In sections that are incomplete. Another factor to

In this essay, there will be discussions
and evaluations on how Conceptual Framework for Financial Reporting and
Accounting will make it possible to judge whether an entity will be able to
bring in future net cash inflows with the help of qualitative characteristics
such as relevance and faithfully representation of financial statements. This
essay will also speak on accounting standards such as prudence and accrual
accounting make financial statements relevant and faithfully represented which
makes financial information more possible to be able to assess the chances for
future net cash inflows. This essay will also look at discussion papers and
what respondents have said about the conceptual framework for financial
reporting.

 

In order for financial statements
to be relevant, financial information will need to be confirmative so that users
are able to check and confirm earlier predictions or changes in earlier
forecasts. Another way financial statements can be relevant is if financial
information has predictive value. This allows users to make predictions based
of financial statements. If financial statements have both predictive value and
confirmatory or one of each of these, then financial statements are seen to be
relevant. A financial statement should contain predictive value as it would
enable uses to find out future outcomes in which will be able to predict
possible prospects for future net cash inflows to an entity.

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Also when looking at other
qualitative characteristics such as faithful representation, there are three
important factors to ensure that financial statements contain in order to be
faithfully represented. One important factor is that financial information with
financial statements should be complete, this means that the entire financial
statement should contain everything that is required and not have any sections
that are incomplete. Another factor to make sure financial statements are
neutral which means that there is no bias and should practice prudence and not
misstate or overstate any figures which could lead to an inaccurate report. The
last factor that makes a financial statement faithfully represented is that the
statement should be free from any errors.

 

Conceptual framework is a set of
agreed fundamentals principles which is a basis of financial accounting and
which provides a theoretical ground for the developed of standards. One primary
purpose of conceptual framework is that it provides the IASB with concepts and
principles that are used to inform standard setters when standards are
developed. This is done so that consistent concepts are implemented in different
standards. Another purpose of conceptual framework is that is assists other
parties so that they can understand as well as interpret existing IFRS’s.

 

One academic journal has stated that expectations by
investors, lenders and other creditors are created on the basis on how they are
able to assess ‘amount, timing and uncertainty for the prospects of future net
cash inflows to an entity. In order for lenders, investors and other creditors
to assess the entity future net cash inflows they would need certain
information about the entity such as the resources available to the entity,
claim against the entity. Also investors, lenders and other creditors would
need to find out how ‘efficiently and effectively the entity’s management and
governing board have discharged their responsibilities to use the entity’s
resources’ (Masb.org.my, 2018).
An example of these responsibilities can be keeping secure an entity’s
unfavourable effects of economic factors which can include price or
technological differences. Another example of responsibilities by an entity is
that the entity should comply with applicable laws and regulations. However,
all of this information cannot be asked directly from reporting entities so
they will have to look at financial reports published by entities. (Masb.org.my, 2018)

 

A different academic journal has
suggested that information in a financial report about an entity’s cash flow over
a given period will make it easier to find out to assess whether an entity is
able to generate future net cash inflows (Frascanada.ca, n.d.). This is because a
financial report will contain a cash flow statement so users are able to
examine whether there will be net cash inflow in the future. The financial
statement provides information on how a reporting entity uses cash as well as
details on borrowing of funds, any debt repayments or cash dividends. There is
also other information that could affect whether an entity is liquid or
illiquid and solvent or not (Frascanada.ca,
n.d.). Relevance helps or makes it possible to assess future net
cash inflows as there is predictive value. This means that looking at cash flow
statements users are able to predict future net cash inflows by looking at the
figures already stated in the financial statements. If predictive value was not
present in financial statements then there would be no way possible for
investors, lenders and other creditors to assess whether an entity would bring
in future net cash inflows. As a result, an entity would not receive the funds
they need in order to progress.

 

Another academic journal has said
that it depends on how important or relevant the measure is and will depend on
how investors, lenders and other creditors are able to judge how an asset or
liability can contribute to brining in future cash flows (Drsc.de, 2015). As a result, there is a
measurement basis for how an asset or liability should be assessed. ‘For a
particular asset should depend on how that asset contributes to future cash
flows and for a particular liability should depend on how the entity will
settle or fulfil that liability’ (Drsc.de,
2015). However, some people did not agree with this measurement basis in
which they responded by saying the IASB should implement a single or ideal
measurement basis, in contrast to the majority who agreed with this measurement
basis. Also respondents did not agree with how investor, lenders and other
creditors will be able to judge how assets and liabilities will contribute to
future cash flows (Drsc.de, 2015). The
IASB has then accepted this comments by respondents and have removed the
reference to assessments on investors, lenders and creditors (Drsc.de, 2015). In terms of faithful
representation is states that representation is supposed to be free from any
errors however financial statements do not have to entirely accurate. On
faithful representation the journal also says that when looking at if an
entity’s financial position and financial performance, it is essential to look
at how best to portray links between items. Few respondents have said things
about these statements and the IASB have moved these suggestions to the
exposure draft.

 

Prudence is an accounting
standard that is used when preparing financial statements. Prudence is when the
amount of revenue is recognised or when expenses are not stated as they should
be or understated. This then means that financial information in financial
statements is not faithfully represented. As a result of financial information
such as revenues and expenses are not as they should be so it will not be
accurate for investors, lenders and creditors to predict future net cash
inflows. There is a problem with prudence is that ‘creation of hidden reserves
or excessive provisions’ as well as understatement of assets or income Drsc.de. (2015). As this means that financial
statements are not neutral which as a result means that financial statements
cannot be faithfully represented and investors, lenders and other creditors
will not be able to predict future net cash inflows. When developing the
current version of chapter 3 which is similar to chapter 2 in the exposure
draft, IASB have taken out the reference to do with prudence as they were
issues that prudence can be looked at in a way that is not consistent the
neutrality Drsc.de. (2015). In
the discussion paper published by the IASB respondents agreed with the removal
of the term prudence from the conceptual framework. The respondents had to say
that there was no understanding of what prudence actually meant and it could be
interpreted differently and adding the word in the conceptual framework could
make it not consistent with applying this accounting standard Drsc.de. (2015). The discussion paper
also included more on what respondent’s thought the exercise of prudence can be
judged differently by people or seen as being subjective which makes it harder
judge an entity financial performance. IASB has thought of prudence as an
‘exercise of caution’ when looking at the judgements on the situations of
uncertainty which can make it easier to for neutrality to take effect in
accounting policies. Cautious prudence is an element in making sure that there
is faithful representation of assets, liabilities, equity, income and expenses (Drsc.de, 2015). 

 

 

Accrual accounting shows effects that transactions and other
events as wells as the position on a reporting entity’s economic resources,
also claims in a specific period when those effects have happened, even if
there are cash receipts and payments that occur at a different date (Masb.org.my, n.d.). Accrual
accounting is essential as details of a reporting entity’s economic resources
as well as claims and differences in the economic resources including claims over
a specific period makes it possible to judging an entity’s past performance as
well as future performance than just information that is only based around cash
receipts and payments from that accounting period(Masb.org.my, n.d.). Information that is
regarding an entity’s financial performance over a time period that is shown by
differences in economic resources as well as claims other than obtaining
additional resources directly from investors and creditors, is needed to judge
an entity’s past and future prospects of generate net cash inflows (Masb.org.my, n.d.). This
information shows the level to which a reporting entity has increased their
resources available, therefore its volume for creating net cash inflows through
their operations instead of getting more resources from investors and lenders.

 

One alternative view by the EFRAG (European Financial
Reporting Advisory Group) has stated that they believe business models need to
play a part in selecting of measurement basis (Ifrs.org, n.d.). This is because they believe
that a business model can tell whether cash flows are going to rise from
operations or trading. The journal by EFRAG also says that if the business
model is not considered by the IASB the cash flows that users could expectations
could be more hypothetical than real (Ifrs.org,
n.d.). From this we can understand that EFRAG have implied that financial
statements do not give us a way of determining future net cash inflows to an
entity and the conceptual framework needed to developed more. The journal on
the IASB conceptual framework also states that the changes in business
activities will end in similar assets and liabilities produces differences in
the amount as well as timing of cash flows. EFRAG suggest that the above
statement should be shown in financial statements and should be used in the
conceptual framework for guidance (Ifrs.org,
n.d.).

 

In conclusion, the IASB’s
conceptual framework have facilitated for the reporting of relevant and
faithfully represented financial information in financial statements which have
made it possible for future net cash inflows. Although many other financial groups
such EFRAG suggested that business models are able to tell whether an entity
generates future net cash inflows rather than financial reports and more should
be more added to the conceptual framework for preparing financial reports. Also
the accounting standards such as accrual accounting have made it so that
financial reports are faithfully represents which can make it better to judge
whether future net cash inflows can be generated. Also the implementation of
prudence has raised some respondent disagreeing that the accounting standard
wasn’t given a clear understanding so it was subjective. In some aspects such
as prudence there should be a way of making it clearer so the term cannot be
subjective by preparers of financial statements.