LOS D requires us to:
describe general requirements for financial statements under International
Financial Reporting Standards (IFRS).
1. Characteristics of Effective Financial Reporting Framework
An effective financial reporting framework shall have the following three important characteristics:
a. Transparency. A framework should enhance the transparency of a company’s financial statements. Transparency means that users should be able to see the underlying economics of the business reflected clearly in the company’s financial statements. Full disclosure and fair presentation create transparency.
b. Comprehensiveness. To be comprehensive, a framework should encompass the full spectrum of transactions that have financial consequences. This spectrum includes not only transactions currently occurring, but also new types of transactions as they are developed. So an effective financial reporting framework is based on principles that are universal enough to provide guidance for recording both existing and newly developed transactions.
c. Consistency. An effective framework should ensure reasonable consistency across companies and time periods. In other words, similar transactions should be measured and presented in a similar manner regardless of industry, company size, geography, or other characteristics. Balanced against this need for consistency, however, is the need for sufficient flexibility to allow companies sufficient discretion to report results in accordance with the underlying economic activity.
2. Barriers to Single Coherent Framework
The main reason for the conflict before setting a single coherent framework is that it is extremely difficult to satisfy all the characteristics of an ideal framework simultaneously. These problems arise as a result of the following barriers:
a. Valuation. As we have seen above there are many valuation techniques available and choosing the best-suited base requires a good amount of judgment.
b. Standard-Setting Approach. The standards are set either on the basis of rules or on the basis of principles. Both the approaches have their own sets of advantages and disadvantages. Like rules-based standards give a clear approach for dealing with a transaction, but it cannot be adopted uniformly by all the countries without any variation and vice-a-versa for the principles-based approach.
c. Measurement. Measurement of the values at a particular point of time or over a period of time creates a dilemma for the adoption of the framework.