A Conceptual framework is important to financial reporting. Financial reports provide information that is useful for present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers. Hutchison-Whampoa Limited (HWL) is a global business company with long history. It is important for HWL to prepare the annual report as a basis of linking the conceptual framework in order to provide most useful information to satisfy the users all over the world.
The need for a conceptual framework for financial reporting
Conceptual framework is a coherent and consistent foundation with specific objectives which underpins the development of accounting standards. It provides guidance on identifying the boundaries of financial reporting. A conceptual framework form a theoretical basis for determining which events should be accounted for recognized, how transactions should be measured and how they should be communicated or presented to users.
Accounting standards are written by a group of people. They may have slightly different prospective of view on accounting standards. Conflict and controversial issues may exist between accounting standard. A conceptual framework is used to be a guideline in setting of accounting standards. It can reduce conflict between accounting standards and political interference in the standard setting process.
In addition, future accounting practice problems can be solved by reference to the conceptual framework. It makes sure the consistency with underlines objectives, qualitative characteristics, recognition criteria, measurement, presentation and disclosure.
The purpose of financial reporting is to provide most reliable and useful information for users in decision making. As financial statements prepared in compliance with accounting guidelines and requirement, a conceptual framework can increase financial statement users’ understanding of and confidence in financial reporting. It also enhances comparability of financial statements among different companies and credibility to the profession and accounting statements.
Reviewing the 2010 annual report of Hutchison Whampoa Limited Financial reports provide information about entity’s past and present performance, strategies, future development, business risk and the stewardship of management to shareholders in decision making. Financial reporting should be relevant, faithful representative, comparable and understandable. Shareholders rely on information provided in financial report to decide when to buy and sell, how much to invest and how long to hold an equity investment of an entity.
Fundamental qualitative characteristics: Relevance
Relevant financial information is capable of making a difference in the decisions made by shareholders. Relevant information helps shareholders make predictions about the ultimate outcome of past, present, and future events (predictive value) or confirm or correct prior evaluations (confirmatory value).
Different users may use different types of information. Shareholders are always concerned about returns on their investments. Dividend per share is often viewed as a sign that a company is doing well or not. Shareholders believe if dividends per share go up, it represents the company is performing well financially. In the financial highlights of 2010 annual report, 11% increase of dividend per share from $1.73 to $1.92 compare with year 2009. In looking back at the past nine years, dividends per share are the same at $1.73. Shareholders may take account of the earnings per share in their decision making as well.
Corporate governance is also important to shareholders for determining whether the company should be invested. Shareholders’ value can be maximized in effective corporate governance. Shareholders want to know whether the management operates the company effectively, whether they use resources properly and how they manage...
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