The PNG University of Technology

Private Mail Bag, Lae, Morobe 411, PNG

School of Business Studies
Dr. Luis R. Alamil, MBA, DBA, FFA(Aus.), CPA
Lecturer

AC311: FINANCIAL ACCOUNTING & REPORTING ISSUES

Lecture notes 311-001
Chapter 1
Conceptual Framework of Financial Reporting

Introduction
Business owners understand that success can only truly be a success when it is indicated by
measurable, comparable, and accurate figures. Financial reporting is one of the most important
parts of this process. It is used to manage the success of the business, stay on track for the
management goals and milestones, and help managers when making important decisions in the
future.

Learning Outcomes
After studying this chapter, you shall be able to:
1. Narrate the purpose, role and importance of financial accounting.
2. Internalize the history and background of International Financial Reporting Standards (IFRS).
3. Asses the scope of the problems facing financial reporting; and the Developments in
contemporary financial reporting.
4. Determine the informational perspective of the financial statements.
5. Evaluate the comprehensive real-time database approach to external reporting.
Terminology

Financial Reporting The process of producing statements such as the company’s

quarterly and year-end income statement, balance sheet and
statement of cash flow disclosing and communicating financial data
and financial status to external and internal stakeholders.
Balance Sheet A balance sheet is a snapshot of business’s financial health at a
specific date and often considered one of the most essential
financial reports since they clearly present the business and
shareholder’s equity, providing a clear and overall perspective on
the business’s financial status.
Income Statement An income statement is a common tool to obtain information about
the company’s revenues, expenses, gains, and losses during a
particular period; and summarizes the changes in shareholder’s
equity that occurred during a period (year, quarter).
Statement of Cash Flows This type of statement is used to analyse how much cash is
generated by the business and where it is spent; shows changes in

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 cash during the period and is often used by business owners in need
of insight into their business’s insolvency and liquidity.
Statement of This statement is intended to help business owners keep track of
Shareholders’ Equity any changes in retained earnings after dividends are released to
shareholders.
Notes to Financial Notes to financial statements (also called financial disclosures) refer
Statements to any other notes and information provided alongside financial
statements. They allow other readers to better read and interpret
the information provided in statements as well as evaluate the firm’s
performance.
Faithful representation Faithful representation means illustration of the substance of an
economic phenomenon instead of representation of its legal form
only.
Comparability Comparability enables users to identify and understand similarities
in, and differences among, items about the same entity for another
period or another date.
Verifiability Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
Timeliness Timeliness means that information is available to decision-makers in
time to be capable of influencing their decisions.
Understandability Classifying, characterising and presenting information clearly and
concisely to make it understandable. While some phenomena are in-
herently complex and cannot be made easy to understand, to
exclude such information would make financial reports incomplete
and potentially misleading.

LO1.1 Purpose, role and Importance of Financial Accounting1

The process of producing statements that disclose a business’s financial status to management,
investors, and the government is known as Financial Reporting. Financial reporting is a way of
following standard accounting practices to give an accurate depiction of a company’s finances,
including revenues, expenses, profits, capital and cash flow.
Financial reporting includes:

 External financial statements (e.g., income statement, statement of comprehensive

income, balance sheet, statement of cash flows, and statement of stockholders’ equity).
 Notes to the financial statements.
 Communications regarding quarterly earnings and related information (often via press
releases and conference calls).
 Quarterly and annual reports to stockholders.
 Financial information and reports posted on a business’s website.

1
FreshBooks (2024). What Is Financial Reporting? Definition, Importance, and ..., https://www.freshbooks.com › hub › reports › financial-
r...

2
  Financial reports to governmental agencies, including quarterly and annual reports to the
Securities and Exchange Commission (SEC).
 Documentation pertaining to the issuance of common stock and other securities.
Financial reporting provides financial information about businesses that is useful to investors and
other users in making decisions. It uses financial statements and reports to disclose financial data
that indicate the economic health of a company over a specific period of time. The information is
vital for management to make decisions about the company’s future and provides information to
capital providers like creditors and investors about the profitability and financial stability of the
company.
Purpose of Financial Reporting
The main objective behind financial reporting is to provide business owners, shareholders, and
other decision-makers with all of the information they need to make the best choices for the
company. Financial reporting affects everything from cash flow to dividends and should account for
all streams of profit and loss to ensure a complete, useful picture.
Generally, financial reporting provides information about the results of operations, financial
position, and cash flows of a business. Readers review the statements to decide the allocations of
resources. Here are a few of the most common and most important types of financial statements:
1. Balance Sheet: Think of a balance sheet as a snapshot of your business’s financial health at a
specific date. These are often considered one of the most essential financial reports since they
clearly present the business and shareholder’s equity, providing a clear, overall perspective on
the business’s financial status. A classified balance sheet distinguishes current and noncurrent
assets and liabilities.
2. Income Statement: Also sometimes called a Profit & Loss Report, is a common tool to help users
obtain information about the company’s revenues, expenses, gains, and losses during a
particular period. This statement summarizes the changes in shareholder’s equity that occurred
during a period. Since this report focuses on profit-generating activities, it can be a very useful
tool for potential investors and creditors.
3. Statement of Cash Flows: This type of statement is used to analyse how much cash is generated
by the business and where it is spent and shows changes in cash during the period. It is often
used by business owners in need of insight into their business’s insolvency and liquidity; and can
be used to track and manage spending as well as to help in securing loans and other funding.
4. Statement of Shareholders’ Equity: This statement is intended to help business owners keep
track of any changes in retained earnings after dividends are released to shareholders. Its
purpose is to report changes in shareholders’ accounts during the period from investments by
owners, distributions to owners, net income, and other comprehensive income. This is
invaluable for providing insight to those supporting the business financially. It also provides
more in-depth insight into a company’s performance thanks to reporting on equity withdrawals
and dividend payments.
5. Notes to Financial Statements: Notes to financial statements (also called financial disclosures)
refer to any other notes and information provided alongside financial statements. These notes
allow other readers to better read and interpret the information provided in statements as well
as evaluate the firm’s performance.

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 The notes usually include a summary of significant accounting policies (accounting methods,
depreciation methods, and inventory measurement methods, like LIFO or FIFO). A note to
financial statements will often state the ‘basis for accounting’ (whether cash or accrual
accounting methods were used). Other notes will explain how figures were calculated in detail,
providing greater reliability and accountability to financial reports.
Importance of Financial Reporting
When done properly, financial reporting offers many benefits to all who are involved with a
business. With that said, however, the main goal of financial reporting is to provide insight and
information to stakeholders, business owners, partners, and other important roles. Using the
information gained from financial reporting, these parties can make more informed decisions for
the good of the business and their investments.
Financial statements provide various important financial information that help investors, creditors,
and analysts evaluate a company’s financial performance. A lot of the financial information in
financial reports is also required by law or by accounting standard practices. To better understand
what these statements look like in practice, you can follow our guide on financial statement sample,
which demonstrates how this information is typically presented and organized.
Financial reporting helps management communicate important business events and transactions,
as well as past successes and future expectations of the business. Here are few reasons why
financial reporting is important to business:
1. Ensuring Tax Compliance (and Optimizing Liability): The most important reason to use financial
reports is that business owners and management have to and are required by law to do so. The
Internal Revenue Agency uses these reports to make sure the business is paying fair share of taxes.
Businesses that make a lot of profit have to pay quite a lot of taxes. Accurate financial reporting
helps reduce their tax burden and helps them ensure that all their resources are not depleted in a
short amount of time.
2. Showing Financial Condition to Potential Investors: Potential investors want to know how well
the company is doing before they invest. Investors, creditors, and other capital providers rely on a
company’s financial reporting to gauge the safety and profitability of their investments.
Stakeholders want to know where their money went and where it is now. Financial statements like
the balance sheet addresses and provides detailed information about the company’s asset
investments and outstanding debt and equity components. Investors and creditors can use this
information to better understand the company’s position and capital mix.
3. Evaluating Operations at Scale over Longer Periods of Time: The information on a balance sheet
is a snapshot of a company’s assets and liabilities at the end of a financial period. However, a
balance sheet doesn’t show what operational changes might have occurred to cause changes in the
financial condition of a company. Operating results during the period are also something investors
need to consider. A change statement, such as an income statement, shares results about sales,
expenses, and profit or losses during the period. Using the income statement, investors can both
evaluate a company’s past income performance and assess future cash flow.
4. Examining and Analysing Cash Flow: A company’s profits are reported in the income statement
but provide no direct information on the company’s cash changes. A company incurs cash inflows

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and outflows during a period from operating activities and non-operating activities, namely
investing and financing. Cash from all sources, not only revenue from operations, is what pays
investors back. That’s why a cash flow statement is an important statement for an investor to
review. The cash flow statement shows the changes in cash during a period of time. By reviewing
this statement, investors can know if a company has enough cash to pay for expenses and
purchases.
5. Examining and Distributing Information on Shareholder Equity: The statement of shareholders’
equity is important to equity investors. It shows the changes to various equity components like
retained earnings during a period. Shareholder equity is a company’s total assets minus its total
liabilities and represents a company’s net worth. Steady growth in a business’s shareholders’ equity
because of increasing retained earnings, as opposed to expanding the shareholder base, means
higher investment returns for current equity shareholders.
6. Help with Business Decision-Making, Planning, and Forecasting: When a business needs to
make a decision, analysing financial statements is crucial. Managers can look at the value of the
assets that a business currently holds and decide if they can afford to purchase more to expand
business operations. Conversely, when the value of assets is severely depreciated, managers can
decide if they need to be sold off.
7. Mitigate Financial Reporting Errors: Accurate financial reporting can help businesses catch costly
mistakes and inter errors early on in the process. There is no better way to detect illegal financial
activities than through discrepancies found in financial statements. Through a reconciliation
process, errors that have been made can be found. Companies spend a lot of time reconciling their
books of accounts and verifying each journal entry, so they can find if an accounting error has
occurred or if anyone has tampered with any part of the business.
Benefits of Financial Reporting
Good financial reporting offers countless benefits to business. These include:
a. Optimized debt management;
b. Real-time insights and tracking for quick business decisions;
c. Identification and forecasting of business trends;
d. Managing liabilities and keeping them in check with assets;
e. Greater ease of access and communication of important financial records;
f. Cash flow insights and analysis;
g. Providing useful information to current and potential investors and creditors; and,
h. Internal controls to prevent fraudulent activities.
LO1.2 The International Financial Reporting Standards (IFRS)2
International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial
statements of public companies that are intended to make them consistent, transparent, and easily
comparable around the world. This helps with auditing, tax purposes, and investing.
IFRS originated in the European Union with the intention of making business affairs and accounts
accessible across the continent. It was quickly adopted as a common accounting language. The IFRS
is issued by the International Accounting Standards Board (IASB). The IFRS system is sometimes
2
Barclay Palmer, (2024). What Are International Financial Reporting Standards ... https://www.investopedia.com › ... › Government &
Policy

5
confused with the International Accounting Standards (IAS), which are the older standards that the
IFRS replaced in 2001.3
IFRS specify in detail how companies must maintain their records and report their expenses and
income. They were established to create a common accounting language that could be understood
globally by investors, auditors, government regulators, and other interested parties. The standards
are designed to bring consistency to accounting language, practices, and statements and to help
businesses and investors make educated financial analyses and decisions. They were developed by
the International Accounting Standards Board, which is part of the not-for-profit, London-based
IFRS Foundation. The Foundation says it sets the standards to “bring transparency, accountability,
and efficiency to financial markets around the world."4
Although the U.S. and some other countries don't use IFRS, currently 168 jurisdictions do, making
IFRS the most-used set of standards globally.5 IFRS currently has complete profiles for 168
jurisdictions, including those in the European Union. The United States uses a different system, the
generally accepted accounting principles (GAAP).6
IFRS vs. GAAP
Public companies in the U.S. are required to use a rival system, the generally accepted accounting
principles (GAAP). The GAAP standards were developed by the Financial Standards Accounting
Board (FSAB) and the Governmental Accounting Standards Board (GASB). The Securities and
Exchange Commission (SEC) has said it won't switch to International Financial Reporting Standards
but will continue reviewing a proposal to allow IFRS information to supplement U.S. financial
filings.7
The two systems have the same goal: clarity and honesty in financial reporting by publicly-traded
companies. IFRS was designed as a standards-based approach that could be used internationally.
GAAP is a rules-based system used primarily in the U.S. Although most of the world uses IFRS
standards, it is still not part of the U.S. financial accounting world. The SEC continues to review
switching to the IFRS but has yet to do so.
The differences between IFRS and GAAP reporting include:
a. IFRS is not as strict in defining revenue and allows companies to report revenue sooner. A
balance sheet using this system might show a higher stream of revenue than a GAAP
version of the same balance sheet.
b. IFRS also has different requirements for reporting expenses. For example, if a company is
spending money on development or on investment for the future, it doesn't necessarily
have to be reported as an expense. It can be capitalized instead.
Several methodological differences exist between the two systems. For instance, GAAP allows a
company to use either of two inventory cost methods: First in, First out (FIFO) or Last in, First out
(LIFO). LIFO, however, is banned under IFRS.

3
Financial Accounting Standards Board. "Comparability in International Accounting Standards - A Brief History. https://www.fasb.ord
g/page/page content/international-brief history.
4
International Financial Reporting Standards. "Who We Are” https://www.ifrs.org/about-us/who-we-are/.
5
International Financial Reporting Standards. "Who Uses IFRS Standards? https://www.ifrs.org/use-around-the-world/use-of-ifrs-
standards-by-jurisdiction.
6
Ibid.
7
U.S. Securities and Exchange Commission. "Working Together to Advance High Quality Information in the Capital Markets.
https://www.sec.gov/news/speech/key-note address/ 2016-aicpa/conference/working-together/.

6
 Standard IFRS Requirements
IFRS covers a wide range of accounting activities. There are certain aspects of business practice for
which IFRS set mandatory rules.

 Statement of financial position: This is the balance sheet. IFRS influences the ways in
which the components of a balance sheet are reported.
 Statement of comprehensive income: This can take the form of one statement or be
separated into a profit and loss statement and a statement of other income, including
property and equipment.
 Statement of changes in equity: Also known as a statement of retained earnings, this
documents the company's change in earnings or profit for the given financial period.
 Statement of cash flows: This report summarizes the company's financial transactions in the
given period, separating cash flow into operations, investing, and financing.8
In addition to these basic reports, a company must give a summary of its accounting policies. The
full report is often seen side by side with the previous report to show the changes in profit and loss. 9
A parent company must create separate account reports for each of its subsidiary companies.
Note: Chinese companies do not use IFRS or GAAP. They use Chinese Accounting Standards for
Business Enterprises (ASBEs).10 IFRS is required to be used by public companies based in 168
jurisdictions, including all of the nations in the European Union as well as Canada, India, Russia,
South Korea, South Africa, and Chile. The U.S. and China each have their own systems.11
Why Is IFRS Important? IFRS fosters transparency and trust in the global financial markets and the
companies that list their shares on them. If such standards did not exist, investors would be more
reluctant to believe the financial statements and other information presented to them by
companies. Without that trust, we might see fewer transactions and a less robust economy.
IFRS also helps investors analyse companies by making it easier to perform “apples to apples”
comparisons between one company and another, and for fundamental analysis of a company's
performance.

International Financial Reporting Standards (IFRS) are issued by the International Accounting
Standards Board (IASB).12 Table 1 shows the current standards.

Table 1: The International Financial Reporting Standards (IFRS)

# Name Issued
IFRS 1 First-time Adoption of International Financial Standards 2008*
IFRS 2 Share-based Payment 2004
IFRS 3 Business Combinations 2008*
IFRS 4 Insurance Contracts 2004
IFRS 5 Non-current Assets Held for Sale and Discontinued 2004
Operations
8
International Financial Reporting Standards. "IAS 1 Presentation of Financial Statements, https://www.ifrs.org/issued-standards/list-of-
standards/ias-1-presentation-of-financial-statements.
9
International Financial Reporting Standards. "IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
https://www.ifrs.org/issued-standards/list-of-standards/ias-8-accounting-policies-changes-in-accounting -estimates-and-errors.
10
China Briefing. "Chinese Accounting Standards for Business Practices: Prepare for Changes in 2021.https://www.china-
briefing.com/news/chinese-accounting-standards-business-enterprises-prepare-changes-2021/.”
11
Barclay Palmer, (2024). What Are International Financial Reporting Standards ... https://www.investopedia.com › ... › Government &
Policy
12
International Financial Reporting Standards. IAS Plus. https://www.iasplus.com › standards › ifrs

7
 # Name Issued
IFRS 6 Exploration for and Evaluation of Mineral Assets 2004
IFRS 7 Financial Instruments: Disclosures 2005
IFRS 8 Operating Segments 2006
IFRS 9 Financial Instruments 2013*
IFRS 10 Consolidated Financial Statements 2011
IFRS 11 Joint Arrangements 2011
IFRS 12 Disclosure of Interests in Other Entities 2011
IFRS 13 Fair Value Measurement 2011
IFRS 14 Regulatory Deferral Accounts 2014
IFRS 15 Revenue from Contracts with Customers 2014
IFRS 16 Leases 2016
IFRS 17 Insurance Contracts 2017
IFRS 18 Presentation and Disclosures in Financial Statements 2024
IFRS 19 Subsidiaries without Public Accountability: Disclosures 2024

LO1.3 Scope of the problems facing financial reporting13

Every organization relies on reporting to deliver real-time and historical data to monitor the
company’s performance. In addition, within any given organization, various departments develop
their own internal reports. The finance department, for example, may create reports that include an
income statement, balance sheet and statement of cash flows. Marketing may use reporting to
gauge campaign performance. IT may rely on reporting to record how quickly staff members
resolve help-desk tickets.
However, the reporting process seldom comes without a variety of challenges. To ease the process,
companies often use reporting tools — software applications that convert raw data into actionable
insights. These tools automate the collection of data and the generation of reports, providing
important information to help organizations enhance data-driven decision-making.
Reporting Challenges
Although reporting is critical to organizations, many companies encounter a variety of related
challenges. These issues might stem from poor data quality, inadequate data practices, process
roadblocks, internal challenges or flaws within a company’s reporting tools.
These challenges, however, can be overcome. With the proper approaches to data, a deeper
understanding of necessary processes and an assessment of organizational needs provided by
targeted reporting tools and software, companies can achieve reporting that is quick, up-to-date,
insightful and actionable.
Here’s a look at 12 of the reporting challenges companies commonly encounter, as well as solutions
for resolving them.
1. No data hygiene
The data used to build reports is typically stored in a variety of disparate systems, in various formats
and based on different coding structures. To be usable, this data must be consistent and accurate,
devoid of duplicated, out-dated, incomplete or incorrect information. If the data isn’t properly

13
Lisa Schwarz (2023). 12 Top Reporting Challenges and How to Overcome Them; https://www.netsuite.com › ... › Data Warehouse
Articles.

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cleansed and consolidated prior to running a report, problems can arise; after all, a mistake in one
cell of a spreadsheet can invalidate an entire report and lead to misguided decision-making.
The solution: Establish good data hygiene. Organizations can start by performing a system audit to
find data points that require fixing; determine how much of the data is useful and identify the
particular information they need. They can also remove data that won’t be used; analyse small
details to identify inaccuracies, out-dated information or incomplete data sets; create processes to
ensure uniformity within the database; and create a database standard to streamline data input
processes and verify that data is as clean as possible.
2. Lack of data security
Ensuring data security — by protecting information from unauthorized access, corruption or theft —
is necessary for all organizations. Without proper data security, companies risk facing cyber- attacks
and data breaches, as well as threats from inside and mistakes made by human error. Cyber-attacks
can be costly for businesses, with some companies losing millions of dollars as a result of
widespread data breaches.
The solution: Install proper data security by deploying technologies and tools that provide better
visibility into all data sources and access points of an organization’s critical data. Organizations may
use a variety of tools to fortify its data security, including access management, application security
and patching, physical security of servers and user devices, encryption, employee education
programs, and network and endpoint security monitoring.
3. Static reporting
To make decisions quickly and accurately, team members must be able to access relevant
information in a timely manner. Static reporting — or reports that provide insight into data that’s
relevant to a specific time period — is useful in certain instances, such as when monitoring brand,
product or market performance, but it is less practical for long-term planning. Static reports have a
short shelf life and are often archived in order to analyse historical data.
The solution: Opt for dynamic reports, or real-time reports. These provide users with the most up-
to-date information, enabling them to make quicker, more informed decisions. Dynamic reporting
also offers additional features and capabilities that allow users to interact with and share data, as
well as conduct more advanced analyses on their own.
4. Poor report design
An organization’s staff members may have different preferences for how they want to view data —
perhaps in charts, line graphs or bar graphs, for example. Board members might require high-level
data on the company’s overall business performance, while sales managers might only want data
related to how their particular teams are performing. If these needs are not communicated well, an
organization’s reports may lack the information different stakeholders need, resulting in multiple
iterations that are either too detailed or not detailed enough.
The solution: Many self-service reporting technologies use visualizations and dashboards to
highlight important metrics. And, because these tools are intuitive and easy to use, most people can
access the data they desire in the format they need, rather than having to rely on IT teams to
generate it.
5. Inexperienced staff

9
While reporting tools are often expected to be intuitive to use and easy to understand, not all teams
are sufficiently equipped with the necessary training or experience to interpret and digest the data.
Such gaps can result, for instance, when staff members with technology experience leave an
organization and those left behind are less familiar with data analytics.
The solution: Train a wide variety of staff in using reporting tools. This is key to developing data and
analytics skills internally. Organizations may offer a one-time training course or ongoing training to
give teams the skills and experience they need to understand the data and create reports.
Organizations may also choose to hire experts to fill these skills gaps and share their knowledge
with business teams.
6. Lack of integrated reporting
Organizations strive to meet business goals and, thus, generate reports focused on a variety of
benchmarks to help them derive useful information and insights they can use to make informed
decisions. However, opportunities for errors and data inaccuracies may arise when the reporting
system is not integrated with the planning system. This disconnect may disrupt the way
information flows between the two systems and can lead to an organization being deprived of a
single source of truth, which ensures everyone is working with the same data.
The solution: Integrating the two systems. By doing so, teams can instantly run multiple scenario
analyses to track processes in real-time and can more easily report on benchmarks by providing
accurate results. Business users can learn how to use the tools more quickly when the planning and
reporting systems are also integrated, which can improve real-time collaboration and workflow.
7. Long reporting process
Traditional reporting processes — that is, those in which reports are manually compiled — are
lengthy: Executives relay the information they want, and then wait for IT or finance to build and
deliver them, which may take days, weeks or sometimes even months. If additional details are
needed once the report is delivered, the process takes even longer. To make critical business
decisions, executives need the most up-to-date information possible, and they need it quickly.
The solution: Look into self-service data tools, which allow staff members to access easy-to-use
reporting and business intelligence, curtailing the length of traditional reporting processes. Rather
than relying on finance and IT departments to issue their reports, users can easily schedule when to
receive automated reports, or generate reports on their own, reducing process bottlenecks and
delivering the latest data for quick decision-making.
8. No reporting standard operating procedures
Standard operating procedures (SOPs) are written instructions that explain the process users must
execute to carry out an operation — in this case, reporting. SOPs are designed to achieve efficiency,
quality output and uniformity, while averting miscommunication. If organizations don’t develop an
SOP for reporting, it becomes more challenging for users to understand how best to use these
tools.
The solution: Thoroughly document necessary procedures. A reporting SOP should include a title
page, table of contents and statement of purpose. It should thoroughly document required
procedures, references, quality assurance and quality control. The SOP should be reviewed and
reinforced by management, and these documents must be readily accessible to individuals that use

10
reporting tools. Teams should also be trained on how to use the SOP to ensure that the information
is easy to understand.
9. Manual report creation
Manually creating reports increases the likelihood of introducing mistakes. Because many
enterprises resource planning (ERP) systems aren’t built with robust, built-in reporting capability,
teams typically develop a workaround, often exporting data from a system, importing it to a
spreadsheet, manually manipulating it, then formatting it to suit their needs. Not only does this
process siphon significant staff time and resources, it can introduce errors and result in inaccurate
information that negatively impacts decision-making.
The solution: Embrace automated reporting tools to reduce the risk of reporting errors that occur as
the result of manual processes. These tools use dashboards that reflect real-time data, presenting
information in an easy-to-understand way and freeing up individuals to spend more time on data
analysis and less time on report compilation.
10. No baseline
A baseline is data that measures historical conditions for a period of time prior to the start of a
project to be used for comparison purposes later. Without a baseline from which to measure
progress, the data and insights organizations derive won’t be all that valuable, since they won’t
have a starting point to compare them to.
The solution: Establish a reporting baseline to help business leaders set realistic goals and measure
the organization’s progress. A baseline also helps highlight issues that become apparent through
changes in the data. Baselines should include both historical data and a forecast that predicts a
future course. If no historical data is available, a company can start the baseline where the
organization stands currently and build the history over time from there.
11. Lack of actionable insights
In some instances, decision-makers may find it difficult to derive insights from reporting. This could
happen when there isn’t enough detail in the report to guide their decision-making, when they find
it difficult to derive insights from huge repositories of data, or when they don’t have the confidence
to act on emerging trends or patterns because they lack autonomy or a sense of ownership within
the process.
The solution: To counteract these issues, organizations should focus on solutions that make
analytics reporting accessible and easy to understand. Individuals should have access to the data
that’s essential to their jobs so they can create reports independently, take more ownership and be
more confident in making sound, data-based decisions.
12. Inadequate reporting software
For reporting to be effective, data must be integrated and consolidated. When tools fail to
communicate with one another, data disconnects prevail, and organizations have trouble achieving
a single source of truth. Reporting software tools may also be inadequate when they don’t fulfill the
reporting requirements a company needs, or they are not built to support the organization’s
communication goals.
The solution: If business leaders suspect that reporting tools are inadequate for the organization’s
needs, they should review them to determine if they’re set up optimally. This may include using
APIs to connect systems and implementing better data consolidation systems.

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LO1.4 Conceptual Framework for Financial Reporting14
The Framework's purpose is to assist the IASB in developing and revising IFRSs that are based on
consistent concepts, to help preparers to develop consistent accounting policies for areas that are
not covered by a standard or where there is choice of accounting policy, and to assist all parties to
understand and interpret IFRS. [SP1.1]
In the absence of a Standard or an Interpretation that specifically applies to a transaction, manage-
ment must use its judgement in developing and applying an accounting policy that results in infor-
mation that is relevant and reliable. In making that judgement, IAS 8.11 requires management to
consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income,
and expenses in the Framework. This elevation of the importance of the Framework was added in
the 2003 revisions to IAS 8. The Framework is not a Standard and does not override any specific
IFRS. [SP1.2]
If the IASB decides to issue a new or revised pronouncement that is in conflict with the Framework,
the IASB must highlight the fact and explain the reasons for the departure in the basis for conclu-
sions. [SP1.3]
The Framework addresses the following:
 the objective of general-purpose financial reporting
 qualitative characteristics of useful financial information
 financial statements and the reporting entity
 the elements of financial statements
 recognition and derecognition
 measurement
 presentation and disclosure
 concepts of capital and capital maintenance
External stakeholders, such as investors, shareholders and creditors, use a company’s financial
reporting to evaluate its financial health and creditworthiness. Other external shareholders include
regulatory agencies like the IRS and the Securities and Exchange Commission (SEC), which require
financial reporting for legal and compliance reasons. Internal stakeholders, such as the company’s
CEO and other top managers, use financial reporting to gauge performance and inform decision-
making, and as a foundation for building budgets and projections.
Whether it’s used for external or internal reporting purposes, the underlying financial data must
comply with accounting standards such as the Generally Accepted Accounting Principles (GAAP),
used in the US, or the International Financial Reporting Standards (IFRS), used in many other
countries. External reporting of the core financial statements, plus other required schedules and
documents, must follow strict guidelines defined by regulatory agencies and GAAP/IFRS reporting
standards. Internal financial reporting typically includes the core financial statements but can also
be customized to meet the needs of internal stakeholders.

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 Objective of general-purpose financial reporting
The primary users of general-purpose financial reporting are present and potential investors,
lenders and other creditors, who use that information to make decisions about buying, selling or
holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising
rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s
economic resources. [1.2]
The primary users need information about the resources of the entity not only to assess an entity's
prospects for future net cash inflows but also how effectively and efficiently management has dis-
charged their responsibilities to use the entity's existing resources (i.e., stewardship). [1.3-1.4]
The IFRS Framework notes that general purpose financial reports cannot provide all the information
that users may need to make economic decisions. They will need to consider pertinent information
from other sources as well. [1.6]
The IFRS Framework notes that other parties, including prudential and market regulators, may find
general purpose financial reports useful. However, these are not considered a primary user and
general-purpose financial reports are not primarily directed to regulators or other parties. [1.10]
Reporting entity's economic resources, claims, and changes in resources and claims
Economic resources and claims
Information about the nature and amounts of a reporting entity's economic resources and claims
assists users to (a) assess that entity's financial strengths and weaknesses; (b) to assess liquidity and
solvency, and (c) its need and ability to obtain financing. Information about the claims and payment
requirements assists users to predict how future cash flows will be distributed among those with a
claim on the reporting entity [1.13]. A reporting entity's economic resources and claims are reported
in the statement of financial position. [See IAS 1.54-80A]
Changes in economic resources and claims
Changes in a reporting entity's economic resources and claims result from that entity's performance
and from other events or transactions such as issuing debt or equity instruments. Users need to be
able to distinguish between both of these changes [1.15].
Financial performance reflected by accrual accounting
Information about a reporting entity's financial performance during a period, representing changes
in economic resources and claims other than those obtained directly from investors and creditors, is
useful in assessing the entity's past and future ability to generate net cash inflows. Such information
may also indicate the extent to which general economic events have changed the entity's ability to
generate future cash inflows [1.18-1.19]. The changes in an entity's economic resources and claims
are presented in the statement of comprehensive income [See IAS 1.81-105].
Financial performance reflected by past cash flows
Information about a reporting entity's cash flows during the reporting period also assists users to
assess the entity's ability to generate future net cash inflows and to assess management’s steward-
ship of the entity’s economic resources. This information indicates how the entity obtains and
spends cash, including information about its borrowing and repayment of debt, cash dividends to

13
shareholders, etc. [1.20]. The changes in the entity's cash flows are presented in the statement of
cash flows [See IAS 7].
Changes in economic resources and claims not resulting from financial performance
Information about changes in an entity's economic resources and claims resulting from events and
transactions other than financial performance, such as the issue of equity instruments or distribu-
tions of cash or other assets to shareholders is necessary to complete the picture of the total change
in the entity's economic resources and claims [1.21]. The changes in an entity's economic resources
and claims not resulting from financial performance is presented in the statement of changes in
equity [See IAS 1.106-110].
Information about use of the entity’s economic resources
Information about the use of the entity's economic resources also indicates how efficiently and ef-
fectively the reporting entity’s management has used these resources in its stewardship of those
resources. Such information is also useful for predicting how efficiently and effectively manage-
ment will use the entity’s economic resources in future periods and, hence, what the prospects for
future net cash inflows are [1.22].

LO1.5 Qualitative characteristics of useful financial information

The qualitative characteristics of useful financial reporting identify the types of information are
likely to be most useful to users in making decisions about the reporting entity on the basis of infor-
mation in its financial report. The qualitative characteristics apply equally to financial information in
general purpose financial reports as well as to financial information provided in other ways [2.1, 2.3].
Financial information is useful when it is relevant and represents faithfully what it purports to
represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely
and understandable [2.4].
Relevance and faithful representation are the fundamental qualitative characteristics of useful
financial information [2.5].
Relevance: Relevant financial information is capable of making a difference in the decisions made
by users. Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value, or both. The predictive value and confirmatory value of financial informa-
tion are interrelated [2.6-2.10]. Materiality is an entity-specific aspect of relevance based on the
nature or magnitude (or both) of the items to which the information relates in the context of an in-
dividual entity's financial report [2.11].
Faithful representation: General purpose financial reports represent economic phenomena in words
and numbers. To be useful, financial information must not only be relevant, it must also represent
faithfully the phenomena it purports to represent. Faithful representation means representation of
the substance of an economic phenomenon instead of representation of its legal form only [2.12].
A faithful representation seeks to maximise the underlying characteristics of completeness, neutral-
ity and freedom from error [2.13]. A neutral depiction is supported by the exercise of prudence.
Prudence is the exercise of caution when making judgments under conditions of uncertainty [2.16].
Applying the fundamental qualitative characteristics

14
Information must be both relevant and faithfully represented if it is to be useful [2.20]. In enhancing
qualitative characteristics, comparability, verifiability, timeliness and understandability are quali-
tative characteristics that enhance the usefulness of information that is relevant and faithfully rep-
resented [2.23].
Comparability: Information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for another
period or another date. Comparability enables users to identify and understand similarities in, and
differences among, items [2.24-2.25].
Verifiability: Verifiability helps to assure users that information represents faithfully the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and indepen-
dent observers could reach consensus, although not necessarily complete agreement, that a partic-
ular depiction is a faithful representation [2.30].
Timeliness: Timeliness means that information is available to decision-makers in time to be capable
of influencing their decisions [2.33].
Understandability: Classifying, characterising and presenting information clearly and concisely make
it understandable. While some phenomena are inherently complex and cannot be made easy to un-
derstand, to exclude such information would make financial reports incomplete and potentially mis-
leading. Financial reports are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information with diligence [2.34-2.36].
Enhancing qualitative characteristics should be maximised to the extent necessary. However,
enhancing qualitative characteristics (either individually or collectively) cannot render information
useful if that information is irrelevant or not represented faithfully [2.37].
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general purpose financial
reporting. Reporting such information imposes costs and those costs should be justified by the
benefits of reporting that information. The IASB assesses costs and benefits in relation to financial
reporting generally, and not solely in relation to individual reporting entities. The IASB will consider
whether different sizes of entities and other factors justify different reporting requirements in
certain situations [2.39, 2.43].

LO1.6 Financial statements and the reporting entity

The objective of financial statements is to provide information about an entity's assets, liabilities,
equity, income and expenses that is useful to financial statements users in assessing the prospects
for future net cash inflows to the entity and in assessing management's stewardship of the entity's
resources [3.2]. This information is provided in the statement of financial position and the
statement(s) of financial performance as well as in other statements and notes [3.3].
Reporting period: Financial statements are prepared for a specified period of time and provide com-
parative information and under certain circumstances forward-looking information [3.4-3.6].
Perspective adopted in financial statements and going concern assumption: Financial statements
provide information about transactions and other events viewed from the perspective of the

15
reporting entity as a whole and are normally prepared on the assumption that the reporting entity is
a going concern and will continue in operation for the foreseeable future [3.8-3.9].
The reporting entity: A reporting entity is an entity that is required, or chooses, to prepare financial
statements. It can be a single entity or a portion of an entity or can comprise more than one entity.
A reporting entity is not necessarily a legal entity [3.10].
Determining the appropriate boundary of a reporting entity is driven by the information needs of
the primary users of the reporting entity’s financial statements. [3.13-3.14]
Consolidated and unconsolidated financial statements: Generally, consolidated financial statements
are more likely to provide useful information to users of financial statements than unconsolidated
financial statements [3.18].

LO1.7 IFRS Framework

The IFRS Framework states that the going-concern assumption is an underlying assumption. Thus,
the financial statements presume that an entity will continue in operation indefinitely or, if that pre-
sumption is not valid, disclosure and a different basis of reporting are required [F 4.1].
The elements of financial statements
Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed the elements of financial statements.
The elements directly related to financial position (balance sheet) are [F 4.4]:
a. Assets;
b. Liabilities; and
c. Equity.
The elements directly related to performance (income statement) are [F 4.25]:
a. Income; and
b. Expenses.
The cash flow statement reflects both income statement elements and some changes in balance
sheet elements.
Definitions of the elements relating to financial position
 Asset. An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity. [F 4.4(a)]
 Liability. A liability is a present obligation of the entity arising from past events, the settle-
ment of which is expected to result in an outflow from the entity of resources embodying
economic benefits. [F 4.4(b)]
 Equity. Equity is the residual interest in the assets of the entity after deducting all its liabili-
ties. [F 4.4(c)]
Definitions of the elements relating to performance
 Income. Income increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants. [F 4.25(a)]

16
 Expense. Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants. [F 4.25(b)]
The definition of income encompasses both revenue and gains. Revenue arises in the course of the
ordinary activities of an entity and is referred to by a variety of different names including sales, fees,
interest, dividends, royalties and rent. Gains represent other items that meet the definition of
income and may or may not, arise in the course of the ordinary activities of an entity. Gains
represent increases in economic benefits and as such are no different in nature from revenue.
Hence, they are not regarded as constituting a separate element in the IFRS Framework. [F 4.29
and F 4.30]
The definition of expenses encompasses losses as well as those expenses that arise in the course of
the ordinary activities of the entity.
Expenses that arise in the course of the ordinary activities of the entity include, for example, cost of
sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such
as cash and cash equivalents, inventory, property, plant and equipment.
Losses represent other items that meet the definition of expenses and may or may not, arise in the
course of the ordinary activities of the entity. Losses represent decreases in economic benefits and
as such they are no different in nature from other expenses. Hence, they are not regarded as a
separate element in this Framework [F 4.33 and F 4.34].
Recognition of the elements of financial statements
Recognition is the process of incorporating in the balance sheet or income statement an item that
meets the definition of an element and satisfies the following criteria for recognition: [F 4.37 and F
4.38]
 It is probable that any future economic benefit associated with the item will flow to or from
the entity; and
 The item's cost or value can be measured with reliability.
Based on these general criteria;
o An asset is recognised in the balance sheet when it is probable that the future economic
benefits will flow to the entity and the asset has a cost or value that can be measured
reliably. [F 4.44]
o A liability is recognised in the balance sheet when it is probable that an outflow of
resources embodying economic benefits will result from the settlement of a present
obligation and the amount at which the settlement will take place can be measured
reliably. [F 4.46]
o Income is recognised in the income statement when an increase in future economic
benefit related to an increase in an asset or a decrease of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of income occurs simultane-
ously with the recognition of increases in assets or decreases in liabilities (for example,
the net increase in assets arising on a sale of goods or services or the decrease in liabilities
arising from the waiver of a debt payable). [F 4.47]

17
 o Expenses are recognised when a decrease in future economic benefit related to a
decrease in an asset or an increase of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of expenses occurs simultaneously with the recog-
nition of an increase in liabilities or a decrease in assets (for example, the accrual of
employee entitlements or the depreciation of equipment). [F 4.49]
Measurement of the elements of financial statements
Measurement involves assigning monetary amounts at which the elements of the financial state-
ments are to be recognised and reported [F 4.54]. The IFRS Framework acknowledges that a variety
of measurement bases are used today to different degrees and in varying combinations in financial
statements, including [F 4.55]:
 Historical cost
 Current cost
 Net realizable (settlement) value
 Present value (discounted)
Historical cost is the measurement basis most commonly used today, but it is usually combined
with other measurement bases. [F. 4.56] The IFRS Framework does not include concepts or princi-
ples for selecting which measurement basis should be used for particular elements of financial
statements or in particular circumstances. Individual standards and interpretations do provide this
guidance, however.

Lo1.8 Risks of Inaccurate Financial Reporting15

In an ideal world, every company’s financial reporting would always be 100% error-free. Financial
statements contain vital information about a company’s health, and internal and external
stakeholders need to be able to rely on their accuracy to make critical management and investment
decisions with confidence. Unfortunately, inaccurate reporting can sometimes occur, either due to
unintentional error or — in the worst situations — deliberate fraud.
Inaccurate reporting can have painful and costly consequences, including poor business and
investment decisions, regulatory fines and reputational damage. Understanding the causes, risks
and ways to mitigate errors can help companies avoid financial reporting inaccuracies and the
problems they can cause.
Importance of Accurate Financial Reporting
Accurate financial reporting is vital to external and internal stakeholders that rely on the
information for decision-making for several reasons:
 Investors need an accurate profile of a company’s financial health when deciding whether,
 and how much, to invest in the company. Investors use the information in financial reports
when deciding whether to buy stock in publicly traded companies.
 Creditors, such as banks, the Small Business Administration (SBA) and credit card companies,
rely on the accuracy of an organization’s reporting to analyze its creditworthiness and establish
appropriate credit lines.

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Kristina Russo | CPA, MBA, Author / 2022, What Are the Risks of Inaccurate Financial Reporting?
NetSuite, https://www.netsuite.com › ... › Accounting

18
 The company’s CEO and other senior managers rely on internal financial reporting for day-to-
day decisions, such as when to buy inventory or how to set product prices. Executives also use
internal financial reporting as a tool for stewarding the company’s strategic direction.
Financial reporting needs to be timely as well as accurate — even the most accurate information can
be worthless if it’s out of date or it’s not available when needed. In addition, external financial
reporting must meet deadlines defined by regulatory agencies.
How Does Financial Reporting Go Wrong?
Many financial reporting errors are accidental. Given the plethora of standards and regulations
governing financial reporting, combined with the pressure for timeliness, it’s easy to see how
companies can make mistakes. But there are also examples of deliberately inaccurate financial
reporting by unscrupulous characters. Whether unintended or not, errors in financial reporting can
have serious consequences.
Causes of Inaccurate Financial Reporting
Many factors can contribute to inaccuracies in financial reporting, including inadequately trained
staff, error-prone manual processes and inconsistent accounting methods.
1. Inadequately trained or incompetent staff across the company can directly and indirectly
cause accounting errors. For example, warehouse staff may miscount inventory, and
salespeople may make mistakes in travel expense reports — both of which can cause
accounting errors.
2. Accounting personnel who are not up to date on accounting standards and regulatory
requirements. GAAP, SEC and IRS standards and guidelines change frequently — recent
examples include the changes to lease accounting defined in ASC 842 and the tax changes
included in the Tax Cuts and Jobs Act (TCJA). Members of the accounting team may fail to stay
current on the latest information, especially when they’re struggling with heavy workloads.
3. Manual processes. To err is human. Manual processes increase the likelihood of simple
accounting mistakes, such as transposing digits, misplacing a decimal point, double-counting or
failing to record an activity in a ledger.
4. Unclear communication between those setting accounting policy and those responsible for
implementing it can cause errors. Examples of disconnects include misunderstandings about
how to handle accounting estimates, such as reserves for possible bad debt.
5. Poorly integrated financial systems can create data havoc, resulting in errors through
improper mapping of information between different systems and the need for manual
intervention in the flow of data.
6. Inadequate review processes can result in errors slipping through, such as imbalances in
7. Intercompany accounts. This is often the result of poor time management, inadequate
resources or misplaced priorities.
8. Inconsistent accounting methods among departments or subsidiaries can cause errors in
financial statements. Examples include using different methodologies for inventory valuation or
revenue recognition, and incompatible transfer pricing.
9. Chart of accounts misuse. Incorrect treatment of transactions, such as miscoding an invoice in
the accounts payable process or misclassifying expenses as revenue, are errors that can obscure
financial reporting.

19
10. Fraud. Schemes in which employees deliberately misstate or omit information in financial
statements are relatively rare — but they are also the costliest type of workplace fraud that
companies suffer.
Impact of Inaccurate Financial Reporting
Financial reporting inaccuracies can have far-reaching consequences for the company, as well as for
investors and other external stakeholders.
1. Wasted time and resources. Companies can spend a significant amount of time trying to track
down and fix financial reporting errors and dealing with the consequences. It’s frustrating for
everyone involved and can lead to strained relationships, as well as job dissatisfaction.
2. Bad decisions. Inaccurate information can lead to poor decisions. This is especially important
when it comes to internal financial reporting, which is often the basis of operational decisions,
such as product pricing, as well as workforce hiring and firing decisions.
3. Cash-flow problems. Over reporting cash flow can cause the company to be short on cash
when paying bills or payroll. Conversely, underreporting cash flow can mean missing
opportunities for investment income or interest.
4. Fines and penalties. Inaccurate or late reporting can lead to penalties and fines from the IRS
and local authorities. If an IRS audit finds that a company underpaid its taxes due to inaccurate
financial reports, the company is charged interest and penalties on top of settling its tax bill.
5. Reputational damage and loss of credibility. Inaccurate financial reporting undermines the
credibility of a company and its management — even if the errors are unintentional. Lenders
may consider that applicants with financial reporting errors are riskier and charge them higher
interest rates or even refuse to lend them money. Investors become wary when they lose trust
in a company’s financial information.
Stock markets are unforgiving when companies need to rescind or revise financial reporting:
Share prices often fall and valuations sink. A household appliance maker’s stock price dropped
almost 3% when the company said it needed to restate its financial results, because some assets
had been erroneously recorded by unauthorized employees. On another occasion, the same
company needed to revise financial statements due to incorrect recording of expenses. Because
those revisions took longer to correct than expected, the company missed a reporting deadline
and its stock price took a 9% hit.
6. Bankruptcy. When inaccurate financial reporting is a result of fraud, the impact can be ruinous.
Intentional misrepresentation of financial statements can result in legal action, arrest and
imprisonment of executives, penalties and fines. The SEC Division of Enforcement investigates
and administers enforcement actions for these cases. In one prominent example, a major
energy company was investigated by the SEC for inflating earnings reports using deceptive
accounting practices. As the full extent of the inaccuracies became apparent, the formerly high-
flying company saw its stock price plummet from a high of $90 per share to less than $1. The
company ultimately filed for bankruptcy. Several executives were imprisoned, and employee
pension plans became almost worthless.

20
 In another example, a food manufacturer was accused of inflating its profit on key products and
reporting inaccurate earnings. Although the company never admitted to any wrongdoing, its
stock lost 20% of its value in a single day.
How to Keep Financial Reporting Accurate?
The primary methods used to ensure accuracy of financial reporting are internal accounting controls
and external audits.
1. Controls. Controls are internal processes or policies that are put into place to reduce the
likelihood of errors. While controls are not iron-clad safeguards, especially in cases
of orchestrated fraud, they are meant to provide a reasonable level of protection against
financial reporting misstatements. Controls are such important financial reporting “circuit
breakers” that the Sarbanes Oxley Act requires public companies to issue an Internal Controls
Report demonstrating that adequate financial controls exist for their assets and financial
records.
There are two basic types of controls: prevent and detect. Preventive controls are designed to
prevent errors before they occur. They aim to keep financial data clean before it flows into
financial statements. Typical preventive controls include segregation of duties, user access
restrictions for accounting systems, physical safeguarding of assets, requiring multiple levels of
approval with formal delegated authority for actions such as purchasing goods and paying
invoices, and employee screening and training.
Detect controls work at the back end of the accounting process to identify errors or
irregularities for investigation and correction. The most common detect controls are account
reconciliations that compare internal financial data to external documentation, such as
comparing general ledger cash accounts to external bank statements. Other detect controls
include comparing actual activity to budgets or forecasts, conducting physical inventory cycle
counts, regular testing by internal auditors and periodic external audits. Because detect controls
alert companies to errors after the fact, it is important that they are conducted in a timely way.
2. External audits. A common misconception is that the best way to ensure correct financial
reporting is to have external auditors audit the company’s financial statements. While this is
certainly a best practice — and a regulatory requirement for public companies — audits do not
guarantee perfection. Instead, auditors provide a written opinion of the accuracy of the
statements, following an audit process based on Generally Accepted Auditing Standards
(GAAS). The best result is a “clean” or “unqualified” audit opinion, which states that the
financial reporting is free of material misstatement and that management of the company is
ultimately responsible for preparation of the financial statements. Alternatively, auditors can
release opinions that indicate possible problems with the financial statements. For example,
they may release a “modified” or “qualified” opinion when there is an unresolved disagreement
with company management. Modified opinions are rare, because most companies rectify the
disagreement before the audit is finished. “Disclaimed” and “adverse” audit opinions both
indicate significant problems with the financial statements and are also very rare.

LO1.9 Developments in contemporary financial reporting

The major driving forces behind the developments in contemporary financial reporting include the
following:

21
 a. Globalization
Globalization has given rise to the push for the international harmonization of accounting standards
and the resultant debate about whose standards should be adopted. Starting 2005, the European
Union publicly traded EU incorporated companies have to follow the international financial
reporting standards (IFRS) of the International Accounting Standards Board (IASB), formerly the
International Accounting Standards Committee (IASC). Over the final quarter of the twentieth
century, there was increasing recognition of the politicization of the standards-setting process
(Armstrong, 1977; Solomons, 1978; Zeff, 2002)16 and the implications of the economic
consequences of accounting standards and policies (Zeff, 1978).17 Therefore, the adoption of
international standards needs to be viewed as much in a political context as in an accounting one.
b. The influence of management
In contemporary financial reporting, management exerts a significant influence by directly shaping
the information presented through their accounting policy choices, estimations, and disclosure
decisions, often with the goal of portraying a desired financial picture to stakeholders, which can
lead to potential ethical concerns regarding the accuracy and transparency of the reporting.
This is a critical constituency when it comes to developments in accounting. Management is central
to any discussion of financial reporting, whether at the statutory or regulatory level, or at the level
of official pronouncements of accounting bodies' (Moonitz, 1974: 64).18 One of the reasons for the
failure of the current cost experiment in the early 1980s was the lack of support from financial
statement preparers (they were not convinced of the validity of the exercise). Current values are
now starting to creep into the financial statements, and `some corporate executives concerned
about the volatility of reported results have claimed that standard-setters have a hidden agenda to
undermine the bedrock of historical cost by introducing piecemeal requirements for current value
measurement' (Miller and Loftus, 2000: 5).19 There is a concern that the standard setters may be
requiring data for external reporting that management does not find useful for its own internal uses.
The debacle regarding current cost accounting in the 1980s should not be forgotten.
The key aspects of management's influence on financial reporting are:
Accounting policy selection: Management has discretion in choosing accounting methods (e.g.,
depreciation methods, inventory valuation) which can significantly impact reported financial
results.
Estimates and judgments: Many financial statement items require management estimations (e.g.,
bad debt expense, asset impairment), which can be subject to bias depending on management's
desired outcome.
Disclosure practices: Management decides what information to disclose beyond the basic financial
statements, potentially influencing how stakeholders perceive the company's performance.
Earnings management: Intentional manipulation of financial results through accounting choices to
meet specific targets or expectations, potentially compromising reporting quality.

16
Armstrong, M. (1977) `The politics of establishing accounting standards', The Journal of Accountancy, February: 76±9.// Solomons, D.
(1978) `Politicization of accounting', The Journal of Accountancy, November: 65±72.// Zeff, S.A. (2002) ```Political'' lobbying on proposed
standards: a challenge to the IASB', Accounting Horizons, 16 (1): 43±54.
17
Zeff, S.A. (1978) `The rise of ``economic consequences''', The Journal of Accountancy, December: 56±63.
18
Moonitz, M. (1974) Obtaining Agreement on Standards, Studies in Accounting Research No. 8. Sarasota, FL: AAA.
19
Miller, M.C. and Loftus, J.A. (2000) `Measurement entering the 21st century: a clear or blocked road ahead?', Australian Accounting
Review, 11 (2): 4±18.

22
Incentives and pressure: Management may be incentivized by compensation structures or market
pressure to present overly positive financial results.
Extreme market pressures
The pressures from the capital markets are forcing management to achieve earnings targets. These
pressures are exacerbated by the unforgiving nature of the equity market as securities valuations
are drastically adjusted downward whenever companies fail to meet `street' expectations.
Pressures are further magnified because management's compensation often is based in large part
on achieving earnings or other financial goals (Panel on Audit Effectiveness, 2000: 3).20
One consequence of these market pressures is the danger of `aggressive earnings management'
that `results in stakeholders, and the capital markets generally, being misled to some extent about
an entity's performance and profitability' (Auditing Practices Board, 2001: 3).21 Recent financial
scandals may be viewed as coming about as a result of extreme disclosure and earnings
management.

LO1.10 The informational perspective of the financial statements

The emphasis is now on the provision of information to enable the users of the financial statements
to take decisions and to make assessments of future cash flows of the reporting entity. Since the
1960s, users have been actively involved in dialogue about accounting principles and are
represented on some accounting standard-setting bodies. `An outsider, however, might find it
remarkable that accounting knowledge should be articulated not only by professional accountants,
but also by accounting information users (much like doctors and patients collaborating on the
development of medical knowledge' (Hines, 1989: 80).22 In 1994, the AICPA issued a report
containing the findings of a special committee aimed at improving business reporting. The
intention was to `influence future agendas of standard setters and regulators and the direction of
their projects'. Its adoption of `a customer focus' orientation was explained as follows: “Just as
successful businesses align the features of their products and services with the needs of their
customers, so, too, should the providers of business reporting. Recognizing this, the Committee
concentrated on the information needs of users to help identify and evaluate ideas for improvement
(AICPA, 1994: 4).”23
The user-primacy, decision-oriented view has not gone unchallenged, and it may have resulted in
unrealistic expectations about what the financial statements are capable of delivering. While
analysts may want to predict the future, others may still wish to understand the past; shareholders
will want dividends, governments will want taxation and information for their statistics, and
employees will be interested in a fair return for their efforts.
In Germany, the protection of creditors has been the driving force behind corporate reporting.
Bankers are interested in predicting future cash flows, but as they are generally in a privileged
position, having access to the company's budgets, they will not have to rely on the financial
statements to make their predictions. Increasingly, companies are having private meetings with key

20
Panel on Audit Effectiveness (2000) Report and Recommendations. Stamford, CT: Public Oversight Board.
21
Auditing Practices Board (APB) (2001) Aggressive Earnings Management ± Consultation Paper. London: APB.
22
Hines, R.D. (1989) `Financial accounting knowledge, conceptual framework projects and the social construction of the accounting
profession', Accounting, Auditing and Accountability Journal, 2 (2): 72±92.
23
American Institute of Accountants, Committee on Terminology (1953) Accounting Terminology Bulletin No. 1. New York: AIA.

23
stakeholders (Holland, 1997; Marston, 1999).24 Scott (1994: 62)25 considered that there `is the
increasing evidence that investors may not be as rational and security markets may not be as
efficient as previously believed. This threatens the foundation upon which most financial
accounting research over the last 25 years has been based, and has led to calls for a ``return to
fundamentals''.'
The debate about financial performance
The `statement of financial performance' (ASB, 2000)26 combines the statement of total recognized
gains and losses and the profit and loss account, one reason for this being that users seemed to be
ignoring the “statement of total recognized gains and losses”. However, there is a question as to
what is meant by the word `performance' and whether just focusing on `financial performance will
really indicate an enterprise's overall performance. The operating and financial review aims to
expand on the contents of the financial statements, but in the management accounting area, the
recognition of the limitations of financial performance indicators has resulted in the search for
complementary indicators, such as the balanced scorecard (Kaplan and Norton, 1996).27 These
issues are now being recognized in relation to external reporting (Upton, 2001).28
Advances in technology
This has resulted in a questioning of the relevance of the financial statements. “The demand for
more timely and broader information comes from decision makers, such as potential investors,
creditors, customers and suppliers, who are doing, or may want to do, business with an entity”
(CICA, 1999: 2).29 However, because of the multitude of decisions involved, “it is likely that decision
makers' information needs will be met at least in part by real-time access to corporate databases, a
possibility that is increasingly feasible given advances in information technology” (CICA, 1999: 2),
whereby users would be able to access the data they considered relevant to their decisions.
“Technology-driven information systems are capable of capturing, organizing and disseminating
information in `real time'. Investors can quickly access information and consequently have expanded
their demands for both financial and non-financial information. Some of that information is
`traditional' historical financial data, and some of it is new (Panel on Audit Effectiveness, 2000: 172)”.30
It is even suggested that greater disclosure may result in a lower cost of equity capital for some
forms (Botosan, 1997).31 However, if users are ignoring data in the financial statements, one has to
wonder how they would cope with this cornucopia or abundance of financial data: “Accounting is the
instrument used to treat a mass of enterprise facts so that the how of transactions becomes intelligible.
. . . It is hard to overestimate the contribution to understanding made by compressing a mass of facts
and by setting up the resulting data in ways that permit comparisons to be made. The mind cannot

24
Holland, J. (1997) Corporate Communications with Institutional Shareholders: Private Disclosures and Financial Reporting. Edinburgh:
Institute of Chartered Accountants of Scotland.// Marston, C. (1999) Investor Relations Meetings: Views of Companies, Institutional
Investors and Analysts. Glasgow: Institute of Chartered Accountants of Scotland.
25
Scott, W.R. (1994) `Research about accounting and research on how to account', in Ernst & Young Foundation (eds), Measurement
Research in Financial Accounting: Workshop Proceedings. Waterloo, Ont.: Ernst & Young Foundation and Waterloo University, School of
Accountancy. pp. 62±7.
26
Accounting Standards Board (ASB) (2000) FRED 22, Revision of FRS 3, `Reporting Financial Performance'. London: ASB.
27
Kaplan, R.S. and Norton, D.P. (1996). The Balanced Scorecard: Translating Strategy into Action. Boston, MA: Harvard Business School.
28
Upton, Jr., W.S. (2001) Business and Financial Reporting, Challenges from the New Economy, Special Report. Norwalk, CT: FASB.
29
Canadian Institute of Chartered Accountants (CICA) (1999) Continuous Auditing. Toronto: CICA.
30
Panel on Audit Effectiveness (2000) Report and Recommendations. Stamford, CT: Public Oversight Board.
31
Botosan, C. (1997) `Disclosure level and the cost of equity capital', The Accounting Review, 72 (3): 323±49.

24
grasp very many separate facts at once, and figures lose most of their significance unless the eyes can
see quickly whether they are larger or smaller than they were. (Littleton, 1953: 25)”32
In the age of the database, the relevance of double-entry bookkeeping has been questioned (Doost,
2000).33 However, it is likely that some sort of accounting control system will still be required. There
is the danger that real time reporting may be the ultimate in short-termism.
The development of the knowledge economy
This has implications for financial reporting with its current emphasis on tangible assets. There is a
concern that the financial statements may not reflect this development. According to Enterprise
Development Website, 2000:1, “For the past two hundred years, neo-classical economics has
recognized only two factors of production: labour and capital. This is changing. Information and
knowledge are replacing capital and energy as the primary wealth-creating assets, just as the latter
two replaced land and labor 200 years ago. In addition, technological developments in the 20th century
have transformed the majority of wealth-creating work from physically-based to `knowledge-based'.
Technology and knowledge are now the key factors of production. We are now an information society
in a knowledge economy.34
This is already having an impact and is leading to a questioning of the usefulness of the financial
statements. Research by Arthur Andersen into 10,000 public companies showed that by 1998,
under 30% of their market capitalization was represented by book value. More than 70% of their
value fell outside the public measurement and reporting system. This is a dramatic shift from just
20 years before, when book value provided 95% of market value. (Lindsey, 2001: 117)35
But before the usefulness of the financial statements is criticized, it is important to be clear about
what they are trying to show.
The rise of corporate governance
Though accountability has long been seen as one of the reasons for financial reporting: A series
of spectacular corporate failures and financial scandals ….. including BCCI, Polly Peck and Maxwell,
highlighted concerns about the standard of financial reporting and accountability. These concerns
centred around an apparently low level of confidence in both financial reporting and in the ability of
the auditors to provide safeguards which the users of company annual reports sought and
expected. (Davies et al., 1999: 223)36
Recent years have seen the rise in importance of corporate governance, and this could be seen to
culminate in the Company Law Review (2001),37 which viewed corporate governance as being
central to future developments in corporate reporting and accountability. It is important to view
the financial statements in the context of corporate governance (and not vice versa), and it should
be remembered that corporate governance encompasses much more than just financial reporting
(Short et al., 1999).38 Therefore, it would seem reasonable that issues like corporate social

32
Littleton, A.C. (1953) Structure of Accounting Theory, American Accounting Association Monograph No. 5. Sarasota, FL: American
Accounting Association.
33
Doost, R.K. (2000) `Has Pacioli's rule ended?', Managerial Auditing Journal, 15 (7): 26±30.
34
Enterprise Development Website (2000) `Knowledge economy', http://www.enterweb. org/know.htm, updated: 6/09/00.
35
Lindsey, R. (2001) `New economy, new accounting, new assurance', Accountancy, February: 116±17.
36
Davies, M., Paterson, R. and Wilson, A. (1999) UK GAAP (6th edn). London: Butterworths Tolley.
37
Company Law Review Steering Committee (2001) Modern Company Law for a Competitive Economy: Final Report. London: DTI.
38
Short, H., Keasey, K., Wright, M. and Hull, A. (1999) `Corporate governance: from accountability to enterprise', Accounting and Business
Research, 29 (4): 337±52.

25
responsibility and environmental accounting should be viewed in terms of corporate governance
rather than financial reporting per se. If a problem is greater than accounting, it should not be
considered in just an accounting context.
While all these developments have been occurring, the auditors have had to try to respond, as well
as react, to criticisms of their own work.
Independence
This can be viewed as the key quality of the external audit; however, auditors have frequently been
criticized for their perceived lack of independence: “How unfair may the financial statements be and
yet be deemed fair in accordance with GAAP?” (Briloff, 1986: 27).39 If auditors are not independent,
the relevance of the audit can quite rightly be questioned. In order to help bolster the independence
of the external auditors, larger companies have established audit committees.
Globalization
As a consequence of globalization `today's complex economic world requires a break from the
auditing traditions that have evolved from the early balance sheet audit' (Bell et al., 1997: 12);40 in
particular, the emphasis on the business risk approach to auditing (Lemon et al., 2000).41 Industrial-
age companies ran on tangible assets such as inventory, machinery, buildings and land. Post-
industrial, information-age enterprises run on intangible assets, including information, human
resources, and R & D. If we are to analyze the risks facing the audited company and understand its
operations, we must understand these new ingredients for value creation and destruction. (AICPA
chairman elect, R.K. Elliott, quoted by KPMG [1999: 18])42
Audit developments
As a result of the above factors, there has been a perceived change in audit emphasis from `audit
efficiency' (aiming to reduce audit costs) to `audit effectiveness' (with an emphasis on whether the
audit is achieving its objective). This has resulted in a re-engineering of the audit process, which will
need to continue (Panel on Audit Effectiveness, 2000),43 and in the drive to add value to the
external audit.
Assurance services
The pressure to `add value' to the external audit has resulted in the consideration of how to extend
the audit function. The Elliott Committee (1997a)44 identified opportunities for assurance services
to expand to the new types of information used by decision makers. It defined `assurance services'
as `independent professional services that improve the quality of information, or its context, for
decision makers' (p. 1).
LO1.11 Comprehensive real-time database approach to external reporting
This would have major implications for the external auditors, as `information provided on a real-
time basis to investors inevitably will raise the question of its reliability' (Panel on Audit
39
Briloff, A.J. (1986) `Standards without standards/principles without principles/fairness without fairness', Advances in Accounting, 3:
25±50.
40
Bell, T.B., Marrs, F.O., Solomon, I. and Thomas, H. (1997) Auditing Organizations Through a Strategic-Systems Lens: The KPMG Business
Measurement Process. USA: KPMG Peat Marwick LLP.
41
Lemon, W.M., Tatum, K.W. and Turley, W.S. (2000) Developments in the Audit Methodologies of Large Accounting Firms. London: ABG
Professional Information.
42
KPMG (1999) The Financial Statement Audit: Why a New Age Requires an Evolving Methodology. New York: KPMG LLP.
43
Panel on Audit Effectiveness (2000) Report and Recommendations. Stamford, CT: Public Oversight Board.
44
Elliott, R.K. (1998) `Assurance services and the audit heritage', Auditing: A Journal of Practice and Theory, 17 (Supplement): 1±8.

26
Effectiveness, 2000: 172).45 The perceived need for more timely assurance has given rise to the
notion of `continuous assurance' through a `continuous audit' (CICA, 1999).46 Because of the pace
of business and the speed of digital communication, it is suggested that the people who were users
of the financial statements want continuous assurance about the systems and controls within an
organization.
Fraud
Accounting history is littered with examples of financial information used as a means of deception'
(Edwards, 1989: 143).47
Fraudulent financial statements are of great concern not only to the corporate world, but also to
the accounting profession. Every year the public has witnessed spectacular business failures
reported by the media. These catastrophic events have shocked the public, undermined auditors'
credibility in their reporting function, and eroded public confidence in the accounting and
auditing profession. Events such as unreported revenues, manipulation of losses, inflated sales,
fraudulent write-offs of uncollectible accounts, unusual related-party transactions,
misappropriation of assets and many other irregularities have spearheaded several court rulings
and shaped the auditing standards. (Vanasco, 1998: 60)48
The detection of fraud is an often-cited expectation of the external auditors. In Victorian times, the
audit did have the detection of fraud as its primary objective (Lee, 1986: 31); however, auditors are
now required to plan their work in order to have a reasonable expectation of detecting material
misstatements arising from error or fraud (APB, 1995: para. 18).49
Given the multiplicity and magnitude of the problems relating to the production and utilization of
the financial statements, it is critical that there is a form conceptual basis underpinning financial
reporting in order to have a foundation from which to tackle these issues:
Accountants must respond to these challenges. But the response should come after a careful
study of the foundations upon which accounting has been constructed. The most dangerous
trap that accountants can fall into is to be confused and demoralized by the numerous
challenges from the neighboring areas of accounting in business and economics and to justify
their theories and practices here and there with a humble apology to these neighbors.
Accounting has its own way of thinking about, observing, and organizing business phenomena.
What is more important, accounting has its own discipline and philosophy, which have
developed over centuries. This does not mean that they should not be changed. It emphasizes
that the response to the challenges should be made keeping in mind the effects of this response
upon accounting foundations (Ijiri, 1967: ix)50
One way of tackling the multitude of problems facing financial reporting is to build upon accounting
theory. The importance of the interrelationship between theory and practice was set out by
Littleton as follows:
” Because accounting theory and practice are inseparably connected, neither can
stand alone. To understand practice fully, we need to understand theory as well.
And to understand the integrated structure of accounting theory, we need to know

45
Panel on Audit Effectiveness (2000) Report and Recommendations. Stamford, CT: Public Oversight Board.
46
Canadian Institute of Chartered Accountants (CICA) (1999) Continuous Auditing. Toronto: CICA.
47
Edwards, J.R. (1989) A History of Financial Accounting. London: Routledge.
48
Vanasco, R.R. (1998) `Fraud auditing', Managerial Auditing Journal, 13 (1): 4±71.
49
Auditing Practices Board (APB) (1995) SAS 110 ± Fraud and Error. London: APB. January.
50
Ijiri, Y. (1967) The Foundations of Accounting Measurement: A Mathematical, Economic, and Behavioural Inquiry. Englewood Cliffs, NJ:
Prentice Hall.

27
 something of the totality that is accountancy, and something of its related fields.”
(1953: 1)51
The changing nature of accounting does have implications for theory development. What impact
would all the developments mentioned have on accounting theory? While it would be expected that
practice would change over time, would theory really be expected to change? If it does change,
does this mean that it was ¯awed, or indeed could any proposed changes to the theory be ¯awed?
How far can accounting change for it still to be called accounting?

SUMMARY
This chapter explores the diversity of crucial issues currently facing financial reporting. It must be
remembered that the second half of the twentieth century saw a number of subtle changes in the
way the financial statements are viewed, but their ramifications have been profound. The focus of
financial reporting has moved from providing the financial statements to shareholders, to the
provision of general-purpose financial statements to enable users to take decisions and make
predictions of future cash flows. Users of the financial statements have been keen to expound their
requirements, but if the responses of receivers [users] to accounting stimuli is to be taken as
evidence that certain kinds of accounting practices are justified, then we must not overlook the
possibility that those responses were conditioned. The receivers are likely to have gained the
impression that they ought to react, and have noted that others react, and thereby have become
conditioned to react. The fact that Pavlov's dog reacted to the sound of a bell does not provide
justification for the existence of the bell. (Sterling, 1970: 453)52
The current emphasis appears to be on assisting almost instantaneous decision making and the
prediction of the future possibly at the expense of understanding the past. Capital markets are
considered to impound information into a share price as soon as it is available, but it must not be
forgotten that markets are comprised of a multitude of human judgements. As with any
judgement, its validity depends on the experience, the evidence and understanding of the person
who has to form the opinion. Just because the users of the financial statements may want
something, at what point is it necessary to say that accountants (and indeed anyone else) cannot
provide them with it? Awareness of the limitations of the financial statements is a key starting point
in the quest for alternative/supplementary disclosures. However, this does not mean that
accountants should be embarrassed about the limitations of the financial statements; and the
financial statements do have their uses, it is just that they may not satisfy the needs of some very
vocal users.
The advances in information technology now mean that there has been a proliferation in the
number of producers and users of accounting data. This ‘mass access' is probably accompanied by
half-remembered warnings (or even worse, no knowledge) about the limitations of accounting
data. It is important that advances in technology are matched with advances in common sense;
however, the vagueness of `accounting theory' may mean that this `common sense' is not so
common.
In the contemporary era, ideally, financial reporting should always be accurate and timely. Accurate
reporting in financial statements and other documents is vital for internal and external
51
Littleton, A.C. (1953) Structure of Accounting Theory, American Accounting Association Monograph No. 5. Sarasota, FL: American
Accounting Association.
52
Sterling, R.R. (1970) `On theory construction and verification', The Accounting Review, July: 444±57.

28
stakeholders, who rely on the information to make critical management and investment decisions.
In reality, unintentional errors and fraud can lead to inaccuracies in financial statements and other
important communications. The risks to the company are significant, ranging from poor operating
decisions to reputational impairment and even bankruptcy and legal action. Understanding the
typical causes of inaccuracies and deploying a net of internal controls, including powerful financial
software, can help reduce the likelihood of errors.

END-OF-CHAPTER EXERCISES
DISCUSSION QUESTIONS
1. What is financial reporting?
2. What are the inclusions of financial reporting?
3. Provide the main objective and purpose of financial reporting.
4. What information does financial reporting provide?
5. Discuss briefly the benefits and importance of financial reporting.
6. What are International Financial Reporting Standards (IFRS)?
7. How Does IFRS Differ From GAAP?
8. What are the standard requirements of IFRS?
9. Discuss briefly at least 3 reporting challenges companies commonly encounter as well as
solutions for resolving them.
10. Discuss briefly the major driving forces behind the developments in contemporary financial
reporting.
11. Given all the issues discussed in this chapter, do you consider that external financial
reporting has lost its focus? Prepare an argument to defend the stance you take.
12. Most financial advertisements that appear in newspapers specifically warn that past
performance may not necessarily be a guide to future performance. How do you reconcile
this with the standard setters' emphasis on enabling users of the financial statements to
predict future cash flows?
13. Real-time reporting would presumably result in profits/losses and gains/losses being
calculated on a minute-by-minute basis. How useful/realistic do you think this would be?
14. With the rise of the `knowledge economy', it is likely that companies will have more and
more intangible assets that at present are not recognized in the financial statements. What
are the implications of this for accountants, companies and those outside the reporting
entity?
15. What is the distinction between aggressive earnings management and fraud?
16. What is the primary objective of financial reporting according to the Conceptual
Framework?
17. What are the two primary qualitative characteristics of financial information identified in
the Conceptual Framework?
18. Can you explain the concept of "comparability" as an enhancing qualitative characteristic?
19. What is meant by "faithful representation" in the Conceptual Framework?
20. How does the Conceptual Framework contribute to the development of accounting
standards?
21. Why is verifiability an important enhancing qualitative characteristic of financial
information?

29
22. How does the Conceptual Framework address materiality in financial reporting?
23. What is the role of the Conceptual Framework in resolving accounting issues and
inconsistencies?
24. Can the Conceptual Framework be changed or updated over time?
25. How does the Conceptual Framework guide the treatment of uncertain events or
conditions in financial reporting?
26. What is the relationship between the Conceptual Framework and specific accounting
standards, such as International Financial Reporting Standards (IFRS) or Generally
Accepted Accounting Principles (GAAP)?
27. How does the Conceptual Framework address the recognition and measurement of assets,
liabilities, income, and expenses?
28. In what ways does the Conceptual Framework contribute to the preparation and
presentation of financial statements?
29. What are the primary components of the Conceptual Framework, and how do they
interrelate?
30. How does the Conceptual Framework address the concept of prudence or conservatism in
financial reporting?
31. Can the Conceptual Framework be used by non-publicly traded entities, such as small
businesses?
32. How does the Conceptual Framework address the concept of faithful representation in
financial reporting?
33. What is the role of the Conceptual Framework in enhancing the comparability of financial
statements across different entities?
34. How does the Conceptual Framework address the concept of substance over form in
accounting?
35. In what ways does the Conceptual Framework contribute to the transparency and
accountability of financial reporting?

30