecognition);
- measurement bases and guidance on when to use them;
- concepts and guidance on presentation and disclosure; and
- concepts relating to capital and capital maintenance.
All of these items will be discussed in this section(s). However, Financial Statements are a relative simple model to represent as accurate as possible the financial outcome of a business model operated by the reporting entity’s management and governing board.
General purpose financial reports are a central component of, and support and enhance, transparent financial reporting by governments and other public sector entities. general purpose financial reports are financial reports intended to meet the information needs of users who are unable to require the preparation of financial reports tailored to meet their specific information needs.
However, general purpose financial reports do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. Those users need to consider pertinent information from other sources, for example, general economic conditions and expectations, political events and political climate, and industry and company outlooks.
To a large extent, financial reports are based on estimates, judgments and models rather than exact depictions. The Conceptual Framework establishes the concepts that underlie those estimates, judgments and models. The concepts are the goal towards which the IASB and preparers of financial reports strive.
As with most goals, the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at least not in the short term, because it takes time to understand, accept and implement new ways of analysing transactions and other events. Nevertheless, establishing a goal towards which to strive is essential if financial reporting is to evolve so as to improve its usefulness.
General purpose financial reports provide information about the financial position of a reporting entity, which is information about the entity’s economic resources (i.e. the assets owned by the reporting entity at a certain moment in time captured in the Financial Position) and the claims against the reporting entity (i.e. the liabilities (long term and short term) payable by the reporting entity at a certain moment in time also captured in the Financial Position). Financial reports also provide information about the effects of transactions and other events that change a reporting entity’s economic resources and claims (i.e. revenue generated and expenses incurred reflected by accrual accounting resulting in a net income or net loss for a specific period of time captured in the Income Statement and cash generated and expended resulting in an increase or decrease of net cash during a specific period of time captured in the Statement of Cash Flows ). Both types of information provide useful input for decisions relating to providing resources to an entity.
The other events that change a reporting entity’s economic resources and claims also comprise change for reasons other than financial performance, such as issuing debt or equity instruments. Information about this type of change is necessary to give users a complete understanding of why the reporting entity’s economic resources and claims changed and the implications of those changes for its future financial performance. These changes are captured in the Statement of Changes in Equity and in the Statement of Cash flows (investing activities and financing activities) and in disclosures to the Financial Statements.
Following this reasoning general purpose financial reports are considered to consist of at least the following sections;
- Balance Sheet/Statement of Financial Position
- Statement of Income and/or (Comprehensive) Income
- Statement of Changes in Equity
- Statement of Cash Flows
- Notes to the Financial Statements
The order of Balance Sheet/Statement of Income etcetera is not prescribed by the Conceptual Framework or IFRS standards, many reporting entities start with the Statement of Income and/or (Comprehensive) Income wanting to focus attention of users on the performance of the reporting entity.