The Regulatory

Framework for
Financial
Reporting 1
Semester 1/2020
1
 Course Name:
The Regulatory Framework for
Financial Reporting 1
Unit 2:
The characteristics of useful
information
2
Objective:
When you have completed this unit, you should be able to;
 Describe the characteristics of useful financial information
 Explain inconsistencies between different characteristics of
financial information
 Describe how different characteristics may assume different
relative importance
Characteristics of useful information
What are the characteristics of useful information?
In order for information to be useful, it should
contain the following seven characteristics;
1. Relevance
2. Understandability
3. Reliability
4. Completeness
5. Objectivity
6. Timeliness
7. Comparability
 Characteristics of useful information
What are the characteristics of useful information?

h of the characteristics can be explained as follow

1. Relevance
 The information must be relevant and must give what he/she wants thus accountants
must know
 Who the user is, what his/her purpose is and what information he/she requires for this
purpose

2. Understandability
 Information provided must be geared to the abilities and knowledge of the users
concerned

3. Reliability
 It must be reliable, users must have confident in the information presented in the
reports

4. Completeness
 Users must be provided an overall picture of the reporting business.
 Characteristics of useful information
What are the characteristics of useful information?
ch of the characteristics can be explained as follow
5. Objectivity
 Information must be objective and unbiased and must meet all user
needs and neutral in that the perception of the measurer should not
be biased towards the interest of any one user group.
6. Timeliness
 Information should be available to users in time for him/her to make
use of it and it must be up-to-date. e.g. annually, half yearly,
quarterly etc.
7. Comparability
 Information provided must be comparable e.g.
 Compare with information about the same business for a different
period and
 It can be easily compared with information about a different business
for the same of even a different period
 The need for communication
What is information?
“accounting” is about providing useful figures
to people about their interest ……..and
The information provided must be communicated and
there has to be understanding by users
The point about information and communication is that the receiver (user) is
genuinely informed

He/she must become mentally and personally aware….

 E.g. R.J. Chambers says;

“ if effective communication is to take place the language used must
be such that the signs employed evoke in others the same response
as if those others were to see the object represented instead of the
signs “
Summary
The items discussed in this chapter:

What have we discussed?

1. We have discussed and identified the users of financial

information and their need for such information

2. The type and characteristics of information needed and

3. The above is a necessary part of the overall framework of

accounting that we need to build up
 Reading no: 2 Introduction
General Purpose Financial Reporting

ASB Interpretation of General Purpose Financial Repor

 Annual reports, prospectuses, management’s forecasts and descriptions of an
entity’s social or environmental impacts be all included in the financial reports

 Australian SAC2: Objective of General Purpose Financial Reporting

 Financial reporting encompasses the provision of financial statements and related
financial and other information, e.g. financial statements, notes, supplementary
schedules and explanatory material intended to be read with the financial
statements, are the principal means of communicating financial information about a
reporting entity to users.

 FASB, AASB & PSASB note that financial reports can encompass
both financial and non-financial information.

ISSUES IN FINANCIAL ACCOUNTING PAGES 36-39

 2.5 The subject of financial reporting
Second level of Conceptual framework
ines and explains the concept of “Reporting Entit
1. SAC1 definition of Reporting Entity:
 Any legal, administrative, or fiduciary arrangement, organisational structure or other
party (including a person) having the capacity to deploy scarce resources in order to
achieve objectives (para. 6) AND requires that “individual reporting entities be identified
by reference to the existence of users who are dependent on general purpose financial
reports for information for making and evaluating resource allocation decision” (para.
12)

2. Accounting Literature
 Identifies several types of entities; e.g. legal entity, an accounting entity, a business entity, and a
reporting entity. HOWEVER

3. SAC 1: defines a reporting entity by reference to users needs. A reporting entity has users dependent on
its general purpose financial reports for information about that entity

 An entity which does not have users dependent on its general purpose financial reports is not a reporting
entity even if it publishes financial reports

ISSUES IN FINANCIAL ACCOUNTING PAGES 36-39

 2.5 The subject of financial reporting
Second level of Conceptual framework
Reporting entities required to prepare general purpose
 Companies whose securities are publicly listed
 Listed trusts and other trustsfinancial reports
which raise funds from the public
 Government-controlled business undertakings
 Federal state and territorial governments and
 Local governments

Other reporting entities that qualify & prepare financial

reports include;
 NGOs, State Authorities and not govt.-controlled business undertakings
Other private sector entities which do not exhibit
characteristics to be identified as reporting entities may
 Exempt proprietary companies
 Family trusts
include;
 Partnerships
 Sole traders and
 Wholly owned subsidiaries of Australian reporting entities

ISSUES IN FINANCIAL ACCOUNTING PAGES 36-39

 2.6 The objective of financial reporting
Level 3 of the conceptual framework
rned with the objective of general purpose financial rep
In Australia two studies were conducted;
1st Kenley & Staubus (1972)
 It suggested that the objective of accounting was “to provide
financial information about the economic affairs of an entity for
use in making decisions”
2nd Barton (1982)
 Barton suggested that the objective of accounting was to
“satisfy” the needs of users for financial information about the
firms operations and its resources and obligations for use in
economic decision making and control and for accountability
purposes;
 The three key words derived for this definition are;
accountability, decision usefulness and control
 2.6 The objective of financial reporting
Level 3 of the conceptual framework
rned with the objective of general purpose financial rep
 However the term “control” is associated with providing information
to managers and governing bodies to assist them in controlling the
operations of the entity

 Thus the control objective is not relevant for financial reporting

 AARF issued SAC 2: “Objective of general purpose financial reporting”

 Para. 7..suggest that;

 General purpose financial reporting focuses on providing information

to meet the common information needs of users who are unable to
command the preparation of reports tailored to their particular
needs.
 2.6 The objective of financial reporting
Level 3 of the conceptual framework
rned with the objective of general purpose financial rep
 Para 26..Also elaborates that the objective of general purpose
financial reporting is to provide information to users that is
useful for making and evaluating decisions about the allocation
of scarce resources.

 SAC2 recognises a decision-usefulness objective for financial

reporting and identifies four categories of users
 Resource providers (shareholders, creditors and employees)
 Receipts of goods and services,
 Parties performing a review or oversight function
 Management and governing bodies

 Therefore, the choice of decision-usefulness as the objective

for financial reporting is a relatively recent phenomenon
 2.6 The objective of financial reporting
Level 3 of the conceptual framework

There are three questions arising from the choice of a

decision-usefulness 0bjective

1. What is the nature of the users decision which rely, at least in

part on the financial information contained in the reports?

2. What qualities are expected of the information in the reports

3. What information is needed to assist in the decision?

 The nature of the decision
SAC2: considers information need of various user groups,

The user groups and decision needs include;

1. Service providers
 Want to know whether the reporting entity is achieving the objectives
which formed the reason for the provision of resources in the past and
operating economically and effectively and using resources as prescribed

2. Existing shareholders
 Whether to buy, hold or sell shares in the company and whether to appoint
new directors or retain the old.

3. Existing creditors
 Whether to lend more, to seek repayment of loans and what interest rates
to charge to compensate for perceived risks
 The nature of the decision
SAC2: considers information need of various user groups,
The user groups and decision needs include;
4. Potential shareholders, creditors and employees
 Decide whether to buy shares, subscribe to a new issue, lend to the
financial entity or accept and offer of employment etc.

5. Receipts of goods and services

 To assess the ability of the reporting entity to continue to provide goods
and services in the future, the likely level and costs of goods and services

6. Parties performing a review or oversight function

 Want to know whether the entity is achieving its objectives and operating
economically and effectively in carrying out its operations
 The quality of the information

One of the criteria for including information in general purpose

financial reports is that it should have “desirable” qualities or
characteristics. These characteristics are part of the fourth level of
the conceptual framework and are considered in section 3.2
 The information in the reports

The information that should be included in general purpose

financial reports should provide assistance in the decision-making
process. In other words, it should be relevant for decision making.