Stewardship contributes an important aspect to financial reporting, which should be reflected by precise acknowledgement in the objectives of financial reporting. Stewardship should be considered as a broader view than resources allocation as it emphases on both earlier performances and how the entity is positioned for the future.
Objective of Financial Statement
The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it.
Financial Position
Information about financial position is useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those with an interest in the entity; it is also beneficial in forecasting how successful the entity is likely to be in raising additional money.
Perfomance
The performance of an enterprise, specifically its productivity and profitability, is required in order to evaluate potential changes in the economic resources that it is likely to control in the future. Information about performance is mainly provided in an income statement.
Changes in the financial position
In constructing a statement of changes in financial position, funds can be defined in various ways, such as all financial resources, working capital, liquid assets or cash.
Underlying assumptions
The Framework identifies the fundamental assumptions of financial statements:
Accrual Basis – Under this basis, they deliver the type of information about past transactions and other events that is most beneficial to the users in making economic decisions.
Going Concern - Going concern assumption is a fundamental principle in the preparation of financial statements which are normally prepared on the notion that an entity will continue in action for the foreseeable future.
Qualitative characteristics of financial statements
The Framework specifies the qualities that make financial information useful; namely, understandability, relevance, reliability and comparability.
Understandability – It is the quality of information provided in financial statements that should be presented in a way that it is readily clear by users who have a sound awareness of economic and business activities who are willing to learn it attentively.
Reliability - To be useful, information must be consistent if it is restricted from material fault and bias and can be relied upon by users to represent events and transactions devotedly.
Comparability - Comparability is the quality of information that allows users to recognize differences and similarities between two sets of economic phenomena. An important implication of comparability is that users be informed of the accounting policies employed in the preparation of the financial statements.
Relevance - The relevance of information is affected by its nature and materiality. In some cases, the nature of information alone is sufficient to determine its relevance. Relevant information is capable of making a difference in the decisions of users by aiding them to evaluate the potential effects or events on future cash flows.
The Elements of Financial Statements
The framework describes the basic elements of financial statements (assets, liabilities, equity, income and expenses) and discusses the principles for recognizing and measuring them. Each of these elements is well-defined in the IASB Framework.
Assets – An asset is a resource measured by the entity as a result of past events or transactions and from which future economic benefits are expected to flow to the entity.
Equity – Equity signifies the residual amount after all the liabilities have been deducted from the assets.
Income – Income is measured by increases in assets or decreases in liabilities.
Expenses - Expenses are measured by increases in liabilities or decreases in assets
Liabilities – A liability is a current obligation of the entity arising from past events, the settlement of which is likely to result in an outflow from the entity of resources representing economic benefits.
An element is recognized in the financial statements if it is likely that any economic benefits related with the element will flow to or from the entity and if the element has a cost or value which can be consistently evaluated.
Measurement of the Elements of Financial Statements
Elements may be evaluated at their historical cost and current cost. The measurement base most commonly approved by entities in preparing their financial statements is historical cost, which is usually joined with other measurement bases.