IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting : The qualitative characteristics are the attributes that make financial information useful. The exposure draft identifies:

  • two fundamental qualitative characteristics relevance and faithful representation
  • four enhancing qualitative characteristics: comparability, verifiability, timeliness and understandability.  They enhance the fundamental qualitative characteristics by distinguishing more useful information from less-useful information.
  • two pervasive constraints that limit the information provided by financial reporting: materiality and cost.

In developing standards, the boards will consider the qualitative characteristics so that information reported in financial reports is useful to capital providers, thus meeting the objective of general purpose financial reporting.

IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting : The boards propose that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.

The objective of financial reporting is the foundation of the conceptual framework. Other aspects of the framework – qualitative characteristics, elements of financial statements, recognition and measurement – will build on that foundation with the aim of ensuring that financial reporting achieves its objective.

IFRS Qualitative Characteristics Of Financial Reporting

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IFRS Qualitative Characteristics Of Financial Reporting : The qualitative characteristics are the attributes that make financial information useful. The exposure draft identifies:

  • two fundamental qualitative characteristics relevance and faithful representation
  • four enhancing qualitative characteristics: comparability, verifiability, timeliness and understandability.  They enhance the fundamental qualitative characteristics by distinguishing more useful information from less-useful information.
  • two pervasive constraints that limit the information provided by financial reporting: materiality and cost.

In developing standards, the boards will consider the qualitative characteristics so that information reported in financial reports is useful to capital providers, thus meeting the objective of general purpose financial reporting.

IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting : The boards published a discussion paper in November 2006. That discussion paper discussed the boards preliminary views on the objective of financial reporting and the qualitative characteristics of financial reporting. The boards received 179 comment letters from all parts of the globe. Two of the main issues raised were the following:

  • Some respondents argued that the objective of financial reporting should be broadened to encompass stewardship decisions made by capital providers.
  • Some respondents asked why the boards proposed to replace the notion of reliability with the notion of faithful representation.

During 2007 and early 2008, the boards considered the issues raised and the exposure draft is a result of that process. Please refer below for more details on the boards proposals.

IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting : Several respondents to the discussion paper expressed a concern that the proposed objective was too narrowly focused on resource allocation decisions.

Although most respondents agreed that decision-usefulness was the appropriate objective, respondents argued that capital providers make other decisions that are aided by financial reporting information in addition to resource allocation decisions.

For example, shareholders must decide how to vote on whether to retain directors or replace them and how members of management should be remunerated for their services. Shareholders  decision-making process may include evaluating how management of the entity performed against management in competing entities in similar circumstances.

In developing the exposure draft, the boards clarified that the objective of general purpose financial reporting is to provide information that is useful to capital providers (eg shareholders and lenders) for:

  • decisions about whether and how to allocate their resources to a particular entity.
  • decisions about whether and how to protect or enhance their investments. These matters are sometimes viewed as relating to managements stewardship or accountability of the entity.

IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting : In considering reliability, the boards observed that there are a variety of views of what the notion means. For example, some focus on verifiability or free from material error to the virtual exclusion of the faithful representation aspect of reliability. And to some, reliability apparently refers primarily to precision. Those considerations led the boards to consider how they could convey better what reliability means.
Accordingly, the boards propose that faithful representation encompasses all of the qualities that the previous frameworks included as aspects of reliability. Faithful representation the depiction in financial reports of the economic phenomena they purport to represent is essential if information is to be decision useful. To represent real world economic phenomena faithfully, accounting representations must be complete, neutral and free from error.

IFRS Qualitative Characteristics Of Financial Reporting

IFRS Qualitative Characteristics Of Financial Reporting : Including verifiability as a component of faithful representation could result in some information being excluded from financial reporting. For example, an entity can faithfully depict a piece of information that represents managements opinion or intentions and this information may be useful for decision-making. This information may not necessarily be directly or indirectly verifiable. Given this argument, the boards concluded that verifiability is not a component of faithful representation.

However, information that is verifiable is generally more decision useful than information that cannot be independently verified; therefore, the boards propose that verifiability should be an enhancing qualitative characteristic.

IFRS Qualitative Characteristics Of Financial Reporting

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IFRS Qualitative Characteristics Of Financial Reporting

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IFRS Qualitative Characteristics Of Financial Reporting : Financial statements are a structured representation of the financial positions and financial performance of an entity. 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. Financial statements also show the results of the management’s stewardship of the resources entrusted to it.

To meet this objective, financial statements provide information about an entity’s:

  1. Assets
  2. liabilities
  3. Equity
  4. Income and expenses, including gains and losses
  5. Contributions by and distributions to owners in their capacity as owners and
  6. Cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

The following are the general features in IFRS:

  • Fair presentation and compliance with IFRS: Fair presentation requires the faithful representation of the effects of the transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework of IFRS.
  • Going concern: Financial statements are present on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
  • Accrual basis of accounting: An entity shall recognise items as assets, liabilities, equity, income and expenses when they satisfy the definition and recognition criteria for those elements in the Framework of IFRS.
  • Materiality and aggregation: Every material class of similar items has to be presented separately. Items that are of a dissimilar nature or function shall be presented separately unless they are immaterial.
  • Offsetting: Offsetting is generally forbidden in IFRS. However certain standards require offsetting when specific conditions are satisfied (such as in case of the accounting for defined benefit liabilities in IAS 19  and the net presentation of deferred tax liabilities and deferred tax assets in IAS 12 ).
  • Frequency of reporting: IFRS requires that at least annually a complete set of financial statements is presented. However listed companies generally also publish interim financial statements (for which the accounting is fully IFRS compliant)for which the presentation is in accordance with IAS 34 Interim Financing Reporting.
  • Comparative information: IFRS requires entities to present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements. In addition comparative information shall also be provided for narrative and descriptive information if it is relevant to understanding the current period’s financial statements. The standard IAS 1 also requires an additional statement of financial position (also called a third balance sheet) when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. This for example occurred with the adoption of the revised standard IAS 19 (as of 1 January 2013) or when the new consolidation standards IFRS 10-11-12 were adopted (as of 1 January 2013 or 2014 for companies in the European Union).
  • Consistency of presentation: IFRS requires that the presentation and classification of items in the financial statements is retained from one period to the next unless:
    1. it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8; or
    2. an IFRS standard requires a change in presentation.

IFRS Qualitative Characteristics Of Financial Reporting

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