Conceptual framework for financial reporting
7th july 2015
Crazy day today, Tuesday. Left home around 6.30,and my dad decided to drop me off at yaba to enter bus to my place of work. Then suddenly as we were passing by a one way route, there was an okada (motorcycle) coming the opposite way. We reached a pool of water and the motorcycle was speeding by, and he raised his legs up as if bewitched, in order to splash some water unto our car. I quickly dodged it, and was amazed it didn’t get to me. It was just the roof and the bottom of the side glass the water touched. I swear it was God’s divine intervention, because it would have been terrible if it splashed on me; I was on a white shirt.
There was crazie traffic, but thankfully I got to the office by 7.57…lucky me….lol. At the office, there was not much to do, just filled some cheque requisition forms, which I was introduced to a day before. So while sitting in my temporary office alone, I thought to myself that what should I do?. How do I improve my standings in order to get a dream job at somewhere like fbn capital, standard chartered bank, vetiva, chapel hill denhams or renaissance capital here in Nigeria or even abroad if luck decides to shine on me. Then I thought to myself, I would be 21 yrs old by the time I finish nysc, almost 22, and I would prefer to leave my current role as finance control officer to an asset management role as maybe an equity research analyst or an investment analyst. So I said to myself, that it would be fantastic to develop a website, showcase my skills and eagerness to learn about the world of investments. I am a very dexterous fellow, with a penchant for hardwork (Fbn capital, chapel hill denhams hope you are hearing….lol…) So i decided to develop myself all round, with a little bit of accounting, finance, investment management, case study analysis, news reading and whatever i think would help me get that dream job.
After I started reading about the conceptual framework for financial reporting, I learnt the following:
All the concepts, principles, conventions, laws, rules and regulations that are used to prepare and present financial statements are known as the General Accepted Accounting principles (GAAP).
A conceptual framework then is a system of concepts and principles that underpin the preparation of financial statements. The IASC issued in 1989 a framework which was called the framework for the preparation and presentation of financial statements. IASB, the successor to IASC has now published a new document which is the conceptual framework for financial reporting . The report is still built on the foundation of the one previously issued by the IASC. The IASB framework is principle based as opposed to rule based which is easier to manipulate; take for example the famous story of enron whereby creative accounting was in play, and though they were following the rules of disclosures and all, they were manipulating figures as well. This later led to the collapse of the company.
The conceptual framework set out the concepts that underlie the preparation and presentation of financial statements for external users. Its purpose include:
(a) To promote the harmonization of accounting standards
(b) To serve as the reference point for the development of new standards
(c) To assist national bodies in the development if national standards
(d) To assist auditors in forming an opinion of the financial statements of a company
(e) To assist the users of the financial information of a company in interpreting the information contained.
(f) To provide information about its approach for the formulation of IFRS
(g) To provide a general guideline to members when dealing with unprecedented accounting reporting situations, to deal with it in an ethical manner and based on the principles
The importance of financial statements cannot be over emphasized, it provides ample information to potential and existing investors. From analyzing the possible timing of dividends to identifying the financial strengths and weaknesses of an entity to making decisions on investments and so much more. They also use the financial statements to assess the reporting entity’s liquidity and solvency, and its need for additional financing.
Other important uses of the financial statement of an entity includes:
1) It helps to gauge the level of efficiency and effectiveness, by the management in managing the organization’s resources.
2) It shows the ability of an entity to generate net cash inflows through its operations and mitigate business risk
3) Information from past financial performance is a good tool to use in predicting the entity’s future returns on its economic resources.
4) It give an indication of the extent to which events such as changes in market prices or interest rates affect its ability to generate net cash inflows
Baruch Englard., Schaum’s Outline of Intermediate Accounting II