Financial Statement

Analysis
Financial Reporting Standards

Objective of Financial Reporting

According to the IASB Conceptual Framework for

Financial Reporting 2010, the objective of financial
reporting is to provide information about the firm to
current and potential investors and creditors that is
useful for making their decisions about investing in
or lending to the firm.

Importance of Financial Reporting

Standards

The conceptual framework is used in the development of

accounting standards.
Reporting standards ensure that transactions are reported by firms
similarly.
standards must remain flexible and allow discretion to
management to properly describe the economics of the firm.
Due to variety and complexity of possible transactions and the
estimates and assumptions financial statements could potentially
take any form.
Thus, financial reporting standards are needed to provide
consistency by narrowing the range of acceptable responses.
Financial reporting is not designed solely for valuation purposes;
however, it does provide important inputs for valuation purposes.

Standard Setting Bodies &

Regulatory Authorities

Standard-setting bodies are professional organizations of accountants

and auditors that establish financial reporting standards.
The two primary standard-setting bodies are;

the Financial Accounting Standards Board (FASB) and

the International Accounting Standards Board (IASB).
In the United States, the FASB sets forth Generally Accepted Accounting
Principles (GAAP).
Outside the United States, the IASB establishes International Financial
Reporting Standards (IFRS).
Other national standard-setting bodies exist as well.
Many of them (including the FASB) are working toward convergence with
IFRS.
Some of the older IASB standards are referred to as International
Accounting Standards (lAS).

Standard Setting Bodies &

Regulatory Authorities

Regulatory authorities are government agencies that

have the legal authority to enforce compliance with
financial reporting standards.

Securities and Exchange Commission (SEC) in the United States

the Financial Services Authority (FSA) in the United Kingdom
SECP In Pakistan

International Accounting Standards

Board's conceptual framework,

The ideas on which the IASB bases its standards are expressed in
the "Conceptual Framework for Financial Reporting" that the
organization adopted in 2010.
The IASB framework details the qualitative characteristics of
financial statements and specifies the required reporting elements.
The framework also notes certain constraints and assumptions
that are involved in financial statement preparation.
At the center of the IASB Conceptual Framework is the objective
to provide financial information that is useful in making decisions
about providing resources to an entity. The resource providers
include investors, lenders, and other creditors.
Users of financial statements need information about the firm's
performance, financial position, and cash flow.

Qualitative Characteristics

There are two fundamental characteristics that make

financial information useful
Relevance. Financial statements are relevant if the
information in them can influence users' economic
decisions or affect users' evaluations of past events or
forecasts of future events.
Faithful representation. Information that is faithfully
representative is complete, neutral (absence of bias),
and free from error.

Faithful representation

There are four characteristics that enhance relevance

and faithful representation:

Comparability. Financial statement presentation should be

consistent among firms and across time periods.
Verifiability. Independent observers, using the same methods,
obtain similar results.
Timeliness. Information is available to decision makers before the
information is stale.
Understandability. Users with a basic knowledge of business and
accounting and who make a reasonable effort to study the
financial statements should be able to readily understand the
information the statements present. Useful information should not
be omitted just because it is complicated.

Required Reporting Elements

Assets. Resources controlled as a result of past transactions that are

expected to provide future economic benefits.
Liabilities. Obligations as a result of past events that are expected to
require an outflow of economic resources.
Equity. The owners' residual interest in the assets after deducting the
liabilities.
Income. An increase in economic benefits, either increasing assets or
decreasing liabilities in a way that increases owners' equity (but not
including contributions by owners). Income includes revenues and
gains.
Expenses. Decreases in economic benefits, either decreasing assets
or increasing liabilities in a way that decreases owners' equity (but not
including distributions to owners). Losses are included in expenses.