The foundation of conceptual framework is based on the objective of general purpose financial reporting. Other aspects of conceptual framework are words the objective of general purpose financial reporting and the qualitative characteristics of useful financial information according to The Conceptual Framework for Financial Reporting, etc.
General purpose financial reporting basically provides the financial information about the reporting entity useful for existing and potential investors, lenders and other creditors. Decisions by investors, lenders and other creditors about buying, settling loans or holding equity and debt instruments are based on the re returns they expect such as interests, principle, market price increases, etc. but investors, creditors, lenders must depend on other conditions such as political climate, events, industry and company outlooks to receive all the information from general purpose financial reports. Economic resources and claims help in a user’s assessment of the reporting entity’s prospects for future cash flows differently are affected by different types of economic resources. Even though the identifications of those cash flows cannot be done with economic resources or claims) users of financial reports need to understand the nature and amount of the resources used for reporting entity’s operations. Changes in economic resources and claims provides information regarding return of entity shows how efficiently the available resources are used in an organization. It also helps to assess the risk of future cash flows. Accrual accounting records the transaction when it is made no matter when the cash is received or paid for. Entity’s economic resources and claims and changes in its economic resources and claims provides better information about the performance of the entity rather than about the monetary transactions only. It also provides information about entity’s ability to generate net cash inflows from the available resources rather than by acquiring extra resources directly from investors and creditors. A reporting entity’s cash flows provides information about the cash spending, borrowings, repayments, cash dividends and other factors that may affect entity’s liquidity and its financial performances. Other than the financial performance such as issuing additional ownership shares, a reporting entity’s resources and claims may also subject to change for reasons.
qualitative characteristics of useful financial information
Qualitative characteristics of useful information provides information to the existing and potential investors and other lendors and creditirs which helps users in decision making process.
According to conceptual framework there are two types of qualitative characteristics of useful information and they are :Fundamental qualitative characteristics
Enhancing qualitative characteristics
Fundamental qualitative characteristics
According to conceptual framework the financial information is useful if it is relevant and faithfully represented. If the financial information is related to an economic decision which can be helpful to users in predicting future results and significant enough to influence the decision then the information is relevant.
If the information represents what really occurred then it is said to be faithfully represented. The below mentioned characteristics are the characteristics of faithfully represented information.
Free from errors
For any financial information to be useful both the fundamental qualitative characteristics should meet i.e relevance and faithful representation.
Enhancing Qualitative characteristics
The financial information must be comparable within the organization as well as between the organizations. In others words the information between different years should be comparable within the organization and the similarities and differences between different companies must be comparable.
If the financial information is supported by the evidence and if it can be audited then the information is said to be verifiable. In other words, the financial information must represent what really happened to be verifiable.
Timeliness means the information provided must be within the time limit. If the provided information is delayed then there is no value of such information.
The information provided must be understandable format to the users with reasonable knowledge of business and economics. The information must be clear and simple. It must not contain complex terms which cannot be understood by the users.