## **Learning Outcomes**

After completing this article, you will be able to explain the primary purpose of general purpose financial statements as set out in the Conceptual Framework, identify the main users and their information needs, and describe the fundamental and enhancing qualitative characteristics that make financial information useful for ACCA Financial Reporting (FR). You will also be able to distinguish between relevance and faithful representation, discuss materiality, and outline how qualitative characteristics support useful reporting.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the role of the Conceptual Framework and how it informs the preparation, presentation, and analysis of financial statements. In particular, this article will support revision of:

- The objective of general purpose financial statements and the needs of users
- The requirements and function of the Conceptual Framework for Financial Reporting
- The fundamental qualitative characteristics: relevance and faithful representation
- The enhancing qualitative characteristics: comparability, verifiability, timeliness, understandability
- The concept of materiality and the assessment of going concern in financial reporting
- The link between qualitative characteristics and the development or application of accounting standards

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which group is identified as the primary user of financial statements under the Conceptual Framework?
   - a) Tax authorities
   - b) Existing and potential investors, lenders, and other creditors
   - c) Regulators and governments
   - d) Employees

2. What are the two fundamental qualitative characteristics of useful financial information according to the Conceptual Framework?

3. Explain what is meant by 'materiality' and why it is important in financial reporting.

4. Name the four enhancing qualitative characteristics of financial information and briefly describe one.

## **Introduction**

All entities prepare financial statements to meet the needs of users who rely on these statements for decision making. The Conceptual Framework for Financial Reporting, issued by the International Accounting Standards Board (IASB), sets out the core purpose of general purpose financial statements, identifies who uses them, and describes the principles that make accounting information useful. Understanding this framework is essential for FR exam candidates and for anyone preparing, presenting or interpreting financial reports in compliance with IFRS.

> **Key Term: Conceptual Framework**
> A set of fundamental objectives and principles developed by the IASB to guide the preparation and presentation of general purpose financial statements and the development of accounting standards.

## The Objective of Financial Statements

International Financial Reporting Standards are grounded in the Conceptual Framework, which defines the main objective of general purpose financial statements as providing financial information about the reporting entity that is useful to users in making decisions about providing resources.

> **Key Term: General purpose financial statements**
> Structured reports designed for users who cannot demand tailored information, aiming to meet the common informational needs of a wide user base.

## Users of Financial Statements

The Conceptual Framework identifies investors, lenders, and other creditors as the primary users of financial statements. These users depend on clear, timely, and reliable financial information to assess an entity’s financial position, performance, and future cash flows, enabling them to make economic decisions such as whether to buy, hold, sell or lend.

> **Key Term: Stakeholders**
> Parties who have an interest in the financial performance or position of an entity, primarily including investors, lenders, and creditors.

## Qualitative Characteristics of Useful Financial Information

Financial information is only useful if it possesses certain qualitative characteristics. The Conceptual Framework groups these into two categories: fundamental and enhancing.

### Fundamental Qualitative Characteristics

#### Relevance

Financial information is relevant if it could influence the economic decisions of users. This includes information with predictive value, confirmatory value, or both. Materiality plays an essential role in determining what information is relevant.

> **Key Term: Relevance**
> The capacity of information to impact decision making by helping users predict or confirm outcomes.
>
> **Key Term: Materiality**
> Information is material if omitting, misstating, or obscuring it could affect the decisions of users based on the financial statements.

#### Faithful Representation

Information must represent economic phenomena accurately, depicting the substance of transactions rather than just their legal form. A faithful representation is achieved when information is complete, neutral, and free from error.

> **Key Term: Faithful representation**
> The quality requiring that information reflects the substance of transactions, is complete, neutral, and without material error.

### Enhancing Qualitative Characteristics

Enhancing characteristics improve the usefulness of information when fundamental characteristics are present:

- **Comparability:** Enables users to identify similarities and differences between different entities or time periods.
- **Verifiability:** Provides assurance that information can be checked and agreed by independent observers.
- **Timeliness:** Information is available soon enough to affect decisions.
- **Understandability:** Information is presented clearly and concisely so users can comprehend its meaning.

> **Key Term: Comparability**
> The characteristic that allows users to identify similarities and differences across entities or over time.
>
> **Key Term: Verifiability**
> The ability for different knowledgeable users to reach agreement that information faithfully represents what it purports to depict.
>
> **Key Term: Timeliness**
> The characteristic requiring information to be presented while still relevant to decision making.
>
> **Key Term: Understandability**
> The extent to which information is clearly presented and classified for users with reasonable financial knowledge.

## Materiality and Disclosure

Materiality acts as a filter—individually immaterial items can be aggregated, but all material items must be disclosed separately. Materiality is specific to the entity and the context.

### Going Concern Assumption

The Conceptual Framework assumes that financial statements are prepared on a going concern basis unless management intends, or is forced, to discontinue operations. If not, this must be disclosed and alternative bases explained.

> **Key Term: Going concern**
> The assumption that the entity will continue operations for the foreseeable future, with neither the intention nor need to liquidate.

## Relationship Between Characteristics

Both fundamental characteristics are necessary for information to be useful. Enhancing characteristics support, but do not substitute for, relevance and faithful representation. For example, information that is timely and highly comparable is not useful if it is neither relevant nor faithfully represented.

### **Worked Example 1.1**

**A company knows that 10,000 units of an outdated product with a cost of \$60,000 can only be sold for \$1,000. Should this be disclosed separately in the financial statements?**

> **Answer:**
> Yes. Since \$60,000 may be material to users, and the information helps assess inventory realisation, separate disclosure is needed for relevance and faithful representation.

### **Worked Example 1.2**

**Company Q changes its policy for depreciation this year, but does not restate prior year figures. How does this affect users?**

> **Answer:**
> Comparability is compromised. Users cannot directly compare current and prior results. Disclosure of the policy change and, if practicable, restated comparatives are typically required.

### **Exam Warning**

> A common error is to focus only on legal form—not economic substance—when reporting transactions. For FR, you must show how the Conceptual Framework requires reflecting the true nature of events, not just compliance with contracts.

## **Summary**

The Conceptual Framework clarifies that the objective of financial statements is to provide useful information for decision making by investors, lenders, and creditors. Information must possess both relevance and faithful representation. Comparability, verifiability, timeliness, and understandability improve but do not replace the fundamental characteristics. Materiality determines what is shown separately. The going concern assumption underpins general purpose statements unless a different basis is required.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- State the objective of general purpose financial statements and identify key users
- List the two fundamental and four enhancing qualitative characteristics of useful information
- Explain materiality and its influence on recognition and disclosure
- Describe the going concern assumption in relation to financial statements
- Identify how qualitative characteristics underpin financial reporting practice and standards

## **Key Terms and Concepts**

- Conceptual Framework
- General purpose financial statements
- Stakeholders
- Relevance
- Materiality
- Faithful representation
- Comparability
- Verifiability
- Timeliness
- Understandability
- Going concern

Regulatory and conceptual framework - Purpose of financial statements and qualitative characteristics (Conceptual Framework)