Conceptual Framework for Financial Reporting

CHAPTER 1—THE OBJECTIVE OF GENERAL PURPOSE
FINANCIAL REPORTING 
INTRODUCTION
1.1
OBJECTIVE, USEFULNESS AND LIMITATIONS OF GENERAL PURPOSE
FINANCIAL REPORTING
1.2
INFORMATION ABOUT A REPORTING ENTITY’S ECONOMIC RESOURCES,
CLAIMS AGAINST THE ENTITY AND CHANGES IN RESOURCES AND
CLAIMS
1.12
Economic resources and claims
1.13
Changes in economic resources and claims
1.15
Financial performance reflected by accrual accounting
1.17
Financial performance reflected by past cash flows
1.20
Changes in economic resources and claims not resulting from financial
performance
1.21
INFORMATION ABOUT USE OF THE ENTITY’S ECONOMIC RESOURCES
1.22
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Introduction
The objective of general purpose financial reporting forms the foundation of
the Conceptual Framework. Other aspects of the Conceptual Framework—the
qualitative characteristics of, and the cost constraint on, useful financial
information, a reporting entity concept, elements of financial statements,
recognition and derecognition, measurement, presentation and disclosure —
flow logically from the objective.
Objective, usefulness and limitations of general purpose financial
reporting
The objective of general purpose financial reporting
1
is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions relating to
providing resources to the entity.
2
Those decisions involve decisions about:
(a)
buying, selling or holding equity and debt instruments;
(b)
providing or settling loans and other forms of credit; or
(c)
exercising rights to vote on, or otherwise influence, management’s
actions that affect the use of the entity’s economic resources.
The decisions described in paragraph 1.2 depend on the returns that existing
and potential investors, lenders and other creditors expect, for example,
dividends, principal and interest payments or market price increases.
Investors’, lenders’ and other creditors’ expectations about returns depend on
their assessment of the amount, timing and uncertainty of (the prospects for)
future net cash inflows to the entity and on their assessment of
management’s stewardship of the entity’s economic resources. Existing and
potential investors, lenders and other creditors need information to help them
make those assessments.
To make the assessments described in paragraph 1.3, existing and potential
investors, lenders and other creditors need information about:
(a)
the economic resources of the entity, claims against the entity and
changes in those resources and claims (see paragraphs 1.12–1.21); and
(b)
how efficiently and effectively the entity’s management and governing
board
3
have discharged their responsibilities to use the entity’s
economic resources (see paragraphs 1.22–1.23).
1.1
1.2
1.3
1.4
1
Throughout the Conceptual Framework, the terms ‘financial reports’ and ‘financial reporting’ refer
to general purpose financial reports and general purpose financial reporting unless specifically
indicated otherwise.
2
Throughout the Conceptual Framework, the term ‘entity’ refers to the reporting entity unless
specifically indicated otherwise.
3
Throughout the Conceptual Framework, the term ‘management’ refers to management and the
governing board of an entity unless specifically indicated otherwise.
Conceptual Framework
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Many existing and potential investors, lenders and other creditors cannot
require reporting entities to provide information directly to them and must
rely on general purpose financial reports for much of the financial
information they need. Consequently, they are the primary users to whom
general purpose financial reports are directed.
4
However, general purpose financial reports do not and cannot provide all of
the information that existing and potential investors, lenders and other
creditors need. Those users need to consider pertinent information from other
sources, for example, general economic conditions and expectations, political
events and political climate, and industry and company outlooks.
General purpose financial reports are not designed to show the value of a
reporting entity; but they provide information to help existing and potential
investors, lenders and other creditors to estimate the value of the reporting
entity.
Individual primary users have different, and possibly conflicting, information
needs and desires. The Board, in developing Standards, will seek to provide the
information set that will meet the needs of the maximum number of primary
users. However, focusing on common information needs does not prevent the
reporting entity from including additional information that is most useful to a