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The Conceptual Framework explains the principles and ideas that influence international financial reporting standards (IFRS). There are three aspects of financial reporting addressed by the IFRS Framework. First, the IFRS Framework explains the objective of financial reporting. Then, the Framework delineates the qualitative characteristics that data included in financial reports must have in order to be useful in financial analysis. Finally, the Framework defines financial reporting elements and explains how they should be recognized and measured.
According to the IFRS Framework, the goal of financial reporting is to ensure that potential investors, lenders, and venture capitalist have pertinent financial information about a business being evaluated. Such financiers are not privy to the daily operations of a company and cannot force a business to provide such data on demand. Consequently, these individuals depend on accurate and honest financial reports when deciding whether to buy, sell, or provide credit to businesses. The IFRS Framework makes it clear that the information contained in such reports does not need to show the value of the company. Instead, the report should contain enough data to allow individuals to estimate its value.
The IFRS Framework illustrates qualitative characteristics likely to be found in relevant data in an effort to help an IFRS accountant prepare the most useful report possible. Such reports should contain financial information that is relevant and faithfully presented. When distinguishing between data that fulfills such requirements, the IFRS Framework suggests that the IFRS accountant identify information that is comparable, verifiable, and timely.
Data is considered relevant if it has the ability to influence whether or not an investor buys stock in the company or a lender extends credit to the business. The faithful representation of data means that assets and liabilities are measured according to fair value and complicated facts or transactions are described in the notes of such financial reports. Comparability means that the data provided is able to be compared to other businesses to help individuals make the best investing or lending choice amongst companies in similar industries. Verifiability ensures that the data provided could be substantiated by an independent auditor. Timeliness ensures that only the most recent data is reported because older information is less useful in the present.
Elements of financial reporting are defined in order to facilitate investing decisions by ensuring uniformity amongst multiple financial reports. In the IFRS Framework, assets are defined as resources controlled by the business that produce economic benefits. Liabilities represent debts that will lead to an outflow of cash and negatively impact profits. Equity is the residual interest owners have in the company after liabilities are subtracted from assets. The IFRS Framework also explains how various sub-categories of assets, liabilities, and equity should be measured.
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