The Objective of General Purpose Financial Statements Essay Sample
- Word count: 1556
- Category: financial
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The Objective of General Purpose Financial Statements Essay Sample
The foundation of conceptual framework is based on the objective of general purpose financial reporting. IASB issued conceptual framework to provide guideline to entities in making proper financial reports. Financial reports are very important to external as well as internal users. By analyzing the financial reports, potential investors make investment decisions. Hence, it is very important to have a precise and error free financial report. This was impossible without guidelines and instructions.
Hence, IASB issued conceptual framework. This provides uniformity in the financial reports of different reporting entities throughout the world which makes it easy to use and comparable as every user with reasonable knowledge of accounting and business can understand it.
Two main concepts of conceptual framework are discussed in this report and they are as follows
i. The objective of general purpose financial reporting
ii. Qualitative characteristics of useful financial information
This report analyses the annual report 2016 of Myer Holdings Ltd. It explains how the annual report 2016 of Myer Holdings limited meets the disclosure requirements for PPE as per AASB 116. It also shows how the disclosures on PPE satisfy the fundamental and enhancing qualitative characteristics of useful financial information.
2. The objective of general purpose financial reporting
General purpose financial reporting basically provides the financial information about the reporting entity useful for existing and potential investors, lenders and other creditors. Decisions by investors, lenders and other creditors about buying, settling loans or holding equity and debt instruments are based on the re returns they expect such as interests, principle, market price increases, etc. but investors, creditors, lenders must depend on other conditions such as political climate, events, industry and company outlooks to receive all the information from general purpose financial reports. Economic resources and claims help in a user’s assessment of the reporting entity’s prospects for future cash flows differently are affected by different types of economic resources.
Even though the identifications of those cash flows cannot be done with economic resources or claims) users of financial reports need to understand the nature and amount of the resources used for reporting entity’s operations. Changes in economic resources and claims provides information regarding return of entity shows how efficiently the available resources are used in an organization.
It also helps to assess the risk of future cash flows. Accrual accounting records the transaction when it is made no matter when the cash is received or paid for. Entity’s economic resources and claims and changes in its economic resources and claims provides better information about the performance of the entity rather than about the monetary transactions only. It also provides information about entity’s ability to generate net cash inflows from the available resources rather than by acquiring extra resources directly from investors and creditors.
A reporting entity’s cash flows provides information about the cash spending, borrowings, repayments, cash dividends and other factors that may affect entity’s liquidity and its financial performances. Other than the financial performance such as issuing additional ownership shares, a reporting entity’s resources and claims may also subject to change for reasons.
3. Qualitative characteristics of useful financial information
Qualitative characteristics of useful information provides information to the existing and potential investors and other lenders and creditors which helps users in decision making process.
According to conceptual framework there are two types of qualitative characteristics of useful information and they are:
i) Fundamental qualitative characteristics
• Faithful representation
ii) Enhancing qualitative characteristics
3.1. Fundamental qualitative characteristics
According to conceptual framework the financial information is useful if it is relevant and faithfully represented. If the financial information is related to an economic decision which can be helpful to users in predicting future results and significant enough to influence the decision then the information is relevant.
If the information represents what really occurred then it is said to be faithfully represented. The below mentioned characteristics are the characteristics of faithfully represented information.
• Free from errors
For any financial information to be useful both the fundamental qualitative characteristics should meet i.e. relevance and faithful representation.
3.2. Enhancing Qualitative characteristics
The financial information must be comparable within the organization as well as between the organizations. In others words the information between different years should be comparable within the organization and the similarities and differences between different companies must be comparable.
If the financial information is supported by the evidence and if it can be audited then the information is said to be verifiable. In other words, the financial information must represent what really happened to be verifiable.
Timeliness means the information provided must be within the time limit. If the provided information is delayed then there is no value of such information.
The information provided must be understandable format to the users with reasonable knowledge of business and economics. The information must be clear and simple. It must not contain complex terms which cannot be understood by the users.
4. To what extent the annual report 2016 of Myer Holdings limited meets the disclosure requirements for PPE as per AASB 116
The main objective of AASB 116 is to account, recognize and treat property, plant and equipment. As per the disclosure requirements for PPE mentioned in AASB 116, the entity should disclose the information about depreciation method, its effective useful life, accumulated depreciation, gross carrying amount and its reconciliation and revaluation of its assets.
It is mentioned in the annual report, 2016 of Myer holdings limited that there is no depreciation for land and they follow straight line depreciation method for its all other assets. The useful life of other assets are as follows:
• Buildings 40 years
• Fixtures and fittings 3-12.5 years
• PPE including leasehold improvements 10-20 years
Furthermore, all the information of gross carrying amount i.e. carrying amount at beginning of period, additions, transfer between classes, assets written off – cost, assets written off – accumulated depreciation, impairment, depreciation charge, exchange difference and carrying amount at end of period are given.
Additionally, the entity should disclose the information about the revaluation of its assets. They must provide the information about the effective date of revaluation, any involved independent value, methods of estimating its fair value, carrying amount of the revalued assets under cost model and revaluation surplus. However, Myer Holding Limited was not successful in disclosing all the required information about revaluation of its assets.
Besides the information regarding revaluation of its assets, Myer Holding Limited was successful in disclosing all the disclosure requirements for property, plant and equipment as per AASB 116.
5. To what extent the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information
To meet the fundamental qualitative characteristics, the financial information provided must be relevant and faithfully represented.
After analyzing the annual report of Myer Holdings Limited, it can be stated that all the information provided by the entity regarding the accounting treatment of PPE are completely relevant as all the information regarding depreciation method used, effective useful life of its assets, its accumulated depreciation, gross carrying amount and its reconciliation are mention with its balance and evidence. This proves that the information provided by Myer Holdings Limited is relevant.
Similarly, after analyzing the financial statements and its notes to user, we can say that all the items are calculated properly to make the report free from errors. It also gives information about its accounting policies for the valuation of its assets which makes the information complete and unbiased or neutral. This shows that the information is faithfully represented.
Finally, the annual report, 2016 of Myer Holdings Limited fulfills at least one of the enhancing qualitative characteristics of useful financial information i.e. comparability. In the annual report 2016 of Myer Holdings Limited, the data of 2015 and 2016 are provided which helps its users to compare its performance within the entity. Likewise, the financial reports are provided in standard format that makes its user easy to understand and compare with other entity’s financial report.
6. The disclosures on PPE align with the objective of general purpose financial reporting
The main objective of general purpose financial reporting is to provide financial information of entity’s which may be helpful for existing and potential investors, lenders and creditors. It helps them to make good investment decision by analyzing the quality of entity’s PPE.
Since the information of PPE provided in annual important is very important to the existing and potential investors, lenders and creditors, the disclosures should satisfy the fundamental and enhancing qualitative characteristics of useful financial information. The disclosures disclosed should be relevant, faithfully represented, complete, neutral, understandable and comparable.
The disclosures disclosed by Myer Holdings Limited fulfills the fulfills the fundamental and enhancing qualitative characteristics of the useful information to great extent. The information provided are relevant, faithfully represented, easy to understand, clear and comparable. But the entity was not successful in disclosing all the required information of revaluation of its assets the information is somewhat incomplete which may affect the decision of existing and potential investors.
7. Conclusion and recommendation
It is mentioned earlier that the financial information provided in annual report should meet the fundamental and enhancing qualitative characteristics of useful information as it may influence the investment decision of existing and potential investors.
In case of Myer Holdings Limited the information provided in annual report 2016 comply with relevance, faithful representation and comparability. However, the missing information about the revaluation of its assets made the information incomplete and not neutral to some extent. The entity should try to provide complete information and should disclose all the required disclosure as per AASB 116.