Since the introduction of conceptual framework, many people have benefited from it. This is because, with the proper accounting standard to follow, the entities have less to worry about posting the entries to wrong sections or misinterpreting them to the financial reports readers or the users. By following the standards, the entities does not only posting their reports correctly, but they are complying the international accounting standards. This is because, most of the conceptual framework is basically similar between the IASB and FASB framework.
The conceptual framework basically is "a framework that seeks to identify the objective of general purpose financial reporting and the qualitative characteristics that financial information should possess" (Craig Deegan 2010, p. 47) The building blocks of conceptual framework for general purpose financial reporting can be referred to figure 1.1 in appendix 1.
The objectives of general purpose financial reporting basically explain about the needs of financial informations to the users. Generally, most of the users of the financial reports need the information about the entity's performance, financial position, financing and investing and compliance. This is essential for the users to understand and have the knowledge of how well the entity which they invest is doing in the market. They also will be able to make decisions based on these criteria.
Introduction of Conceptual Framework
We need the financial reports and accounting information in order to evaluate and make business and economic decisions on daily basis in order to survive the competitive world today. These decisions will be directly related to how the economy of the country reacts. Even if a small mistake done in the decision making process, the economy will be greatly affected. In order to avoid this, accountants need to prepare the report according to some standards such as relevance, understandability and comparability.
Before 1984, the developments of the accounting standards in Australia were mainly conducted by the accounting professionals. After the year 1984, this was taken over by a government body called, "Australian Accounting Standards Board" (AASB). AASB adopts the accounting standards issued by the "International Accounting Standards Board" (IASB). AASB needs to review the accounting standards from time to time in order to stay up-to-date with increasing complex of economic activity.
The Australian conceptual framework is made up of three Statement of Accounting Concepts (SAC). Firstly, the SAC 1 is the definition of the Reporting Entity. Secondly, the SAC 2 explains about the Objective of General Purpose Financial Reports. Thirdly, the SAC 3 indicates the qualitatives characteristic of financial informations.
Basically, there is no exact definition for the conceptual framework. Though, the "Financial Accounting Standards Board" (FASB) in United States defines it as a "coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards".
Objectives and Nature of General Purpose Financial Reporting
The objective of financial reporting is one of the important step in developing the conceptual framework. SAC 2 states out the objectives of general purpose financial reporting "which focuses on providing information to meet the common information needs of users who are unable to command the preparation of reports tailored to their particular information needs. These users must rely on the information communicated to them by the reporting entity". This means that, the users might be able to understand certain terms or amounts listed in the report. This objective ensures that the users will be able to interpret those terms into their own understanding.
According to SAC 2, "the main objective of general purpose financial reporting is to provide information that is useful for the users in order for them to make and evaluate decisions on the allocation of scarce resources". This is essential to the users because without proper information, they cannot make or evaluate decisions. This would lead to bad consequences to the entity as well as to the users' investments towards the entity.
Users' interest of the general purpose of financial reporting is to know whether the entity is accomplishing its main objectives, such as the entity's mission and vision, whether the entity is operating efficiently and economically, such as, without wastage of resources and downtime, the ability to continue providing goods and services into foreseeable future and making sure the resources used for the planned purpose, for example, use the resources for the sole purpose of producing the goods and services.
SAC 2 separates the main external users of general-purpose financial reports in three main categories which is, firstly, the resource providers, secondly the recipients or consumers of goods and services and thirdly, the parties performing an inspection or supervision function.
The first category is the providers of the resource. This category includes people such as the employees, lenders, suppliers, investors and creditors. In secondly category, the receivers or consumers of goods and services, it includes beneficiaries, tax-payers, customers and rate-payers. The third category is the parties performing an inspection or supervision function. People in this category include those in the labour unions, governments, parliaments, media, employers' groups, regulatory agencies and specially-interested community groups such as environmental and conservation groups.
The framework also lists the users and their needs accordingly into seven categories. The first category, Investors and their advisors need the information in order to help them to make decisions to buy, hold or sell off their bad investments. Secondly, the employees and their respective group also need the information since they need to know whether the company they are working for is doing well in the business aspects as well as provide them employment opportunities and benefits such as wages, paid leave, pension benefits and so on.
Third category of users is the lenders. They need the information for them to ensure the entity's ability to repay their loans and interest on time. Fourth category is the suppliers and other creditors. They need the information to know whether the entity is able to pay the amount that owed to them on the time. The fifth category of users is the customers, who may have interest to know whether the entity or the company will continuingly able to operate into long term. In sixth category, the government and its agencies need the informations about the entity's activities and also be able to pay the taxes. Seventh user is the public itself. The public also may need the information if the entity's performance is directly influencing the local economy.
Based on the findings, the general purpose financial reporting really necessary to many users since major part of it relies on the information given in the reports. Should the information is not sufficient or not understandable enough for the users, it is a big loss to the entity due to users' wrong decisions. Entities should understand how to interpret those information to their respective stakeholders or users who is the main investor to the company.
Basically, we need to consider the users' level of knowledge of understanding the financial accounting informations. Despite that, it is often recognised that the users do have some level of interpreting the financial reports. In paragraph 25 of IASB/AASB states that, "… users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence." Therefore, the entities may assume that the users may have the slight knowledge of interpreting the financial reports. However, entities should act in caution since the informations contained in the reports will be based on the users decision making on the investment towards the entity.
Biblography
Books
Hoggett, Edwards & Medlin, 2009, Financial Accounting, 7th Edition, Wiley, Brisbane.
Accounting handbook 2010 : [Incorporating all Australian accounting standards for financial reporting periods ending 30 June 2010, as at 15 November 2009], 2010, Victoria, AU: Pearson Australia
Craig Deegan, 2010, Australian Financial Accounting, 6th Edition, McGraw-Hill Australia, North Ryde, NSW.
Craig Deegan, 2009, Financial Accounting Theory, 3rd Edition, McGraw-Hill Australia, North Ryde, NSW.
Website
Conceptual Framework: Objectives and qualitative characteristics, Issue 86 / October 2010, viewed 28 March 2011, <http://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/$File/Supplement_86_GL_IFRS.pdf>
Statements of Accounting Concepts (SAC 2), Objective of General Purpose Financial Reporting, viewed 28 March 2011, <http://www.aasb.gov.au/admin/file/content102/c3/SAC2_8-90_2001V.pdf>
Australian Accounting Standards Board & Financial Reporting Standards Board 2009, Analysis of IFRSs Adopted in Australia & New Zealand, viewed 29 March 2011, <http://aasb.com.au/admin/file/content102/c3/AASB_FRSB_Joint_Meeting_Oct_2009_Agenda_paper_3_3.pdf>
IFRS Foundation, Conceptual Framework, viewed 29 March 2011, <http://www.ifrs.org/Current+Projects/IASB+Projects/Conceptual+Framework/Conceptual+Framework.htm>
Professor Garry Carnegie, BA606 FINANCIAL ACCOUNTING, viewed 29 March 2011, <http://uob-community.ballarat.edu.au/~gcarnegie/BA606lect01-02.ppt>
Financial Reporting Requirements for Queensland Government Agencies, viewed 30 March 2011, <www.ifac.org/Guidance/EXD-Download.php?EDFID=00351>
