The primary objective of financial reporting is to provide useful information to existing and potential investors, lenders, and other creditors for decision making. This objective has been established through the conceptual framework developed by accounting standard setters over many years.
Financial reporting aims to provide information about an entity’s economic resources, claims against the entity, and effects of transactions and other events and circumstances that change its economic resources and claims in order to help users, particularly investors, creditors and others, assess the prospects for future net cash inflows to the entity and in particular the amount, timing and uncertainty of future net cash inflows to the entity. Since investors’ and creditors’ interest in the cash flows of an entity relate to the returns that they expect from it, financial reporting should provide information to help them assess expected cash flows.
For financial reporting to be truly useful, the information provided must not only represent faithfully the transactions and other events and circumstances that it either purports to represent or could reasonably be expected to represent, but it should also be relevant to the decision-making needs of users and faithfully represented. This means the information must be presented in a way that contributes to the understandability and integrity of the financial reporting. For information to be relevant, it must be capable of making a difference in the decisions made by users. It should help users in evaluating past, present or future events or in confirming or correcting their past evaluations. It must also be timely to be useful to decision makers.
To achieve the objective of financial reporting, essential characteristics such as understandability, relevance, materiality, reliability, timeliness, comparability as well as balancing benefit and cost must be applied. Financial reports must be complete and transparent in disclosing both favorable and unfavorable facts. Selective disclosure or non-disclosure will not achieve the objective. Understandability is an essential quality of information included in financial reports. Users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information. Notwithstanding this, financial reports needs to be presented in a way that can be understood by users of different skills and abilities to recognize its significance. To be relevant, information must be capable of making a difference in a user’s assessment of the prospects of the entity and the economic decisions. Materiality relates to both the nature of the information and the amount. A piece of information is material if its omission or misstatement could influence the decisions of users. Reliable information is free from material error and bias and can be depended upon by users to represent faithfully items or transactions they purport or could reasonably be expected to represent. Timeliness means having information available for users in time to be capable of influencing their economic decisions. Comparability allows users to identify and understand similarities and differences between two sets of economic phenomena. Comparable information enhances the usefulness of financial information in making economic decisions.
The overarching and primary objective of financial reporting is to provide useful information that enables investors, creditors and other users to make well informed resource allocation decisions through general purpose financial reports prepared on the accrual basis of accounting which presents faithfully the financial position, financial performance and cash flows of an entity . The reports aim to meet the common needs of the wide range of users and should provide information to enable them to assess the management’s stewardship and discharge of its accountability obligations and the prospects for future net cash inflows to the entity. Financial information provided in general purpose financial reports should help all types of users, existing and potential investors, lenders and other creditors and other users make rational investment, credit and similar economic decisions.