Regulatory and Conceptual Framework
I am going to analyse and evaluate the conceptual and regulatory framework of financial reporting. In order to do this I will look at the objective of financial statements, identify the users of financial statements, explain the conceptual framework for financial reporting, look at the regulatory framework for financial accounting and finally look at the three ways of achieving accounting comparability. According to IAS Plus website, 2011, the objective of financial statements is; ‘to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions’ This objective is what all entities are aiming to achieve when creating their financial statements. There are two types of framework put in place to help the company to achieve this objective. The two types of framework are conceptual framework and regulatory framework. In order for the financial statements to meet their objective they must follow the conceptual framework. Conceptual framework is, ‘not an accounting standard, sets out the principles and concepts that underlie the preparation and presentation of financial statements for external users’ (Gupta. A, p.146, 2008) Conceptual framework is basically a set of rules on the preparation and presentation off financial statements. The conceptual framework ensures that all financial statements are created correctly and are understandable. They assist many people such as; 1. ‘Preparers in applying accounting standards and in dealing with topics that have yet to form the subject of an accounting standard. 2. Auditors in forming an opinion as to whether financial statements conform to accounting standards, or not. 3. Users in analysing and interpreting the information contained in financial statements prepared in conformity with accounting standards, and 4. The Accounting Standards Board (ASB) of the ICAI in development of future accounting standards and in its review of existing ones relating to the preparation and presentation of financial statements for reducing the number of alternative accounting treatments permitted by accounting standards.’ (Gupta. A, p.146, 2008) The conceptual framework is issued by the International Accounting Standards Board and is therefore closely linked with the Accounting Standards. Following the conceptual framework assists in the creation and review of accounting standards. Without the conceptual framework, there would be no unity in the creation of financial statements. Financial statements are produced to assist the users of financial statements in decision making, for example, creditors and lenders. However, these aren’t the only two users of financial statements; there are both internal and external users of financial information. The internal users of financial statements are; * Managers such as, market manager, production supervisor, finance directors and company officers- these need financial statements in order to make decisions on planning, and organisation. In addition to all other decisions that assist in the running of the business. * Owners- the owners of the business need to know how the business is performing and what their financial position is. * Workforce- the workforce view financial statements to help gain an idea of the companies financial health. The external users of financial information are;
* Investors- they need to view financial information in order to make decisions on whether to sell, hold or buy more stock. * Creditors- creditors are suppliers and banks, they view financial information in order to evaluate the risk of selling on credit or lending money. * Government- the government use financial statements of a company to help determine their taxable income, make decisions on government grants and to assist with controlling the companies compliance with regulations. The financial statements...
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