According to Hoggett, Edwards, & Medlin (2009), the Conceptual Framework is a set of accounting theories that enable regulators to develop standards that were consistent and logically formulated, as well as provide the guidance to accountants in areas where no standards previously existed and also to better understand the standards developed.
Statement of Accounting Concepts (SAC) 1 in the Conceptual Framework states that the intent of general-purpose reporting is to provide information that is useful to those that make economic decisions, as well as for the purpose of company management discharging their responsibility to shareholders. A balance sheet, an income statement, a statement of change in equity and a statement of cash flows are all required financial statements according to the framework..
The Conceptual Framework also allows concise financial reporting to companies shareholders. The framework requires a publication of full general purpose financial reports and in some cases concise reports by reporting entities.
SAC 1 addresses the aspect which is involved in identifying the entities which are reporting entities and therefore those that are required to prepare the reports. In the Conceptual Framework reporting entities are defined as all entities, with reasonable expectancy of users dependent on general purpose financial reports to make and evaluate decisions, on the allocation of scarce resources. A reporting entity must have separation of management from economic interest, economic or political importance, and financial characteristics.
The Statement of Accounting Concepts (SAC) 2 focuses on the objectives of reporting. In this section it states that General Purpose Financial Reports shall provide information that is useful to users for making and evaluating decisions. It identifies the users of general-purpose reports, the usual information needs of such users and the broad types of information that general purpose external financial reports should provide.
The main objective is to identify the users of general purpose financial reports, the nature of their information needs and the type of reporting related to those needs, in the context of general purpose financial reports being focused at meeting the common information need of users.
The second objective is that the reports should be prepared by management and governing bodies in a way as to discharge their accountability for the resources controlled by them.
The SAC 2 divides the main users of general-purpose financial reports into the following three categories; Resource providers: this category includes employees, lenders, creditors, suppliers, and investors. The second category is recipients or consumers of goods and services (i.e. customers, beneficiaries, tax payers and rate payers).
The third category is parties performing a review or oversight function, such as parliaments, and governments.
Before the objective of general-purpose external financial reporting can be applied, the basic qualitative characteristics of financial information need to be highlighted. The framework also makes it compulsory to define the basic elements (assets, liabilities, equity, income, and expenses used in financial).
The basic qualitative characteristics that are included in the Framework are relevance, reliability, comparability and understandability.
The first characteristic states that information must be relevant to decision-making needs of users in order to be useful. When information is able to influence economic decisions of users by helping them evaluate past, present, or future events, or perhaps used to correct their past evaluations.
Information on financial position and previous performance is generally used as the basis for foreseeing future financial position and performance, and other issues in which users are interested in, for example, the ability of the entity to meet its commitments as they fall due. Relevance may assist by helping evaluate past, present, or future events, and or confirming or improving their past evaluations (Framework para 26).
Reliability is also another important characteristic that states, information must be useful, to be able to be relied upon. Information may relied upon when it is free from material error and bias and can be depended upon by users to represent faithfully or could reasonably be expected to represent.
Comparability as mentioned above is also an important characteristic. It states that users must be able to compare the financial reports of an entity, between any reporting period in order to seek out trends in its financial position and performance.
It states that users must also be able to compare the financial reports between different entities in order to assess their relative financial position, financial performance, and cash flows. Therefore the measurement and display of the financial result of similar transactions and other occurrences must be carried out in a consistent manner throughout an entity and over time, as well as consistent way for different entities.
The final qualitative characteristic mentioned that plays a crucial part is Understandability. It states that an essential quality of the information disclosed in financial reports is that it is readily understandable by users. For this use, users are assumed to have a reasonable knowledge of business and economic functions and accounting, as well as a willingness to study the information with fair diligence. However, it also states that complex information should be included in the financial report as it is relevant to the economic decision-making needs of users.
These accounting theories allow regulators to develop standards that are consistent and logically formulated, as we all provide guidance to accountants in areas where previously no standards existed. The definitions of each concept are outlined throughout the Framework so that the guidelines are easily understood and followed. I think these all work to achieve the objective of meeting common information needs of users, which is an important concept that is adapted and outlined in the Framework.
