The IFRS Framework sets forth the concepts that underlie the preparation and presentation of financial statements for external end-users, provides further guidance on the elements from which financial statements are constructed, and discusses the concepts of capital and capital maintenance.
Objectives of Financial Statements
The Framework identifies the central objective of financial statements as providing information about a company that is useful in making economic decisions. Financial statements prepared for this purpose will meet the needs of most end-users. Users generally want information about a company's financial performance, financial position, cash flows, and ability to adapt to changes in the economic environment in which it operates.
The Framework identifies end-users as investors and potential investors, employees, lenders, suppliers, creditors, customers, governments, and the public at large.
Qualitative Characteristics of Financial Statements
The Framework prescribes a number of qualitative characteristics of financial statements. The key characteristics are relevance and reliability. Preparers can face a dilemma in satisfying both criteria at once. For example, information about the outcome of a lawsuit may be relevant, but the financial impact cannot be measured reliably.
Financial information is relevant if it has the capacity to influence an end-user's economic decisions. Relevant information will help users evaluate the past, present, and most importantly, future events in a company.
To be reliable, financial information must represent faithfully the effects of the transactions and events that it reflects. The true impact of transactions and events can be compromised by the difficulty of measuring transactions reliably.
Financial information must be easily understandable in addition to being relevant and reliable. Preparers should assume that end-users have a reasonable knowledge of business and economic activities, and an ability to comprehend complex financial matters.
End-users must be able to compare a company's financial statements through time in order to identify trends in financial performance (comparability). Hence, policies on recognition, measurement, and disclosure must be applied consistently over time. Where a company changes its accounting for the recognition or measurement of transactions, it should disclose the change in the Basis of Accounting section of its financial statements and follow the guidance set out in IFRS.
The application of qualitative characteristics and accounting standards usually results in financial statements that show a true and fair view, or fairly present a company's financial position and performance.
The Elements of Financial Statements
The Framework outlines definition and recognition criteria for assets, liabilities, equity, revenues and expenses as the elements of financial statements.
Valuation of elements is based on:
This is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction, which may involve either market measures or present-value measures.
Constraints and Assumptions
There are three inherent constraints.
A company sells goods and gets the negotiated selling price. In terms of special circumstances, the company isn't able to determine the costs for the mentioned proceeds.
Revenue and costs from the same activity have to be recognized simultaneously. Therefore, the revenue from a sale shall be recognized when the costs incurred or to be incurred with respect to the transaction can be measured reliably. Revenues won't be able to be shown in this case.
|yxten1: what is the difference between current costs of liabilities and settlement value of liabilities? by definition provided, they sound the same to me..Anybody care to explain?|
|JimM: I think it has to do with time and the phrase "normal course of business" in the settlement definition. Current cost is if it is paid off today. This might include a penalty for early payment, if the terms of the liability include such. Settlement cost is if it is paid off as normal. If there was an early payment penalty, it would not be included in this.|
|Drzewes: That's a nice thing - u pay hundreds of bucks for Schweser notes and still there's no valuation basis theory there, while a review tool (AN) has got it alright.|
|Drzewes: Great conclusion JimM|
|nneks: JimM is right xcept on the point of penalties...Current cost of liabilities refers to paying today...ONLY. And the settlement value is the cash or cash equiv. EXPECTED to be paid to settle all accounts(liabilities)|
|jpducros: This details are pretty tough to remember. Any hint to do so ?|
| Mgtw: Current value = settle NOW = early penalties |
Settlement value = settle when due = no early penalties
|spmadoff: The two qualitative characteristics of financial statements are: (1) Relevance and (2) Faithful Representation. Not Reliable|