Question

The Conceptual Framework for the Preparation of Financial Statements describes the basic concepts that underlie the preparation of financial statements for presentation to external users who include shareholders. The contents of The Conceptual Framework serve as a guide to development of International Financial Reporting Standards (IFRSs). It seeks to share understanding of certain key terms that are used in IFRSs and may be referred to by directors when handling a business matter that is not directly addressed by any issued standard.

Required:

1. Describe four primary users of financial statements and explain how they benefit from the application of the Conceptual Framework and IFRSs to preparation of financial statements.                                                                                                ( 4 marks)
2. Explain what measurement in financial statements is and give examples (use information in the solution to Question 1 of Section A) of initial measurement and subsequent measurement.                                                                            ( 4 marks)
3. Explain what recognition in financial statements is and describe the general criteria for recognising an income and an expense in financial statements.  
4. Explain the significance of fundamental characteristics of financial information and discuss how enhancing characteristics supplement primary ones.                                                                                                               (Total: 20 marks)

Answer 1

Answer a)

Four primary users of financial statements are :

1 Investors- They will likely require financial statements to be provided, since they are the owners of the business and would want to assess risk and return of the amount invested.

2 Lenders- An entity providing loan to an organization will require financial statements in order to estimate the ability of the borrower to repay the loaned amount and related interest charges within the prescribed time.

3 Creditors- They will require financial statements to evaluate whether the business represent sound credit risk decide and it is safe to extend credit to the company.

4 Rating agencies- A credit rating agency will require the financial statements in order to give a credit rating to the company as whole.It quantifies assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

With application of conceptual framework and IFRS business practices becomes more transparent and reliable, investors tend to invest more due to transparency .Financial statements prepared using such framework help investors to understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. Such framework provide reliability to lenders and creditors as well over the sound credit risk of the company.